Selling a Restaurant-Mistakes to Avoid
If you are selling a restaurant, there are mistakes to avoid that can become obstacles to reaching the closing table. To increase the odds of a restaurant for sale getting to the closing table, the Asset Sale Purchase agreement needs to be adequately prepared by a trained professional.
The sales price is only the start of a complex negotiating process that the small details are a BIG determining factor for success. The restaurant resale process negotiations include language that must be agreed upon by both restaurant seller and restaurant buyer.
Once the price has been agreed upon, the knots and bolts of the deal still need to be finalized. Most are not familiar with the critical items that should be addressed in a purchase agreement.
EATS Restaurant Brokers are Restaurant Resale Specialist that understands the critical items on the Asset Purchase Agreement that need to be negotiated upfront between both parties. This blog will cover the essential details that should be addressed in an Asset Purchase Agreement.
Texas Restaurant Broker Dominique Maddox says, “We have a high closing rate because, after ten years as a Restaurant Broker, I have extensive training in restaurant sales negotiations. I understand the critical details to address upfront.
We recently moved our headquarters to Dallas, Texas; we are excited about helping restaurant owners in Texas to avoid mistakes that stop them from selling a restaurant and getting paid at the closing table”.
EATS Restaurant Brokers Top Mistakes to Avoid
Equipment List: The equipment list is usually an itemized list of restaurant equipment and decorations included in the restaurant sale. The list is created by the restaurant owner and provided to the interested buying parties.
The equipment list is an essential part of the restaurant valuation, Asset Purchase Agreement, and assets a buyer will receive. Buyers should understand that fixtures attached to the building belong to the landlord and not the tenant.
Grease trap, hood system, walk-in cooler, walk-in freezer, water sink, and built-in bar should not be included on an equipment list. When an Asset Purchase Agreement is fully executed, it contains a list of equipment that will transfer ownership.
Mistakes to Avoid: Check items on the equipment list to confirm ownership. Restaurant equipment is commonly rented (mainly dishwasher); a restaurant owner can’t sell something they don’t own. Read the lease to ensure the landlord does not own the equipment and the current tenant didn’t lease a fully equipped restaurant space.
Fees: Who Covers them?
Attorney Fees
Who pays the attorney fees and why? In residential real estate, it’s common for both parties to split closing attorney fees in residential real estate, or the Seller will sometimes pay the fees.
Restaurant Brokerage is different; it’s the buyer’s cost and responsibility. It’s beneficial for a restaurant buyer to pick and pay a closing attorney that understands business brokerage. A closing attorney is not needed to close a simple deal if a deal does not involve bank lending or franchise ownership transfer.
Mistake to Avoid– Choose a closing attorney that charges a flat rate compared to an hourly rate. Confirm the services the attorney will provide for the agreed price. Do not use a closing attorney that is not familiar with UCC lien searches or business brokerage deals. Always use a closing attorney for a restaurant sales transaction.
Inventory Cost:
The inventory on hand on the day of closing belongs to the buyer, but actually, they need to pay the restaurant owner first. Several buyers have a misunderstanding that the food inventory is included in the purchase price.
This understanding is far from the truth unless clarified at the beginning of the negotiations. The standard process is that an inventory count is complete the night before closing or the morning of closing. The buyer will pay inventory costs for the food items or other inventory.
Buyer and Seller take inventory together, and the buyer pays a separate check for the final sum. Occasionally a Restaurant Broker will put an estimated number on the Asset Purchase Agreement (for example, $5000). Once the inventory count is final, both parties will finalize the underpayment or overpayment for inventory.
Mistake to Avoid– Confirm restaurant owner will have a copy of recent inventory delivery invoices with current prices. I would suggest not paying for items that are almost gone.
Transfer Fee
A transfer fee is required when reselling a franchise restaurant for sale. The current restaurant owner has already agreed to this fee on the franchise on the Franchise Disclosure Document(FDD).
The transfer fee will cover the buyer’s required training, ranging from 2-10 weeks, depending on the franchise. The transfer fee does not directly go to the restaurant seller; buyers are expected to pay the transfer fee. This fee can range from $5,000-$50,000.
Mistake to Avoid– Confirm Transfer fee upfront and put language in the Asset Purchase Agreement for the party responsible for payment.
Want more help selling a restaurant? Contact Restaurant Broker Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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10 Reasons for selling a restaurant
Reasons for selling a restaurant can differ from restaurant owner to owner. Everyone has a specific reason that they want to sell a restaurant.
EATS Restaurant Brokers list of Top 10 reasons for selling a restaurant:
Retirement– The baby boomers are ready to retire and enjoy the last chapter of their life in peace without the stress of restaurant ownership. The Covid-19 pandemic and worker shortage have baby boomers listing restaurants for sale faster than in the past.
Failing Restaurant– 60% of restaurants will fail within three years after opening the doors. 80% will close the doors permanently within five years of opening up for business. Restaurant ownership is a rewarding but demanding business to survive in for multiple years.
Lack of Capital- The restaurant business is all about the numbers and ratios to total sales. Many restaurant owners have to use personal capital to keep a restaurant operating. Liquid capital can quickly disappear from bank accounts when it comes to restaurant ownership; money is one of the most significant driving factors for restaurant owners to sell a restaurant.
Burnout– The restaurant industry is a lifestyle that most people cannot handle over an extended time. Restaurant owners can be asked to work 10-12 hour shifts and always be on call for problems.
Divorce- Several restaurants for sale on the buyer market are due to parties getting divorced.
Illness- To be successful in the restaurant industry, you need to stay healthy and active. The restaurant hospitality industry is for the strong mentally and physically and, individuals can endure long hours and stressful situations. Illness is a significant factor in the decision-making when it’s time to sell a restaurant.
