• Is the business currently producing an income for the owner?
• Is the business seller retiring and fully funded his or her retirement plans?          • Does the sale of the business only represent a small part of the retirement portfolio?
• Is the business debt free?
• Do the financials show that the depreciation schedules are completely exhausted?

Affirmative answers to these questions tell the business buyer that the business is making enough money for their needs and you are indeed in a financial position to sell your business and sell it within the constraints of the marketplace.

Another thing that a buyer is going to want to know about is your plan for the future.  Nobody wants to get to the closing table only to have the owner decide that he or she wants to keep the business.  Equally, nobody wants to buy a business only to find out that you’re going to open a competing business.  This is why buyers like sellers that are clearly of retirement age and means.  If your business is complex or highly personal in nature, a buyer may require that you stay involved in the business for a period of time to provide a seamless transition.  If you have dreams of selling your business and moving to the Caribbean, this might be achievable. You may only have to adjust your time line a bit.

Now that you know some of the keys to attracting a buyer for your business, the next step is to find the right buyer for your business.  To do that you’re going to want someone to help you who understands business buyers.

Kendric Foultz is a certified business broker with decades of experience in deal making and working with business buyers and sellers.  Feel free to give him a call regarding your business related issues at 310-968-2369.

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More and more small business owners are finding that profits are going to servicing their debt and keeping their business operational.  In such cases, an option is to sell the business through a short sale.  Especially if a business owner is burnt-out, looking at shuttering the business and declaring bankruptcy.

Declaring bankruptcy is different as a small business owner.  It’s not just an anonymous bank or bureaucratic phone company that is owed money; it’s often suppliers and vendors with whom there are long-term personal relationships.  And often, friends and family have invested in the business or lent large sums of money to help keep the business afloat.

A short sale can provide creditors at least a portion of the funds owed to them, while alleviating the small business owner of having a bankruptcy tied to their name and credit.  It can also save the jobs of the employees.

Special note for franchise owners – If the business is under a franchise agreement and the franchise payments are grossly in arrears, there is a chance the franchisor can take back the business, leaving the owner without a business and still holding all the debt.  It is in the interest of the franchisor for the business to sell and bring in a new owner who will start paying royalties.

How it works –

An experienced and competent business broker will package the business based upon its net profit and assets.  The debt and other non-operational expenses will be added back to the net profit and an industry appropriate multiple will be determined.  If the business sells for less than what is owed, it is a Short Sale.  If it sells for more than what is owed, the owner will receive whatever is left over after all the debt is paid.

In a normal sale, an escrow is used primarily to protect the buyer from successor liability – any debt attached to the business.  In a short sale, the escrow process also aids the seller in settling the business’s debt.

Once all the debt is established, the escrow officer will prepare a seller’s estimated statement reflecting all secured and unsecured debt.  Secured debt includes tax liabilities, private liens, judgments, etc.  Unsecured debt includes private loans.  If the sale price covers all the secured debt, the remaining funds are distributed pro rata to the unsecured creditors.  If the sale price doesn’t cover all the secured debt, remaining funds are distributed pro rata to the secured creditors.

All creditors will need to agree on the payout in order to close the deal.  Since the alternative is usually bankruptcy for a small business owner, creditors would prefer to receive something rather than nothing.  Thus, they generally will agree to the pro rata payout.

Although short sales are messier than regular business transfers, they are a win-win for the buyer, the seller and the creditors.  The buyer gets a good deal on the business; the seller avoids bankruptcy and is alleviated of their debt while their creditors get something rather than nothing.

Enlist an experienced business broker.   They can help you overcome most obstacles and discreetly bring you qualified buyers.  We currently have over 3,000 buyers in our database alone.  For a free consultation, please don’t hesitate to call me.  Shelli Margolin-Mayer, Business Broker: (310) 882-2200 ext. 128.  I’m happy to help.

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In the current economy, many restaurants that once thrived are sadly no longer able to sustain a positive cash flow. However, the good news is that selling a restaurant that is operating under a loss or poor revenues is possible.

The biggest barrier to entry in the restaurant industry is the initial build-out costs.  If your restaurant has a functioning hood, flood drains, three part sink and a permitted refrigerator unit, then your restaurant will sell.  If you have a liquor license, your restaurant will sell for more!

The most common obstacles to selling your restaurant are:

1.      The price you want vs. the actual market price

2.      Messy, incomplete or none existent books and records

3.      Deferred maintenance

4.      Not being up to code

5.      Expiring lease

6.      Time and energy

Preparation is the best way to overcome these obstacles:

1.      Be prepared to carry a note, instead on insisting for all cash. If you price your restaurant too high or too low, you won’t get serious responses.  Tailor your expectations to the reality of the market.

