Where To Begin When It's Time To Sell Your Restaurant
QUESTION From: Dominic in NJ
“My wife and I are thinking about selling our restaurant. What are some of the things we should be doing to get the ball rolling? The place is doing well, we just want to move to be closer to where our daughter goes to school. Where do we start?”
Restaurants are like Westerns. Most follow the same general story line and share numerous key elements that make them all…well…a restaurant - but the characters and the settings are almost always different. And that’s what makes each one uniquely personal. While I’m often customizing game plans and “To-Do” lists for Clients and friends who want to open a restaurant, reposition a restaurant or begin the process of selling their restaurant; I can tell you that there are a few steps & discussion points that almost every one of those plans and lists share in common. The following are those that pertain to positioning a restaurant (and it’s ownership) for a sale or transfer:
Begin a detailed review of your financials in order to get a crystal clear global snapshot / understanding of your equity / assets and debt / obligations. You’ll need to get everything out on the table including any liens, potential liens, account balances, assessments, unemployment, etc... in order to know your total overall exposure. ( Collect & organize your equipment maintenance records and have a certified technician endorse their condition and/or a certified appraiser assess the value of your FF&E on the secondary market, open the books / accounts payable, weigh the annual spend value of loyalty members & email lists, compare your lease terms with the current market rates, weigh cash on hand vs. revolving debt, account balances with vendors, city L&I, any violations yet to be cured, recent contract work completed, etc... with a CPA and/or legal counsel.
If you’re leasing a space, have a professional, who’s experienced in commercial / retail leases, review it in detail (with you) as there are usually conditions on how, when, to whom and even IF a transfer of ownership is possible / may be executed.
In most cases, unless you’ve build an impressive brand / brand equity, your business’ value is heavily tied to the value of the real estate or Lease that comes with it…and a significant portion of the Leases I’ve come across (but not been engaged to help negotiate) preclude the Tenant from transferring or subletting in any way or at the very least, require the Landlord’s consent. Regardless of how great your concept might be, how profitable the business is or how turn-key it might be; if you don’t have your Landlord’s consent AND at least 7 years left on your “below market” Lease- I’d simply lowball you or wait for you to go out of business before I got into a situation where the Landlord was going to jack my rent in 2 or 3 years and tell me I can leave if I don’t like it.
When it comes to finding a buyer, there’s an old adage in real estate brokerage: “Check with the neighbors first.” ...and for a VERY good reason: the person most likely to purchase your business/property needs to know the market well... and like it. Chances are, someone who has already invested in the neighborhood fits both of those bills. So... have you spoken with those who are closest to you i.e., neighbors on either side of you or management staff on your payroll? I’ve been pretty successful in negotiating win-win gradual ownership shifts from owners to managers and think they’re ALWAYS worth exploring. Consider which employees and/or neighboring business owners would be most interested in taking over you business and/or real estate...it doesn’t have to be another restaurant owner or operator. It could simply be someone next-door who would like to expand their non-restaurant business into your space or someone a few miles away that needs to be closer to their target market* or more complementary retail.
(*Another attractive potential buyer to target would be anyone whose typical market competitor is already nearby without them as a competitor...OR someone whose concept or segment is in high demand locally and yet largely under (or not) represented)
Speaking of old real estate adages...there’s another one that says: “The first offer is usually the best offer.”. While I don’t believe (as many do) that the first offer IS usually the best offer...I DO believe that the PARTY who makes the first offer - is usually the one most worth negotiating with in order to get the best offer.
Don’t coast. If you’re considering selling in the next 6-12 months, now is the time to really turn up the gas on marketing, catering, private events, strategic alliances, non-profit support, in-house promotions and gift card sales...anything and everything that boosts sales. One significant metric (if not the most significant) any appraiser or buyer will consider is current sales and year-over-year growth (as many - if not all – will assume they can run a tighter ship than you). But as you know, sales don’t occur in a vacuum so now is not the time to put off firing that difficult manager or the employees with constant issues. Tighten-up your team, re-program them and give your culture the tune-up it’s been needing...if for no other reason than the fact that an absentee or “coasting” owner resistant to make capital or human improvements is like blood in the water for both buyers and brokers alike.
While real estate brokers are certainly an avenue worth pursuing, a business broker or restaurant consultant are, IMHO, far better options...and more incentivized to engage in a deeper vetting process of any prospective Buyers. But avoid an exclusive listing at all costs. I would offer to sign a statement saying that you will pay X% commission provided the individual is the ‘procuring cause’ (that’s broker speak for “ someone with whom the broker had significant and substantive discussions about your business and wouldn’t have known about the opportunity without the broker having approached them about it.”) Keep in mind that you can’t pay a commission or finder’s fee to someone who doesn’t have a real estate / broker’s license so going the consulting route will usually forgoing the contingency fee scenario and involve engaging them on an hourly or fixed-fee basis.
There are few (if any) secrets in a restaurant so you can all but guarantee that if you’re even so much as thinking about selling...your staff is going to find out. Think about how you want to play that now. Although there are several schools of thought with regard to how this is best handled; I am of the opinion that a mass exodu (especially one that may be premature and unjustified) doesn’t do anything to help you or the business you’re trying to sell. I’m a big fan of transparency and while I don’t believe your hourly staff needs to know everything… Letting them know that you are considering a sale, IF (and only if) you can find the right buyer who is in a better position to grow the business and make their jobs even better - can go a long way to dispel rumors and calm fears rooted in uncertainty (One’s imagination can be far scarier than any truth could ever be). Keeping staff in the loop let’s them know you not only value and respect them but that a sale isn’t going to happen “in the middle of the night” and that they don’t have to start looking for another job now out of fear that they’ll show up to work one day soon only to be greeted by the (all too common) locked door with a letter on it.
Whether it’s FF&E or real estate and FF&E, auctions are another way to go...and although you might be thinking “we’re not THAT desperate...at least not yet anyway.”; sometimes you can end up fetching more than you thought possible at an auction as not every bidder shows up to steal the place…especially if the auction is well advertised.
Keep in mind, that unless you’ve got a location locked up that people are dying to have (i.e., something that can be developed into a higher and/or better use or a high traffic “billboard location”) or you’re selling to someone who loves and/or appreciates your specific: product, feel, brand equity and loyal following, the “business” part is often only worth the value of the FF&E and the bricks (or remainder of term left on the Lease). If you think it’s worth more than that- be prepared for a long listing period or for potential buyers to side step you and go directly to your Landlord (just one of the reasons that it’s best to consider offers when you don’t have to move on and only after you’ve renewed a Lease).
Put yourself in the (potential) Buyer’s shoes. Here are two additional links to articles that should shed some light on the perspective of those sitting on the other side of the deal table: