Exit Planning for Restaurant Owners
Exit planning for restaurant owners is a process that should start before a restaurant has opened. The harsh reality of restaurant ownership is 80% close within five years. If you are going into the restaurant industry knowing that it will be time to exit within five years, why not plan in advance?
EATS Restaurant Brokers finds that restaurant owners’ lack of exit planning can create liabilities when selling a restaurant.
Dallas Restaurant Broker Dominique Maddox says, “exit planning for restaurant owners should start once a restaurant is open. The common mistake is that restaurant owners fail to plan an exit until they have to sell a restaurant. An exit strategy should allow the restaurant owner to sell a restaurant with limited liabilities”.
EATS Restaurant Brokers-Exit Planning MUSTS:
- Books and Records-keep clean, excellent, and organized books and records. The restaurant buyers in today’s market are educated and can analyze a restaurant owner’s numbers and expenses for red flags. The best way to sell a restaurant is to have clean tax returns; restaurant owners will have to pay taxes on reported gains.
Restaurants that don’t count cash payments, pay employees under the table, or don’t report most sales on tax returns to save on taxes will sell for less on the open buyer market.
EATS Restaurant Brokers Tip: Before listing a restaurant for sale, check to confirm current sales tax filings.
- Build-out expenses– The initial cost for a restaurant build-out can range from $50,000-$1,000,000for a restaurant space ranging in space between 1000-7000 sq. ft. Potential restaurant owners should analyze if it’s wiser to find a second-generation restaurant space to convert to their concept or build out a white box location.
A restaurant has previously occupied a second-generation restaurant space. In a white box location, the restaurant owner is installing everything needed to open a restaurant. The restaurant space has plumbing, electrical, refrigeration, and initial build-out done.
The person that benefits the most from a restaurant owner building out a first-generation restaurant space is the landlord.
Example: Restaurateur pays $300,000 in build-out expenses before opening the doors to a new restaurant. The restaurant owner estimates the restaurant should make a profit of $50,000 per year. The restaurant owner has to wait six years to get the build-out cost expenses back $300,000/50,000= six years!
EATS Restaurant Brokers Tip: Don’t go BROKE on the build-out.
- Restaurant’s Transferability- All restaurants for sale are not good listings because they lack transferability.
Ex.1 A chef-driven restaurant for sale depends on the performance of the chef. If an owner/operator is also the cook, these types of restaurants are difficult to sell. Most restaurant buyers are not looking at buying a restaurant to be a chef; they want a skilled chef in place.
Ex.2 Some restaurants for sale, the landlord, owns the equipment. Restauranteurs that lease restaurants that come fully equipped only own the business and goodwill; they have limited assets to sell.
This type of arrangement can make it difficult for a restaurant owner to sell in the future. Asset purchase agreements between buyers and sellers have the restaurant equipment being sold listed on the contract.
EATS Restaurant Brokers Tip: Before listing a restaurant for sale, check for UCC liens on equipment or business.
EATS Restaurant Brokers biggest take-aways from this blog are listed below:
- Good Books and Records help restaurants sell for the highest and best price
- Don’t go broke on the build-out expenses and have to wait 3-10 years trying to get the initial investment back.
- Make sure to have a restaurant/system that can transfer to a new restaurant owner.
- Own the equipment in the restaurant
To learn more about Broker consulting services or receive a complimentary restaurant valuation, contact Texas 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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EATS Broker expands to Dallas, Texas
EATS Restaurant Brokers is growing and has expanded its headquarters to Dallas, Texas. One of the nation’s specialized Business Brokerage firms, EATS Restaurant Brokers, has obtained a Real Estate Broker License in Texas and now are Restaurant Brokers in Dallas, TX.
Dominique Maddox worked with one of the nation’s largest Restaurant Brokerage Firms for seven years before starting his Restaurant Brokerage.
EATS Broker was established in Atlanta, GA, in October 2019. Less than two years later, EATS Restaurant Brokers is moving its headquarters to Dallas, Texas.
EATS Broker is among the few and far between Restaurant Brokerage firms that hold a Brokers Real Estate license in multiple states and hold a Certified Franchise Executive (CFE) designation.
Dallas Restaurant Broker Dominique Maddox, President of EATS Broker, said, “ Texas is a tremendous state for us to expand and grow our restaurant brokerage firm.
I’m excited to add the Lone Star state to our list of targeted markets for future growth. I have sold multiple restaurants for sale in Texas while living in Atlanta. Texas has one of the largest restaurant resale markets in the nation, with over 600 restaurants listed for sale now. “
Texas has substantial growth in the restaurant industry; the state has one of the fastest-growing population numbers in the nation. Dallas Restaurants, Houston Restaurants, and Austin Restaurants are known across the country. It’s an exciting time to be in the Restaurant Business in Texas.
EATS Restaurants Brokers is excited about living in Texas and connecting people with opportunities in the restaurant industry. We can help you sell a restaurant or buy a restaurant.
To learn more about restaurant resales or to receive a complimentary restaurant valuation, visit our website at www.EATSbroker.com. EATS Broker assist buyers and sellers in the market to buy or sell a restaurant.
Contact Restaurant Broker Dominique Maddox at 404-993-4448 or sales@eatsbroker.com
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Commercial Lease Assignment: What should you know?
What should you know about a Commercial Lease Assignment before signing the lease? The lease assignment can be short and brief, but it has a tremendous impact on the capability of a restaurant owner selling a restaurant in the future.
When buying or selling a restaurant, it is essential to evaluate the strength or weakness of a commercial lease assignment language.
A restaurant owner that wants to sell a restaurant can easily be stopped by the language in their lease that covers the possibility of a lease assignment to a new tenant.
What should you know if you are negotiating a lease assignment language for a commercial lease? This blog presents a brief breakdown of some of the key points involved in a lease assignment.
When a tenant’s lease interest is assigned to a new tenant/buyer, this is called a lease assignment. The current tenant has already agreed to terms with the landlord; once the new tenant signs the lease assignment, they are now responsible for the lease terms. The landlord’s standard practice is to keep the previous tenant on the lease as a guarantor and add the new tenant.
Most negotiated leases will contain a provision requiring that landlord’s consent to an assignment is necessary, but such approval will not be unreasonably withheld. The tenant will likely also try to include the landlord’s obligation to not unreasonably delay or condition its consent, according to Attorney John G. Kelly.
Dallas Restaurant Broker Dominique Maddox says, “Selling a restaurant has multiple tasks/assignments that have to be completed before restaurant ownership is transferred. Practically every commercial lease will have detailed requirements for the assignment process.
Landlord approval for a lease assignment is a critical part of the selling process. The majority of restaurant owners are clueless about the provisions in their lease for a lease assignment”.
EATS Restaurant Brokers list language to know in a commercial lease regarding a lease assignment
Assignment Fee:
This fee is payable to the landlord before a tenant can transfer the rights to a commercial lease. The amount is usually not negotiated between landlord and tenant, most leases landlord input whatever number they want.
The assignment fees usually range from $0-$10,000 (listings for sale under $2 million); it really depends on the landlord and the language in the lease. The lease assignment fee majority of the time, is paid by the seller.
EATS Restaurant Brokers tip: Read the lease before signing and know how much the assignment fee will cost you.
Financial Qualifications:
Landlords have several different qualifying metrics a tenant should pass before getting approved for a lease. The lease assignment language should not be as strict as the current lease for a new tenant because the business is up and running, usually generating sales.
Depending on the landlord, EATS Restaurant Brokers has seen lease assignments that automatically approve a new tenant if they keep the lease space the same franchise brand. But also seen lease assignment language where the new tenant has to have as much or more liquid assets as the previous tenant. This can be an unreasonable requirement if the first tenant is financially well off when signing the original lease.
Renewal Option
The renewal option gives a tenant the right to extend a commercial lease expiring in the future. Lease options are usually extended by 3 years, 5 years, or 10 years.
Renewal options should have specific language on the conditions required for a tenant to extend an expiring lease. Many leases need a tenant to give 90-180 days’ written notice to confirm if the tenant plans to extend the lease.
Restaurant owners who are trying to sell a restaurant and lease are about to expire might think they will just have the new buyer sign the tenant.
If the window to provide a landlord with a written notice has expired, the landlord has the right to refuse to agree to a lease assignment.
EATS Restaurant Brokers Tip: The restaurant owner should know how far in advance written notice to extend the lease is required to the landlord.
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@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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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 Broker 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@eatsbroker.com. Visit our website at www.EATSbroker.com
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How do you write a letter of intent for a lease
How do you write a letter of intent for a lease is a struggle for inexperienced brokers representing clients or unrepresented potential tenants? Once a potential tenant finds a commercial lease space, the process to negotiate with the landlord begins.
A letter of intent (LOI) is a document declaring one party’s preliminary commitment to do business with another. The letter outlines the key points of a deal that will be negotiated between all parties involved.
LOIs are useful when two parties, usually landlord and potential tenant, work together to hammer out the broad strokes before resolving the finer points.
Letter of Intents can be drafted and presented by either party. The receiving party can accept the terms or redline and revise the words to send back to the original sender.
Key Points on a Letter of Intent Include:
- Tenant Improvement Allowance (TI)
- Rent Abatement
- Personal Guaranty
- Rent structure
- Term of Lease
- Options to extend
- Permitted Use/Exclusive Use
- Rent Commencement Date
- Landlords Delivery Condition
- Lease Assignment Rights
- Security Deposit
- Advanced Rent
- Repairs and Maintenance
- Brokerage Disclosure and Commission
Dominique Maddox, a Restaurant Broker and Founder of EATS Restaurant Brokers says, “the letter of intent is an essential part for a potential tenant to address all concerning issues before signing a new lease.
Landlords pay lawyers to draft leases that protect all their concerns. In this business, I always say the landlord is not your friend. Potential tenants need to have a professional on your side when negotiating the lease”.
EATS Brokerssuggest hiring a professional Business Broker or Restaurant Broker to review the following items on a Letter of Intent (LOI):
- Personal Guarantees- how long will the tenant be a personal guarantor.
- Exclusivity-does the tenant have any protection from incoming tenants competing with their cuisine.
- Covenants, POA rules, and regulations
- Zoning issues
- Subordination
- SBA leases
- Renewals- Provides information on renewals and rates.
- Non-Disturbance
- Dispute resolution
The detailed information to consider when evaluating a new lease can be overwhelming to an inexperienced restauranteur or real estate professional. Most landlords hire property management companies to negotiate new leases. These hired professionals’ job is to get the landlord the best deal possible.
To all potential tenants, remember when you call the “For Lease” sign on a vacant restaurant space, you are letting the landlord know you are representing yourself in lease negotiations.
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@eatsbroker.com.
Visit our website at www.EATSbroker.com
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Day in a Restaurant Broker’s Life
What does a Restaurant Broker actually do daily? Dominique Maddox, Founder and President of EATS Broker share his thoughts about the Day in a Restaurant Broker’s life.
I wrote a blog last year about my daily activities by the minute as a Restaurant Broker that received great interest and replies. I have decided to start a series of blogs about some of my most exciting days as a Restaurant Broker. This blog covers a day where I drove 900 miles round trip in a day to visit four potential restaurant listings and two restaurant owners.
I was super excited about the potential to get four restaurant listings, and one of the restaurant owners operated three locations. My Day was planned out the night before with an 11am face to face listing appointment in Jasper County in South Carolina.
After my 11am scheduled appointment, I was scheduled to meet the restaurant operator of three locations in Florence County, SC, at any time because he would be working that day. His restaurants were located in three different cities. My strategy was to visit all his locations before I met with him in Florence County.
Let’s see how this goes:
4:00 am – Wake up and put on a pot of coffee, and drink water. Review my Cash Scoreboard with my to-do list for the Day. Add any items that come to mind.
4:15 am- 4:30 am – Pack snacks, candy, and energy shots for the day trip. Kiss my wife good-bye, say a quick prayer, and I’m in my car on the way to Sumter County, SC.
4:30 am- 4:45 am- I drive my wife’s car on my long road trips to visit customers. As usual, when I take my wife’s car, her gas is empty, so before I can really start my road trip, I stop for gas. The 1st restaurant location is 290 miles away from my home.
7:45 am – 8:00am- First stop of the Day to refuel the gas, respond to customers’ emails, stretch, and grab some Bojangles for breakfast.
8:30 am- Arrive at 1st restaurant location. I take notes about the restaurant’s appearance related to street visibility, the shopping center’s condition, lease vacant spaces, and other tenants in a shopping center. The restaurant is not open, so I can only look thru the window.
8:45 am- Jump back in the car to make my way towards my 11am scheduled face-to-face meeting with a restaurant owner located 145 miles away.
10:45 am- I arrive early in the surrounding area to drive around to have a better feel for the location. I take notes on the surrounding competition, businesses, residential properties, and the appearance from the outside.
11:00 am – 12:00 pm- Meet with the single unit owner. They would like to sell to relocate outside of the state. I educate them on the current restaurant resale market, provide a restaurant price valuation, and review the lease.
12:15 pm- Respond to buyer inquiries from my car, finalize my notes from my meeting, and input location three in the Waze App. I’m headed to the 2nd restaurant of three owned by the restaurant operator in Florence County, located 165 miles away.
2:45 pm – I arrive at the restaurant, and instantly I’m impressed with the beautifully built restaurant with a drive-thru. I was impressed with the street visibility and design of the restaurant. It was a fantastic improvement from the seller’s first location in Sumter County.
3:00 pm- I take a couple pictures of the restaurant building, outdoor signage, patio space, and drive-thru window. Finalize my notes from my car and head towards the face-to-face meeting with Restaurant Owner 2; the location is 25 miles away.
3:30 pm- I arrive at destination number four. During my ride, I was thinking about the difference between the owner’s two locations. I thought about the Pros and Cons of both places. I was ready for my face-to-face meeting. By this point, I had driven 625 miles in the Day.
3:45 pm – I walk-in a restaurant, and instantly, I’m impressed with the restaurant’s layout, bar area, and stand-alone building. I ask for the owner, grab a menu and take a seat.
The management team lets me know he is not there. I sit down and look at the menu order food. My food arrives, and it’s delicious, but the owner has not arrived yet.
4:15 pm – I start to get nervous, and doubt starts to kick in. I made the cardinal sales professional mistake; I didn’t confirm the scheduled meeting the night before with the owner. I sent a text and get no response.
4:30 pm- Management team members come over and let me know the restaurant owner will not make the meeting.
4:45pm – Disappointed, I get back in my car and start my journey home, located 300 miles away.
5:15pm – The Owner calls to apologize for missing the scheduled meeting. We talk on the phone for about 30 minutes (I have Bluetooth). He agrees to send his Profit and Loss statements to me via email to provide him a restaurant valuation for all three of his restaurants.
9:15 pm- I finally arrive at home after driving over 900 miles. I was mentally tired, my body ached, and my stomach was empty. I was lucky because my wife had dinner ready.
I returned home with zero signed listing agreements. Most would think my trip was unsuccessful, but I feel different.
I was able to show my potential listing clients I will go the extra mile to provide exceptional customer service. I was trying to show Restaurant Owner 2 that I’m not a Broker that will just sit in an office and rarely visit clients at their restaurants,
EATS Restaurant Brokers commits to visiting potential clients within a 300-400 miles radius if needed to get a deal done. We can sell restaurants in Tennessee, South Carolina, North Carolina, Alabama, Texas, Kentucky, Missouri, Louisiana, Virginia and Georgia.
Thinking about selling a restaurant contact EATS 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@eatsbroker.com.
Visit our website at www.EATSbroker.com
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Why Buy a Restaurant? Here are Four Reasons?