Family – Time with the family or lack of time with the family is a big motivator to sell a restaurant. The kids grow up fast, the babies start walking before you know it, the time at night before bed with your soulmate means the world to most.
Bored-Depending on the type of restaurant owned, some restaurants have lots of downtown during non-peak hours. Restaurant owners whose sales are low and can’t attract customers can get bored with restaurant ownership.
Overwhelmed-Restaurant owners have to wear multiple hats when owning a restaurant. One minute they can be ordering inventory, next minute dealing with a busted leak in the ceiling, POS machine not working, and workers are calling out for work. Juggling multiple tasks and responsibilities can be overwhelming to even an experienced restauranteur.
Stress- The restaurant industry is notorious for sending people to the hospital. The stress related to the long hours, the bills adding up, labor work shortage, can lead to health-related stress issues for many individuals.
Additional Issues outside of Top 10 list:
All equity tied up in restaurant assets
The restaurant business is too risky
Want to focus on other business or core business
Outside factors (political/economic)
To raise capital/funds for another business
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Restaurant Broker Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com
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What restaurant numbers should YOU know?
What restaurant numbers should you know if you own a restaurant or want to buy a restaurant? Every independently owned restaurant is unique, while franchise concepts have common similarities. How do you compare the two different restaurants if you want to buy or sell a restaurant? Analyzing the Financial and Operational ratios is a great starting point.
What numbers should be significant to a restaurant owner that wants to sell a restaurant or a buyer that wants to buy a restaurant? Some key impact ratios compared to annual sales are food, labor, lease cost, and Sales per square foot.
Dominique Maddox, a Restaurant Broker at EATS Restaurant Brokers, says, “when analyzing Profit and Loss statements to provide a restaurant valuation, I always pay cost attention to the critical impact ratios.
The numbers and ratios can help explain the heartburn or opportunity in a restaurant.”
EATS Restaurant Brokers shares RATIOS to consider list:
Food Cost: Food cost as a percentage of food sales (costs/sales) is generally in the 28% to 32% range in many full-service and limited-service restaurants. Ratios can fluctuate depending on the type of restaurant.
Upscale restaurants can range up to 35%-40%, while pizza concepts can range from 20%-25%.
EATS Restaurant Brokers Tip: Food costs seem to always be higher at absentee-owned restaurants than Owner/Operator restaurants. The employees don’t operate the restaurant like an owner that manages the day-to-day operations.
Labor Cost: Payroll cost as a percentage of sales should not exceed 30%-35% of total sales for full-service restaurants and 25%-30% of total sales for limited-service restaurants. This percentage includes payroll taxes, insurance premiums, and other employee benefits.
EATS Restaurant Brokers Tip: Generally, you don’t want to see management salaries, including kitchen managers, assistant managers, and General Managers’ salaries to exceed 10% of gross sales.
Build-out-cost: The sales-to-investment ratio should be at least 1.5 to 1. This means a minimum of $1.50 in sales should be expected for every $1 of startup costs, according to www.Restaurantowner.com.
This means if you spend $300,000 on a restaurant build-out, the location should be able to generate at least $450,000 annual sales. The best restauranteurs know how to keep build-out costs at a minimum to increase the Sales-to-investment ratio.
EATS Broker Tip: Buying an Asset Sale restaurant is an excellent opportunity to save money on the initial build-out cost.
Rent and Occupancy: The ideal range for rent expense is 6% or less of total sales. This ratio includes costs such as common area maintenance (CAM) and other occupancy expenses.
Many operators are satisfied with an occupancy cost of 8% or lower. Once a restaurant owner-occupancy cost reaches 10% or higher, the charges start to deduct from the owner’s net profit.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com.
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Restaurant Seller and Buyer Meeting: Tips for Success
EATS Restaurant Brokers decided to create a Restaurant Seller and Buyer Meeting-Tips for Success checklist. The initial meeting between the buyer and a seller can dictate how the working relationship will be in the future.
The goal of the initial meeting is to familiarize both Restaurant Seller and Restaurant Buyer, view the back of the house, buyers get an opportunity to ask probing questions and review restaurant financials. The most straightforward deals are when the buyer and seller like and respect each other. When the personalities don’t mix, the restaurant closing process could be filled with turbulence.
Dominique Maddox of EATS Restaurant Brokers says, “ The best method to minimize differences in personalities is to keep the deal flow managed by a specialized trained Restaurant Broker. When Restaurant Sellers and Buyers communicate directly without a skilled Restaurant Broker, a deal can crumble quickly”.
EATS Restaurant Brokers 7 Tips for a Successful Seller and Buyer meeting.
- Buyer and seller should both have face masks on, even if social distancing is done.
- Walk around the restaurant to get the seller talking and to get the buyer more comfortable. Great way to break the ice between parties.
- We recommended starting with the back of the house (BOH) to show the kitchen area and cooking equipment. This task can range in time depending on the size of the restaurant and restaurant owner explaining items.
- Sit down for a meeting- This is a great time to introduce each party to start talking about why one party wants to sell and the buying party to explain the interest in buying.
- The sit-down meeting allows the buyer to ask questions about the restaurant operations, restaurant equipment, lease, employees, financials, and willingness to negotiate on price.
- Restaurant sellers should be prepared to explain the Cost of Goods (COGS), Labor, Sales, and potential to increase sales.
- Buyer should review financials before meeting with the seller. The buyer should come to the meeting with prepared questions to ask the seller.
- Follow-up questions after the meeting should be directed to Restaurant Broker to share with the seller.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbroker.com. Visit our website at www.EATSbroker.com.
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