This blog is the first time EATS Broker shares its thoughts about why Restaurant Resales fail in today’s market. Before restaurant owners open the doors and go through the excitement of opening a new restaurant, they should have an exit strategy.
H.G. Parsa, an Associate professor of hospitality management at Ohio State University, conducted a study and found that 57 to 61 percent of restaurants fail within the first three years. Among restaurant franchise chains, the failure rate was 57% over a three-period period, compared to independent restaurants, which had a failure rate of 61%.
Now that we know the truth about the restaurant industry, it is time to discuss why Restaurant Resales Fail once they are on the market. The business Brokerage industry estimates that only 30%-40% of the businesses listed for sale will sell to a new buyer.
Restaurants face numerous unique challenges when selling a restaurant as a resale. The Restaurant Broker at EATS Broker points out four reasons:
Money Issues- It takes an average of 6-8 to sell a restaurant once it’s listed for sale. The problem is that most restaurant owners plan to sell a restaurant once a life-altering event happens. A big reason to sell a restaurant is money issues. There are two types of money issues:
- Don’t have enough money to keep doors open: These types of restaurant owners usually wait too long to contact a Restaurant Broker for help and eventually have to close.
- Need the money from the sale: These restaurant owners have a financial net number in mind, and if offers come in below that number, they will not accept them.
Lease Issues -When it’s time to negotiate a lease assignment with the new buyer, it’s a landlord’s world. The landlord can easily make or break a deal, and the landlord’s approval of the potential buyer is a big key to a deal’s success.
The Common reasons landlords deny potential buyers are:
-Lack of Liquidity
-Lack of net worth
-Credit Issues
-Lack of restaurant experience
-Personal reasons
When selling a restaurant business, the buyer usually has the following options, depending on how long is left on the seller’s original lease.
Lease Assignment- take over as guarantor on the lease from the seller and agree to the current lease terms.
-Sign a new lease. The buyer will be able to negotiate with the landlord on the new terms of the lease agreement.
-Sign a lease extension. Usually, the buyer will accept the terms of the seller’s current lease and sign a lease extension for 1-10 years.
Landlords are known to be deal killers with some of their requirements for lease assignment approval.
Seller Expectations Issues-Selling a restaurant is much more complicated than selling a home. People need housing to survive; they don’t need to buy a restaurant. In most cases, the seller is much more motivated to sell a restaurant than the buyer is to buy a restaurant.
Restaurant owners represented by a Restaurant Business Broker or a for-sale-by-owner should have the right expectations when their business goes on the market for sale.
Sellers who are unwilling to negotiate on offers find out in the long run that the first offer is usually the best and sometimes the only one.
Books and Records Can be the most important information provided to an interested buyer. Most people would be surprised about how unorganized some restaurant owners are. Time kills deals, and when a buyer requests financials and the seller is slow to respond, the chances of the deal never closing increase.
The financials the buyer might request during the due diligence period are the following:
-Tax Returns
-Profit and Loss Statements
-POS Sales Reports
-Sales Tax Filings
-Credit Card Statements
-Copy of Franchise Royalty Report (for franchises only)
-Bank Statements
Restaurant owners should have an organized system for their financial documents and keep them updated. The most complex restaurants to resale involve books and records that must be more organized or correctly stated.
There are a number of reasons why restaurants don’t sell when they are put up for sale; this blog includes a couple of reasons why the Restaurant Broker thinks Restaurant Resales fail.
EATS Broker is a restaurant brokerage based in Dallas, Texas. Our Restaurant Brokerage sells restaurants in over 15 states located on the South and East Coast. The Restaurant Business Broker has been selling restaurants for over 12 years. EATS Broker was founded in November 2019.
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 [email protected]. Visit our website at www.EATSbroker.com