It’s a golden opportunity for buyers to buy a restaurant in today’s market. BizBuySell.com states website traffic has increased with Buyers and Sellers activity. Customer traffic on the internet’s largest Business for sale site now exceeds pre-Covid-19 levels. Traffic to the website was up 19% May 2020 compared to May 2019.
Yelp recently updated its Local Economic Impact Report to provide in-depth information on the brick-and-mortar business sectors across the nation. Yelp states in March, Restaurants had the highest number of business closures, compared to other industries, and have continued to close at high rates.
53% of restaurant closures are indicated as permanent on Yelp.
What do high restaurant closures and increased seller activity on BizBuySell.com mean? It’s a great time to buy a restaurant!
EATS Restaurant Brokers Four Reasons Why it’s a great time to buy a Restaurant?
- Cares Act SBA Loan Program
As part of the coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020.
This is a great opportunity to get six months of free financing for their business. For loans made after March 27, 2020, and fully disbursed prior to September 27, 2020, SBA will begin making payments with the first payment due on the loan and will make six monthly payments.
- Second Generation Restaurant space available.
The high amount of restaurant closures is an opportunity for another restauranteur. Prime real estate spaces are coming available due to restaurants not reopening. This is a golden opportunity for buyers to get a second-generation restaurant space in prime retail areas.
- Businesses with Growth Potential
Many businesses are well-positioned for a post-Covid-19 economy. Take Out and Delivery are in high demand from online ordering and increased digital exposure. Quick Service Franchises such as Wing Stop, Papa John’s, and Domino’s have seen business skyrocket since March when the Covid-19 outbreak happen.
The forced closures across the US have increased buyer’s ordering online. Restaurants that were in position with online ordering platforms are going strong.
- Exiting Business Owners
Many baby boomers may choose to sell or close rather than persevere through Covid-19 new guidelines for re-opening. Baby Boomers that are close to retirement are viewing the opening of the economy and increased buyer demand as the time to sell.
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@eatsbroker.com. Visit our website at www.EATSbroker.com
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3 Types of Buyers after Covid-19
EATS Broker talks to 3 Types of Buyers after the Covid-19 pandemic outbreak about buying a restaurant. The conversations we had before Covid-19 were much different than the conversations now. Today’s conversations come with a collection of unknown factors.
Today’s market is buzzing with a large number of buyers and sellers entering the market. Some want to become an entrepreneur while others want to sell a business. According to BizBuySell.com traffic has increased with Buyers and Sellers activity and now exceeds pre-Covid-19 levels. Traffic to the website was up 19% May 2020 compared to May 2019.
Dominique Maddox of EATS Restaurant Broker says, “ it’s a golden opportunity for savvy buyers in today’s market. Restaurants that were for sale at high valuation prices before Covid-19, now need to be reevaluated and the listing price lowered”.
3 Types of Buyers in today’s market after Covid-19:
- Sit on the sideline– these buyers are pessimistic and believe that the worst will happen with the Covid pandemic. These buyers will sit on the sideline to watch and wait. They are waiting to see what emerges next. These buyers will look but will not move forward to purchase.
- The Savvy Buyer– has the Entrepreneur Spirit these are the people looking to buy up businesses at some attractive prices. These are the buyers looking for value at a great price. We saw this in the real estate recession in 2009 and 2010 when prices were low, the savvy buyers were bullish and bought properties.
- The recent unemployed buyer– according to CNBC the employment-population ratio of the number of employed people as a percentage of the U.S. adult population plunged to 52.8% in May. This news means 47.2% of Americans are jobless, according to Bureau of Labor Statistics. As the coronavirus-induced shutdowns tore through the labor market, the share of the population employed dropped sharply from a recent high of 61.2% in January.
With 42 million people out of job, some of those people will be looking to buy a business. These buyers have been furloughed from corporate jobs, or buyers wanting to use their 401K to purchase a business.
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@eatsbroker.com. Visit our website at www.EATSbroker.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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