Selling a Restaurant: What Documentation is needed?
When selling a restaurant, what documentation is needed from the seller? The answer is simple it depends on what type of sales transaction. Trained Restaurant Brokers use two methods when providing a Restaurant Valuation to a seller.
The most profitable and best way to sell a restaurant is based on past Profit and Loss Statements and Tax Returns. If these documentations are not available, the restaurant should be priced as an Asset Sale, meaning pennies on the dollar for the equipment and build-out.
EATS Restaurant Brokers breaks down the essential documentation needed for both types of transactions. We list the documentation that is provided during the due diligence period for the buyer:
Selling a Restaurant Business Based on Tax Returns and Profit and Loss Statements:
– Tax Returns for the past three years
– Profit and Loss Statements for past three years
– Copy of Lease and all amendments
– Sales Tax Clearance Letter
– POS Sales Report
– Bank Statements (sometimes)
– Balance Sheet
– Copy of Franchise Royalty Report
– Equipment List (only items owned by the seller)
– Franchise Agreement
– Sales Tax History
Selling a Restaurant priced as an Asset Sale:
– Sales Tax Clearance Letter
– Copy of Lease and all amendments
– Equipment List
– Limited Profit and Loss information
– Sales Tax History (sometimes)
– Bank Statements (sometimes)
Providing documentation for a successful and profitable business net the seller the highest asking price, can qualify for a restaurant for bank lending and attracts more buyers. Asset Sale is harder to sell and makes the Restaurant Broker work for their commission.
Asset Sale can be a challenging sale because you sell the opportunity or potential to a new buyer. You can tell when a restaurant is listed as an Asset Sale because Cash Flow and EBITDA will be low or nonexistent.
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a restaurant’s overall financial performance.
Dominique Maddox of EATS Restaurant Brokers says, “selling a restaurant business has two phases for a restaurant owner. First providing the documents needed for a valuation. Second, providing more detailed supporting documentation during the buyer’s due diligence period”.
Some restaurant owners can be frustrated and think they provided enough financial information during the valuation phase for buyers to confirm their numbers. This thinking is usually incorrect, and most buyers will ask and want to see more additional supporting documentation before arriving at the closing table.
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@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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Selling a Franchise Restaurant vs Non-Franchise
What are the Pros and Cons of Selling a Franchise Restaurant vs. Non-Franchise is a common question EATS Restaurant Brokers receives from sellers? Franchise Restaurants for Sale make up 60%-70% of all restaurant sold listings annually. Why is the number so high compared to independently owned restaurants?
The hard facts are only 30%-40% of restaurants listed on the for-sale market will get sold to new buyers. Why does a Franchise Restaurant have a better chance of being sold than a non-franchise restaurant for sale?
EATS Restaurant Brokers discuss the Pros and Cons:
Pros:
- Trade Name: Franchisees have the right to use an established trade name, marks, logo, and goodwill. Buyers are generally knowledgeable about the concept and menu.
- Restaurant Valuation: Franchise Restaurants usually get a higher price valuation.
- Franchise Business Consultant: New buyers are assigned a Consultant from the franchise brand to receive additional training and support.
- Books and Records: Franchise Restaurants are known to have better books and records to provide to buyers. Franchise concepts typically require Franchisees to have updated POS sales systems.
- Landlord Approval-: Landlords, are most comfortable approving restaurant concepts for lease spaces. Occasionally lease assignments will have guaranteed landlord approval for franchise concepts.
- Bank Lending: Banks view franchise restaurants as less risky loans compared to an independently owned restaurant. The approval process, at times, can be quickly done.
Cons:
- Franchise Fee: Initial Franchise Agreement Fee ranges from $20,000-$100,000+ depending on Franchise. When a restaurant transfers to a new buyer, a transfer fee is generally required, usually up to 50% of the Franchise Agreement fee.
- Royalty: This operating fee is calculated based on Gross sales ranging from 3%-10% (it could be higher).
- National Marketing Fee: Required fee each franchisee pays to the franchisor to help with the franchise marketing cost. Expenses can range from 0%-6%.
- Remodel Cost: Franchises require locations to date on current specs before a sales transfer can take place to a new buyer. Restaurant remodels cost can be prohibitive depending on the Franchise’s current location requirements. Required upgrades can range from updated tables, chairs, signage, POS system upgrade, lighting, and cooking equipment.
- Required Training: New franchisees are required to complete a certain number of hours working in the restaurant before a buyer can achieve a sales transfer. This process from start to finish can range from 2 weeks-3 months.
- Franchise Approval: Buyers have to get approved by the Franchise.
- Vendors: Franchises have a list of preferred vendors that the franchisees must use.
Independent Owned Restaurant for Sale
Pros:
- No Royalty: Buyers are not required to pay 3%-10% to any franchise; this could equal hefty savings yearly.
- No Required Training: The buyer can schedule training with the seller, but a certain number of hours working in the new buyer’s business is not required to complete the transaction.
- Time to close: Once the buyer and seller agree to terms on an Asset Sale purchase and the landlord approves the new buyer, the deal can close. One of the most significant advantages of non-franchise sales is the lack of time to complete this deal. Instead of 2-4 months to close on a franchise concept, a buyer can close on a non-franchise restaurant in 2-4 weeks.
- Remodel Cost: Sellers are not required to do any upgrades unless buyers request.
- National Marketing Fee: Buyers are not required to pay an automatic marketing fee to anyone.
- Freedom: Have the ability to make changes with getting franchise approval. Owners have the freedom to choose their vendors.
- Local: Customers like to support local restaurants that are not national franchise concepts.
Cons:
- Restaurant Valuation: Normally are lower than Franchise concepts. Unless the restaurant has good books and records, goodwill, and has been open and established for years.
- Training: New buyers are on their own to learn the concept, operations, employees, and marketing. The buyer usually completes no formal training before or after the sale transaction.
- Trade name: Building up the trade name is 100% the responsibility of the operator. The new owner has to maintain or establish a new identity for the restaurant.
- Books and Records: Keeping updated and accurate books and records can be challenging for non-franchise concepts.
- Landlord approval: Landlords will frequently do more due diligence on a non-franchise concept before they approve a lease assignment. From the landlord’s standpoint, it is riskier to approve a non-franchise compared to a franchise concept.
Franchise Restaurant ownership and independently owned restaurants have tons of pros and cons to consider when buying a restaurant.
EATS Restaurant Brokers are Subject Matter Experts in Restaurant resales. Let us provide you a complimentary Certified Restaurant Valuation; contact us today at sales@eatsbrokers.com or 404-993-4448.
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Understanding Add Backs when Selling a Restaurant
Understanding Add Backs when Selling a Restaurant can be difficult for inexperienced restaurant buyers and restaurant sellers to understand. The real value is more than just the bottom net profit number on the profit and loss statements and tax returns.
When it’s time to sell a restaurant, how do you know what to add back to calculate the earnings before interest, taxes, depreciation, and amortization(EBITDA)? These calculations are essential to evaluate the value of the restaurant.
The EBITDA for restaurant valuations used for positive cashflow restaurants is crucial to discovering its actual value. This financial information is critical because today’s buyers will use multiples of the EBITDA to determine their offer price.
Dominique Maddox, a Restaurant Broker and Founder of EATS Restaurant Brokers says, “I let restaurant owners know the only add-backs I will include are the ones accepted by SBA lending professionals. Restaurant owners deduct many personal expenses from the restaurant’s books and records, but not all costs qualify as add-backs for a Certified Restaurant Valuation.
I have years of experience of providing Restaurant Owners restaurant valuations based on the EBITDA on their financials”. Once I find out the EBITDA, I can then assign a correct multiple to find out the recommended listing price”.
EATS Restaurant Brokers-Lender add-back cheat sheet: These are the following add-backs most bank underwriters will accept.
- Depreciation and Amortization
- Interest- on loan payoff
- Personal Travel and meals
- Seller’s auto expenses, including insurance
- One-time costs that are nor re-accruing
- Seller discretionary expenses, ex- life insurance, salaries to family members(not working)
- Severance and lawsuit settlements
- Manager salary-if seller is an absentee owner
The team at EATS Restaurant Brokers has expertise in factoring in add-backs when selling a restaurant. We know which add-backs and adjustments will get approved for SBA lending. Let us provide you a complimentary Certified Business Valuation; contact us today at sales@eatsbrokers.com or 404-993-4448.
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Virtual Brands do they work for restaurant owners?
By now, most people have heard about Ghost Kitchens and Virtual Brands, do they work? Virtual Brands are restaurant concepts that are online-only brands that offer pickup and delivery. Virtual Brands help restaurant owners create multiple brands to represent its existing menu.
Restaurant owners have complained about third-party platforms only allowing restaurants to choose a couple searchable terms for customers to find them on. This is a big problem because what happens if your restaurant has a diverse menu? Only 2-3 searchable terms will not cover most restaurant owners’ menus.
Dominique Maddox, a Restaurant Broker and Founder of EATS Restaurant Brokers, says, “ I can see more restaurants creating Virtual Brands in 2021 to help with the decrease in business and with indoor dining restrictions. I know a restaurant owner that owns a bar/tavern; they created a Chicken Wing, Hot Dog, and Hamburger virtual brand. Now their portfolio has 4 different restaurant brands under one roof.
The most successful virtual brands understand their labor cost, food cost, marketing cost, and delivery party commission to make them profitable”.
What are the Pros and Cons for Virtual Brands?
Pros:
-Helps restaurant owners create 2nd and 3rd streams of income
-Helps restaurant owners increase food delivery sales
-Does not require multiple locations
-Great way to add new food options to customers
-Can make money by charging for shared kitchen space to other Virtual Brand operators
Cons:
-Food cost can increase due to adding new items to the menu
– Most restaurant owners are too busy marketing and branding their central concept that they don’t have the time to focus on building up the Virtual Brand.
-Adding Virtual Brands can make restaurant owners a jack of all trades but a master of none
-Increased labor costs can be an issue with making various food cuisines.
-Virtual Brands don’t allow you to promote your primary restaurant
-Google Reviews are usually done on brick-and-mortar locations and not Virtual Brands
Virtual Brands and Ghost Kitchens will continue to grow in 2021. Some restaurant franchise brands and restaurant owners are experiencing success with Virtual Brands and Ghost Kitchens. Others are not experiencing success because they don’t have time to build up and market the new concept. The concept of having a brick-and-mortar location for customers to dine-in is a concept that some restaurant owners are moving away from, and they are much happier with virtual brands.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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Issues for Business Brokers after Covid-19
EATS Restaurant Brokers attended the Georgia Association of Business Brokers (GABB) Spring Conference last month. The conference was to educated Business Brokers about the issues for Business Brokers conducting sales transactions after Covid-19 depending on if they represent the buyer, seller, or both.
The biggest take-away for EATS Restaurant Brokers was the different issues a Seller’s Brokers should be concerned about vs issues a Buyer’s Brokers would be concerned about.
Dominique Maddox Founder and Restaurant Broker for EATS Restaurant Brokers says, “ over my 8 years of being a Restaurant Broker I have seen a range of issues that affect deals. The majority of my deals I work in a Dual-Agency capacity, this experience has helped me understand both Seller and Buyer Broker needs and wants”.
Working with a trained professional Business Broker or Restaurant Broker can make all the difference of a deal getting closed or terminated. EATS Restaurant Brokers list some issues for Seller’s Broker vs Buyer’s Broker.
Issues for Seller’s Broker:
- Terms of lease-including option years
- What assets are attached to the building
- Security deposit to Landlord
- Security interest to Landlord
- Lease-asset or liability
- What lease exist
- Personal guarantee
- Assignment prohibition
- Franchise issues
Issues for Buyer’s Broker:
- Value of lease to a business
- Insurance Requirements
- Terms of lease-including option years
- What assets are attached to the building
- Security deposit to Landlord
- After-sale liability
- Lease-asset or liability
- What leases exist including amendments
- Personal guarantee
- Assignment prohibition
- Assignment Fee
- SBA lease requirements
- Franchise issues
- Landlord approval requirements
Let us show you how Restaurant Brokerage is done with flavor!
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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Dominique Maddox of EATS Restaurant Brokers Sells CANS Taqueria
Dominique Maddox of EATS Restaurant Brokers Sells CANS Taqueria located at 12635 Crabapple Rd. Milton, GA 30004
Dominique Maddox of EATS Restaurant Brokers Sells CANS Taqueria located at 12635 Crabapple Rd. Milton, GA 30004. EATS Restaurant Brokers represented buyer and seller. The buyer’s family owns the following successful restaurants in Alpharetta, Southern Porch, Mercantile Social, and Flatlands Bourbon and Bayou.
CANS Taqueria has been established since 2011, buyer plans to bring some exciting changes to the drink menu, food quality, and create a fun family environment. Plans now are to have CANS back open by mid- July.
Dominique Maddox is the founder and President of EATS Restaurant Brokers and eatsbroker.com, a business brokerage firm specializing exclusively in restaurant franchise resales, restaurants for sale, bars and nightclubs. After working with one of the nation’s largest restaurant brokerage firms for seven years, Dominique decided it was time to bring a new flavor to the Restaurant Brokerage Industry and founded EATS Restaurant Brokers.
Dominique Maddox has been selling restaurants since 2010 and has undergone intensive training in the Restaurant Brokerage Industry. Dominique attended Morehouse College on a football scholarship, he brings that same competitive spirit and energy to the field of restaurant brokerage.
EATS Restaurant Brokers are Restaurant Resale Specialists that can guide you thru the complex process of buying or selling a restaurant. EATS Restaurant Brokers is a full-service Real Estate Business Brokerage practice focused on the restaurant industry. Our company specializes in selling Restaurant Franchise Re-sales and Restaurant Sales. We also help clients with Restaurant real estate site selection, Tenant Representation, Franchise Consulting, and Business Price Evaluation.
We exclusively sell restaurants, bars and nightclubs. We are happy to answer any questions about restaurant pricing and valuations, exit strategies, bank financing or any other subjects related to the purchase or sale of a restaurant.
Let us show you how Restaurant Brokerage is done with flavor!
Contact Dominique Maddox 404-993-4448 or sales@eatsbrokers.com
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How does Covid-19 affect Restaurant Valuations?
Everybody has a unique story about how the coronavirus crisis has affected their lives. During my alone time I have thought about how does Covid-19 affect Restaurant Valuations moving forward?
My personal story as a Restaurant Broker is that I was scheduled to close my 1st deal with my brokerage EATS Restaurant Brokers in March and the deal got canceled. The buyer was worried about the uncertainly of the future regulations for the restaurant industry.
My experience of eight years as a Restaurant Broker has prepared me for the “new normal” in the restaurant industry. The biggest concern I hear from my current clients is, “how much is my restaurant worth now after Covid-19 pandemic”?
While most restaurants struggle to open the doors back up for business, others apply for the Paycheck Protection Program (PPP) to help with expenses. Regarding Restaurant Brokerage one of the biggest questions not being talked about is, what happens to the restaurants that were listed for sale before the Covid-19 pandemic?
My personal experience is that I was able to save my deal that was canceled but my seller client had to reduce the asking price by 40% to keep the buyer interested. Now the deal is scheduled to close in June. If you are asking yourself why the price reduction, the restaurant industry has changed in the last 60 days, uncertainly will drive restaurant prices moving forward.
How does a Restaurant Broker recommend a price valuation for a restaurant?
1. EBITDA: An acronym, EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is a useful metric for understanding a business’s ability to generate cash Add Backs flow for its owners and for judging a company’s operating performance.
2. Replacement Cost Method
The restaurant advertised as an Asset Sale is valued using the Replacement Cost Method. The replacement cost method assumes a buyer pays the seller in order to benefit from the existing investment in the restaurant facility, lease, leasehold improvements, location of the restaurant, and equipment. This helps the buyer avoid spending time and money to build and comply with city regulations, and delays in building a new restaurant.
Due to the Covid-19 pandemic, some restaurants that were priced as profitable restaurants will be sold as an Asset Sale. The remaining profitable restaurants listed for sale should be ready to lower the asking price.
Restaurant valuations are based on 2019 sales numbers and 2020 sales projections. Banks will require quarterly 2020 profit and loss statements for bank lending approval. Based on national sales reports, most restaurant owners have seen a 70%-80% sales loss in March-April. Today’s buyers are more worried about how sales will increase moving forward much more than previous profit and loss statements.
