Chapter 39: Basics of Selling a Restaurant
STRATEGIES FOR SELLING
A strategy of clearly stated sales objectives will ensure that an acceptable sale is made. Sellers need to prioritize their sales objectives and consider what trade-offs may help achieve them. Deciding what is most important to hold onto and the ability to be flexible in other areas will support your overall selling goals. If a high asking price is important, being flexible on the down payment is a likely trade-off and vice versa. The following is a list of typical sales objectives:
• Selling quickly. Once an owner decides to sell, his enthusiasm for the business can fade and hurt his bottom line. Most restaurant sales take eight to 15 months to complete. Most of the attention a restaurant gets when it goes on the market is in the first three to four weeks, so it is important that the business be attractively priced to capitalize on this initial attention. Sellers should also be ready to respond to offers from the moment the restaurant goes on sale. Chances of selling are not good if buyers are interested but the seller does not have a well-prepared sales solicitation ready.
• Best present-value sales price. The sales price needs to be incorporated in the terms and conditions. Otherwise you will not have a business that is representing its present value. You may sell quickly at a very high price if your terms and conditions are favorable. Price, terms, and conditions are interrelated. If one changes the others do as well. Sellers must determine the price, terms, and conditions that must be met so that they can have a baseline to operate from. It is particularly important because different buyers will want different prices, terms, and conditions. The seller who has determined variable scenarios of what he absolutely requires for his price and from the terms and conditions is preparing himself well for negotiations.
• Large down payment. The bigger the down payment the lower the probability the seller will need to foreclose on the new operation. Investors who have put in large amounts of equity are less likely to abandon an investment if troubles arise. Thus, sellers are often willing to reduce sales prices by as much as 50 percent if the buyer will make a large down payment.
LOOKING FOR THE RIGHT BUYER
Sellers should look for buyers who will manage the restaurant well. The only way a seller should sell his business to a new restaurateur is if the buyer cashes out the seller. A seller wants a competent buyer who will run the business and prevent the need for repossession. Sellers want their business to stay sold.
Sellers should learn as much as possible about potential buyers. Reference checks are helpful in determining if a buyer is seriously interested, but they do not tell you what their motivations are. Sellers should understand what is motivating the buyers and these factors should be highlighted in negotiations.
Are they looking for the property only? Do they want the prestige of owning a restaurant right in town? Are they looking for a consistent return on their investment? Savvy sellers answer these questions and then push the appropriate attributes of the business.
Sellers should develop a professional property information package that will entice buyers. This package should contain just enough information for buyers to see if the business meets their investment requirements. If a buyer wants more information, she is expected to prepare an offer and pay an earnest money deposit before the seller will provide it.
This brochure is often an investor’s first view of the property and is a crucial tool for the seller. Sellers should devote considerable time and effort to its preparation. An effective brochure does not reveal more than the seller wants to divulge, while enticing buyers. It should be printed on high-quality card stock and have the following data:
• Pictures of the restaurant.
• Confidential inquiries. Seller’s name and contact information and other sources such as broker, answering service.
• Description of the restaurant. Concept, theme, hours of operation, square footage.
• Map/Description of neighborhood. Types of businesses, attractions, residential makeup. The map should be easy to read and the business’s location should be highlighted.
• Real estate description. Property’s legal description, common description, and the tax assessor’s most recent valuation figure — unless it contrasts with the seller’s estimate.
• Summary of leasehold improvements. China, glass, and utensils. Original cost, current book value, and estimated replacement cost of these assets.
• Income analysis. Monthly profit and loss statements from the previous 12 months.
• Real-property lease review. Remaining term, monthly base rent, percentage-rent clause, common-area maintenance fees, insurance requirements, options, and rate adjustments.
• Personal-property lease review. Remaining term, monthly base rent, maintenance costs, insurance requirements, options, and amount of final payment that must be made if lease is rent-to-own.
• Financing availability. Amount, interest rate, terms, and conditions of both assumable and seller financing.
• Market survey. Summary data on the restaurant’s target area.
• Competition survey. Summary data on the restaurant’s current and pending direct competition.
• Initial investment summary. Includes estimate of the initial investment required to buy and manage the restaurant.
• Summary of seller’s solicitation. Asking price and down payment. Should also highlight the assets included in the sale and the availability of assumable and seller financing.
Sellers can be contacted directly or through an intermediary. Most sellers prefer to use an intermediary to keep a professional distance and attract buyers through an established system. Intermediaries also help to distinguish the serious investors from the suspect. A good broker protects the seller’s privacy and knows how to sell a business. There are drawbacks to intermediaries. Brokers need to be paid — as much as 10 percent of the restaurant’s sales price — and conflicts of interest can arise. Due diligence in selecting a broker is recommended.
PASS YOUR BUSINESS ON
Millions of businesses are owned and operated by family members. Some of these are passed down through the generations and some family members continue the family legacy. Another option is to have business partners or employees run your business.
If you plan to leave the business to your family, consider the tax implications. These issues and concerns include inheritance tax, trusts, and tax-free gifts. Each of these options is complicated and you should let the experts handle them. Talk with your banker, accountant, lawyer, and your estate planner. These professionals can ensure a smooth transition and minimize the tax burdens on your family.
• The U.S. Chamber of Commerce offers advice on passing your business on at www.uschamber.com.
• CCH Business Owner’s Toolkit has helpful articles at www.toolkit.cch.com.
GROOM YOUR REPLACEMENT
Depending on your plan, someone else may take over your position and responsibilities within the company. It is time consuming to groom a replacement. When you hire people, you can consider whether they would be a good successor to you. Also consider whether they would keep the best interests of your family in mind. When you are at this point, talk to the person you are considering. Share your vision for the future and develop a plan. Develop a plan to:
• Train him on the aspects of the business he does not understand.
• Increase his responsibilities to learn new aspects of the business.
• Review his decision-making abilities and skills.
• Listen to his needs and ideas and discuss ways to make them work.
• Share money-management goals and how you accomplish them.
• Set a timeline for transfer and stick to it unless there are major problems.
• Implement transition stages to lessen your duties and increase his.
• Set benchmarks and goals for each stage in the process.
• Examine and improve “problem” issues.
• Physically and mentally prepare yourself to leave the business.
SELLING YOUR BUSINESS TO YOUR EMPLOYEES
If your family is not interested in being involved without you, there is the option to sell to an employee or a group of employees. If you plan to sell to employees or friends, it is best to have your accountant or attorney act as a go-between to keep the transaction professional.
It is very easy to hurt one another in this situation. The potential buyers will likely have ideas about how to change “your business” and “your way of doing things.” You may also find it difficult to haggle over money with your friends.
Suggest that your employees talk to a professional to clearly understand what they are getting into. Business Law at www.businesslaw.gov discusses Employee-Owned Stock Plans (EOSP) as a way to transfer the business to your employees. You can also find advice from The National Center for Employee Ownership at www.nceo.org and the Beyster Institute for Entrepreneurial Employee Ownership at www.fed.org.
Transferring your business to a worker co-op offers some advantages for everyone. Worker co-op structures are discussed at the National Cooperative Business Association at www.ncba.org. Transferring your ownership to employees (similar to family inheritance) can also be done. Talk with professionals to ensure you have covered all the bases and things are being done in the best interest of the people involved. Talk to professionals you trust.
Bear in mind that an employee often makes an excellent owner. The chef who has dreamed for years of owning her own restaurant and the head waiter who just got married and wants more out of his life are examples of good candidates. It also provides a way for you to make a real profit out of the place as well as keep your restaurant heritage alive. Consider selling to an employee under one of the following plans:
• Management Buy Out (MBO) - It involves your management team guaranteeing a loan for the employee to purchase the company from you. Because the financing for such an arrangement is based on the financial performance of the company, it will only work if the restaurant can support the loan needed to make the transaction. Because the manager (or management team) is arranging the financing, she will normally be awarded about 30 percent of the company’s equity when the deal is finished. It is considered a type of “commission” payment.
• Leveraged Buy Out (LBO) - Similar to an MBO, but with a different financier. In this type of arrangement, a third party arranges the financing and splits the commission with the management team. In this arrangement, management will end up with no more than 10 percent commission.
• Employee Stock Option Plan (ESOP) - With this type of agreement, your employees buy your stock as part of their retirement plan. ESOP can be a good plan in that employees are more apt to work hard for a company that they “own.” However, because ESOP invests the employees’ money almost entirely in the stock of this one restaurant or business, the employees take a great risk. If the stock takes a downturn, they could very well lose their profits.
Realistically, the ESOP route will only work for restaurants with very large payrolls. If you decide to go this route, there could be great tax incentives for you: If your company cannot be traded publicly; if you use the proceeds to buy securities in American companies; if you have had the stock three years or longer; and if you have sold between 30 and 100 percent of shares to the ESOP, you may be eligible for a tax-free transaction. There are a few more requirements for such a perk, so check with your tax professional to see how you can qualify.
DECIDING NOT TO SELL
One option that every seller needs to keep open is the option not to sell (as with the buyer who does not have to proceed with the purchase). It is far better to suffer the embarrassment of pulling out than to end up in a really bad situation. The seller has the right and option to stop the process at any time. Bear in mind the following:
• Get a realistic view of your asking price. One discouragement to sellers is when they get offers that are way below their asking price. You should find out if your price is too high. Have a professional evaluate your asking price. If you did set it high, are you willing to accept less? If not, you better roll up your sleeves; you have a restaurant to run. If you are willing to accept less, work with the professional to set a more realistic price.
• Find out why buyers are not biting. If the price seems right and all seems in order to you, you are obviously missing something — especially if you have had more than one interested buyer who did not bite. Think about a buyer you developed rapport with; take that buyer out to lunch. Find out the reasons why she did not buy. The best person to find out from is the one who got away.
• Let bygones be bygones. During the sale process, you probably let a lot of worms out of the can. Let those worms go. Many restaurant owners worry about how much they disclosed to potential buyers or key employees during the process. If anyone has a problem with the sale phases you went through, talk her through it honestly. If the buyer who got away uses information to hurt your business, outsmart her. But do not become obsessed with the process that did not work. Get back to business as usual. The survival of your restaurant depends on it.
• Put your employees at ease. You must consider that they have dealt with stress, too, if they knew about your plans to sell. It is not easy thinking that you will have a new boss, not knowing if you will be kept on by the new owner, and so on. Your employees will not be feeling super-confident right now. It is your job to win their trust again.
• Do not lose your customer base. The restaurant owner has a great advantage over owners of businesses in other industries when it comes to taking the business off the market. Many customers of a food service establishment will actually be glad to hear you are not leaving, especially if you have a high goodwill rating with the community and your customer base. But while most will be relieved that you will still be there laughing and giving them specials on their anniversary, you may have some customers who are leery about your commitment to them and the business. Whatever you do, do not talk to them too much about the details of the failed sale. It is none of their business. Instead, work very hard to provide them with incredible service and extra perks during this period.
• Watch for changes in relationships with vendors. Some vendors, especially smaller companies, may be hesitant to offer you such lenient payment and credit terms as they once did. Simply stated, they do not want you to close up shop for good and leave them holding the bag. Make sure your bills are paid ahead of time and your dealings with them are iced in integrity. You can win their trust again. Their business depends on you.
• Considering liquidation. If you realize that the right buyer did not come along but you still want out of the restaurant, you will need to prepare yourself for liquidation of your company. It cannot happen overnight. You must develop a “game plan” to make the closing of your business as profitable for you as possible and fair for your employees.
CLOSING YOUR DOORS FOR GOOD?
Sometimes, closing down and liquidating is the right choice. Sometimes it is not. Never make a hasty decision about anything. It is not good business. When reaching any decision regarding a total closeout, consider the following:
• Motives. Look at why you want out. Examine and reexamine your motives for wanting to get away from it all.
