Criteria For Buying/Selling
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16 Important Buying and Selling Criteria for Restaurants
Whether you are looking to buy or sell a restaurant or food service business
let the experienced team at Houlihan Business Brokers guide you through the steps.
Below please find a list of items to consider when buying or selling a business.
This is the most common way to value a restaurant business.This approach derives the selling price by taking a percentage of gross sales. To determine the percentage, you must look at similar restaurants that have been sold, take the actual sale price and divide it by the gross sales. HBB has access to local and national data bases to accurately determine the correct percentage.
The cost to build a restaurant is a key consideration to a buyer. If a restaurant is losing money or is in distress, the Cost to Build Approach can be the primary way to establish the Fair Market Value (FMV). A percentage of the cost to build determines the value. The correct percentage is established by looking at past sales of similar restaurants. Once again, HBB has access to this data.
SDE is defined as earnings before income taxes, interest, amortization and depreciation plus the compensation of one seller. The compensation of one seller should include any salary plus other compensation, such as, a business/family auto, travel and entertainment, health insurance, one-time expenses and other forms of income. The SDE is then multiplied by a multiple. Once again, HBB derives this multiple from national and local databases.
A combination of these top three approaches is evaluated along with features that may add or subtract from the value of each unique restaurant.
Tax returns are a key factor in using the Gross Sales Approach and Sellers Discretionary Earnings approach.
The lease should be 10 years or longer and be assignable without any unreasonable contingencies. The general rule of thumb is for gross rent (base rent + real estate taxes +CAM charges) to be 10% or less than reasonably expected sales.
Do you have a copy of your C of O? Do you have any open building permits? Do you know the legal seating capacity of your restaurant? Do you have an occupancy poster? All of these items are very important to a buyer.
For obvious reasons parking is a very important feature that can add or subtract from the value of a restaurant.
Everyone would like to get an all cash deal, however, that does not always happen. The most common source of financing the sale of a business, is from the seller in the form of a 3 to 5-year note. SBA loans are another options but are difficult to get. For an SBA loan to be approved the business must have strong earnings and the buyer’s credit history will be taken into consideration.
How frequently has a restaurant location changed hands? Prior success or failure does not guarantee success or failure but a long steady history of success is generally a positive feature. A restaurant that has changed hands or gone out of business frequently requires careful due-diligence. The concept, rent or location could be some of the problem issues.
This is important when using the Cost to Build Approach. A brand-new dining room and or kitchen will add value and an older dining room or kitchen will subtract value.
Buying or leasing a business/property will depend on how much money you have to invest and whether or not the property is for sale. There are advantages to owning the real estate. You should discuss this in more detail with HBB, your attorney and accountant. All real estate transactions are done through Houlihan & O’Malley Real Estate Services Inc. The contact information is the same as HBB.
If you, as an owner, are attempting to sell your own restaurant, that process alone reveals that the business is up for sale. Confidentiality is very important to every seller. When word gets out that a restaurant is for sale there is a risk of losing staff and customers. At HBB we take this very seriously. We require that all potential buyer’s sign a confidentiality agreement before we reveal our client.
If you are a buyer, a business plan is extremely important to forecast how much your sales will be and how much rent, among other expenses, you can afford. If you are a new restaurateur a professional business plan will be very important in convincing the landlord to lease you the space. An accountant with restaurant experience should help you develop the plan.
Do you need to upgrade the utilities or the major mechanical systems in the restaurant? Natural Gas, electrical services, , hood systems, HVAC and sprinkler systems are expensive items to install in a restaurant. If you plan to build or remodel a restaurant , get an estimate before you sign the lease.
Selling a business that you have built is a very emotional decision. Give HBB a call anytime to discuss the steps that you need to take to get ready to put your business on the market.
I highly recommend that you discuss this with your attorney and your accountant before you agree to list your business with HBB or anyone else.
As long as you have done your homework and have completed a business plan, any time is a good time to buy. HBB will assist you through this process to present the clear realistic facts for you to make educated decisions.