For restaurant buyers seeking restaurant ownership buying an existing restaurant that is being sold as an Asset Sale is a quick path to Restaurant Ownership. The previous seller has done the hard work of building out the restaurant, dealing with contractors, getting the permits, negotiating terms on the lease, and establishing the location as a restaurant. Now it is time to bring your experience, ideas, menu, leadership skills and buy a restaurant that is priced pennies on the dollar.
My advice to restaurant owners looking to sell a restaurant or currently listed for sale:
-Be flexible with your asking price and be ready to negotiate.
-Re-evaluate your listing price after your restaurant is listed for sale a couple of months.
-Be realistic about the “new normal” in the restaurant industry
-Offer owner financing to a financially qualified buyer
-Listing with equipment liquidation company is a terrible idea- you will get pennies on the dollar for used equipment.
-Use a professional trained Restaurant Broker
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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3 Tips for Leasing a Restaurant Space– EATS Restaurant Brokers
3 Tips for Leasing a Restaurant Space
Restaurant leases can be complex and involve negotiations on some very important details to a lease. In general, restaurant commercial leases are generally much longer than a typical residential lease. The restaurant tenant is making a much larger financial commitment.
Regardless of whether you are an experienced restaurateur, franchise concept, or up-and-coming restaurateur, carefully review and consider the lease terms, and the language in the lease.
Even with the difficulty of negotiating lease terms, some restaurateurs try to negotiate with the landlord by themselves without professional representation. This practice sometimes leads to restaurant tenants signing lease agreements they fully don’t understand.
Leasing a restaurant can be a fairly straightforward process if you understand the steps required and seek help from a professional such as restaurant real estate advisors, attorney, contractors, and architects if you have questions. Finding a restaurant space can be the easy part, negotiating the lease terms can be the difficult part.
EATS Restaurant Brokers 3 Tips for Leasing a Restaurant Space
Don’t Call that For Lease Sign
Unless you have experience in negotiating multiple commercial real estate leasing contracts, don’t call that For Lease Sign without contacting a trained Restaurant Broker. The individual who is advertising the commercial real estate space is a trained professional in contract negotiations representing the landlord’s best interest. Once you have called the For Lease Sign directly, you are letting the leasing agent know that you are representing yourself in negotiations.
Why is this important? Once the landlord’s representative starts negotiating with you and sends you a Letter of Intent and then you contact a Restaurant Broker to represent you it’s too late. The landlord will not pay your professional representative a commission and you will be responsible. This will be a personal expense you will incur and have to decide if you want to pay.
Most people don’t know the landlord pays the leasing company usually a 6% commission to lease the space. This commission is usually split between a tenant representative and a landlord representative in a co-op deal.
Be prepared with your documentation
Today’s leasing agents want to know they are working with a quailed tenant before they open the doors to show the space or start negotiating on a lease. The worst feeling as a potential restaurant tenant is to find the ideal and perfect space but you are not ready to move forward. Before you start your restaurant search, you should have the following items ready to present to the landlord if needed.
- Business Plan with 3 years forecast
- Copy of Menu
- Resume or Bio
- Proof of liquid assets-Bank Statement, 401K statement, or letter from your bank
- Personal Financial Statement
- Copy of Tax Returns
Prepare Letter of Intent
The first step of the lease negotiation is the offer to lease, typically referred to as the Letter of Intent (LOI). The Letter of Intent is to facilitate the start of negotiations between the tenant and the landlord. The complexity of the Letter of Intent depends on the person drafting the form, the tenant’s demands, and the landlord’s willingness to negotiate. This documentation should cover the majority of the key points to the lease:
- Rent structure
- Term of Lease
- Options to extend
- Permitted Use/Exclusive Use
- Rent Commencement Date
- Landlords Delivery Condition
- Lease Assignment Rights
- Tenant Improvement Allowance (TI)
- Rent Abatement
- Personal Guaranty
For more information on restaurant leasing and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at sales@eatsbrokers.com. Visit our website at www.EATSbrokers.com
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