• Hire a manager. The food service industry is unique with regard to the hours that one must work to be successful. If you love your restaurant and the revenues it brings in but are simply tired of the hours, consider hiring a manager. The additional salary will cut into your profits, but it may save your restaurant.
• Take a vacation. Maybe you do not need to change your schedule permanently. Maybe you just have not had a vacation in the last five years. Take a long vacation. Leave someone very capable in charge and go. A vacation may be all you need to get pumped about your business again.
• Learn to delegate. Owning a restaurant can be a very high-stress, high-pressure job. The problem may not be that you need a manager or a vacation, but that you need to delegate to employees who are already on the payroll. Make a list of your job responsibilities. Now write down everything for which your key employees are responsible. Honestly evaluate these lists. Do you have trouble delegating? If so, make the decision to begin delegating immediately. It may provide the relief you need to really enjoy your restaurant once again.
DO NOT MAKE A DECISION OUT OF EMBARRASSMENT– CONSIDER ALTERNATIVES
Too many business owners get embarrassed once their business has been on the market and failed to sell. Some see it as a reflection on them personally as a successful businessperson. If that is how you feel, get over it. Do not totally close the doors because of your pride.
• Challenge yourself. Think back to your original idea to sell the restaurant. Did it have anything to do with being restless and wanting a job change? It is natural to get bored with any job. The great thing about owning your own business is that you can change just about anything you want unless you are tied to a franchiser. If you do not have a controlling entity like a franchise, make changes that challenge you and your staff. Make changes that create a new, fun atmosphere to work and dine in. Basically, everything you have ever thought about doing, do it. Chances are, the business will profit from the changes and your creative juices will begin to flow again. Go for it.
• Create something totally different. If you wanted to sell because the profit margin of your restaurant is just not sufficient enough to keep the doors open, consider rolling everything over into a new business venture. There is a simple way to do this. Change the business address to your home address or a post office box (if your state will allow a P.O. box) so that the restaurant is still considered an existing business. Liquidate all the assets of the business and invest this cash in a high-interest bearing account. When you are ready to start over again, it will serve as start-up funds for your new business or restaurant venture. Check with your legal and accounting professionals to ensure that you are complying with all the laws in your state that refer to this type of situation.
• Give it away. If you have a child or other heir who has shown interest in your restaurant at any time, consider giving it to her now as a part of her inheritance. Closing up for good is not as easy as it sounds. Many business owners say that they have “grieved” over a closed business. If you think closing up would be hard for you, it might be easier to stomach if the restaurant continued on in your family. Do not think that just because she has not shown interest that she does not want it. Some kids feel like they cannot ask for something that is not theirs. If you have an instinct she might be interested, talk to her about it. Let her know it is okay if she is not interested, but give her the chance.
SO, YOU STILL WANT OUT?
If, after all the considerations about selling your restaurant, you still want out, do it right so that there are no regrets in the future. Take time to develop a plan. You did not expect to sell your restaurant overnight and you should not expect to close it overnight. Many think of closing a business as a split-second decision that takes effect quickly. You need to develop a plan that will allow you the most return on your investment dollars. You want to use up as much food and beverage inventory as possible and you want to develop a closeout plan that is fair for your employees. You should know up front that it usually takes months — sometimes years — to totally close up and liquidate a business. As you close the doors on your restaurant for good, consider the following:
• Make a list of all liens. Make a list of all the assets your restaurant has that have liens attached to them. You will need to sell them at a price that will cover the amount you owe your creditors.
• Consider a liquidating professional if you are not concerned with price. An estate buyer (someone who buys entire estates for the purpose of selling the items and making a profit) can offer you one price for everything. Pro: It gets everything sold and out of your restaurant quickly. Con: She will not offer you the best price. Her bid will be lower than what you could get out of the assets if you sold them yourself.
• Develop a garage-sale mentality. That probably sounds terrible to the person who has poured her life into a restaurant. The same kinds of “profits” can be expected when you begin liquidating your restaurant’s assets.
• Have a private sale for employees. You may have one or two employees who are saving up to start their own restaurant one day. They will pay more than garage-sale prices to begin stockpiling the equipment needed for when they are ready to become restaurant owners.
• Check with creditors to see if they will let you turn in assets for credit. Some creditors and vendors will actually allow you to return assets for a partial credit. They may be open to this idea if they deal in used equipment that they can turn around and sell or lease to another restaurant.
• Going-out-of-business sale. A serious and humbling last-ditch effort to sell your business and provide continuing employment for your staff. After you have developed your liquidation plan and know the dollar figure you are expecting to get out of the liquidation process, make a phone call to one of the potential buyers you were in negotiations with earlier. He may be willing to by the whole restaurant; lock, stock, and barrel, now that the price has been so drastically reduced. It provides a way for you to get out quickly and not affect your employees. You can select this option if you are a very confident person who can swallow your pride.
• File all proper tax and legal documents. There are tax responsibilities involved even when you liquidate your business. Actually, these tax documents might be good for you. But whether a gain or a loss is posted, do not forget to take care of any IRS business that is left undone after the closing of your restaurant. There may also be state, federal, or local documents to file, depending on where your business is located. Do not forget to tie up these loose ends.
• Close the business legally. When you are filing documents and filling out IRS papers, be sure to officially and legally file the documents that will close the restaurant in the eyes of the legal system. If you have no intention of opening this business or another business in this name in the future, then there is no reason to keep the restaurant open, legally speaking. If you do, the business continues to be open to all sorts of problems including different kinds of litigation. If it is closed in your mind, make sure it is also closed in the minds of the IRS and government officials in your area.
LEAVING YOUR BUSINESS
No matter how much you enjoy your business, at some point in time, you will probably try to sell it. The alternatives are to go out of business or pass it on to your heirs. There is no way to know what will prompt you to sell. At that time, you will realize how important it was to build a saleable business to increase your return on investment. Since you are reading this book, you will know in the beginning that it is good to build your business with a possible sale in mind.
A profitable restaurant with a loyal customer base and effective business systems can generate top dollar when you are ready to sell. This profit is a reward for those long, hard hours that went into developing the business.
Start building a valuable and profitable business from the start and it will provide you with an excellent income. The right building blocks and a solid foundation will provide you with a valuable asset that can be sold in the future.
Atlantic Publishing offers a book titled How to Buy and or Sell a Small Business for Maximum Profit – A Step-by-Step Guide With Companion CD-ROM (www.atlantic-pub.com, Item # HBS-01). This one book offers many tips on how you can get the best price for your business when you are ready to sell. It explains the piles of paperwork and the laws that affect you when you sell or buy a business. You should not begin the sales process before you read this book.
YOUR EXIT PLAN
You need to develop an exit plan. It does not need to be as detailed as your business plan, but you should review it annually to make any necessary changes. These changes are based on the condition of your business and your goals.
Your plan should cover:
• Best-case scenario – When do you want to retire? Will you sell the business outright or will your family manage it?
• Current value – What could you get if you liquidated or sold it?
• Enhance business value – Are there changes that would make the business more appealing to a buyer? Are there changes you did not want to make, but that would increase the value? It is time to consider those.
• Worst-case scenario – What can be done in an emergency?
• Prepare for the sale – What are the tax implications of selling?
• Bowing out – How can you leave your business to others? How do you dissolve partnerships or corporations?
• Secure your family’s financial health – Prepare your will.
Can your family run the business without you? Do they have instructions for what to do if you are incapacitated? You should meet with your attorney and accountant for valuable advice about how to create your plan. You can see some examples of exit plans at:
• Principal Financial Group – www.principal.com/bizprotection/exitplan.htm
• Family Business Experts – www.family-business-experts.com/exit-planning.html
• American Express Small Business – www.americanexpress.com/smallbusiness
SAY GOODBYE
Saying goodbye to your restaurant, the long hours, and your dreams can be difficult. No matter how much you want to retire or to leave, actually leaving is hard. It is easier to say that final goodbye when you have planned for it. Knowing that your business will be taken care of will help you make the adjustments and changes that are necessary. You sacrificed and struggled to build a profitable and successful restaurant — it is also your responsibility to preserve it.