2.      Your books and records can be your best friend in selling your restaurant.  They will highlight such things as Discretionary Earning which can actual cause your business to show a positive cash flow for a new buyer.  Any non-operational expense, such as your car payments or cell phone can be added back to your bottom line.

Your books and records can also be your enemy, if they are not kept organized and up to date.  Additionally, many businesses are opting to take cash instead of credit cards.  It is very typical that cash transactions aren’t recorded.  However when selling your restaurant, it is to your advantage to show all your revenue in order to receive a higher selling price.  Keeping a simple hand written or spreadsheet record of cash sales can often be sufficient documentation for a buyer, …but only if those cash sales are real.

3.      Make sure all your major equipment and floor drains are in working order and are up to code.  Otherwise be prepared for a price that will reflect getting those items working and up to code.

4.      A new buyer will need to go through a County health inspection.  If your restaurant isn’t up to code, it will not sell!

5.      Location! Location! Location!  If your lease is expiring this year, you may want to think about getting an extension or exercise your option to make your restaurant more attractive to serious buyers.

6.      If you are planning on trying to sell your restaurant by yourself, be prepared to spend a lot of time and energy on the marketing, looky-loo’s and a barrage of questions from would-be buyers.  Selling a restaurant is a full-time job and proper marketing can get expensive to successfully sell it yourself.

The decision to sell is as much an emotional decision as a business one.  Get some help by enlisting an experienced business broker.  They can help you overcome most obstacles and discreetly bring you qualified buyers, so you can your spend your time and money running your restaurant and living your life.

Enlist an experienced business broker.   They can help you overcome most obstacles and discreetly bring you qualified buyers.  We currently have over 3,000 buyers in our database alone.  For a free consultation, please don’t hesitate to call me.  Shelli Margolin-Mayer, Business Broker: (310) 882-2200 ext. 128.  I’m happy to help.

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Restaurants, coffee shops or bars are valuable even if they are not showing a profit. These kinds of businesses are valued through the replacement value technique which assumes a buyer pays the seller a price that is not dependent on the income value to benefit from the existing investment in the restaurant facility, the lease and the location. In other words, the buyer is starting a restaurant business at a discount and will pay for the right to avoid spending hundreds of thousands or even millions and avoid all the delays and city regulations in building a new restaurant

Here is what a restaurant –seller has to say when he received an offer on his business.
“…they see that the only valuable asset of a restaurant is the equipment such as freezer, refrigerator, oven, ice maker and the espresso machine. Sure this equipment can easily be bought at discounted price from restaurant equipment liquidators. I bought some of them myself.
But to open this restaurant, I spent more than the cost of these machines. I paid an architect to draw the layout so this will pass the permit requirement. I had to present these plans to the city’s planning committee for their approval and that was not a stroll in the park. And then the contractor, oh boy… Our target was 3 months. It took us 9 months to finish building this 1000sf restaurant! My landlord gave me 2 months TI (tenant improvement) period but after that I had to pay rent month after month until the construction was completed. I had a great location in Santa Monica but it sure was not cheap, $250,000. I won’t get into the details but it is hard to put a value on the time, sweat, and near-breakdowns I put into this business… And then I get an offer for $10,000 because the buyer thinks my used equipment is only worth that much. I know I won’t get back the money I invested but come on.”
****
When valuing a Restaurant using the replacement value technique, you  need to take into consideration the costs of the following Assets:
- Tenant Improvements (electrical rewiring, plumbing, heating and air conditioning. cosmetic changes, build outs)
- Fixtures (hood system/ventilation, grease trap, walk-ins, shelving units, lighting)
- Permits and licenses (health permit, ABC license, entertainment permit, extended hours to operate)
- Location, location, location (Is this even replaceable?)
- Lease
- Goodwill
- Equipments
- Furniture
- Clientele/Database
- **Alcohol license (ABC License Type 41, Type 47 or Type 48)

Mina Singson is an experienced Restaurant/Bar Broker.  She has listed and sold different types of restaurant businesses. For  a free consultation, please contact Mina Singson at 310-882-2200 ext. 125 or email: msingson@bizex.net

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A True Story

Restaurants are not necessarily an easy sell.  However, if they are priced at their proper value and positioned to sell in the right forums, they can be sold in a timely manner to the satisfaction of both the buyer and seller. Preparing the restaurant’s books and records for sale is as important as bringing in the right buyer. The following is a true story of a restaurant that recently sold through an experienced restaurant business broker.

When the Johnston’s[1] bought their pizza deli in Los Angeles five years ago, the plan was to build a business for their children to takeover.  Both Mr. & Mrs. Johnston had fulltime careers that they wanted to keep.  With the help of their son, the restaurant was able to sustain a positive cash-flow for several years.

However, both of their children started pursuing college educations in an unrelated field. Thus, the Johnston’s dream of passing the business on to their children vanished.  Mr. Johnston began spending more and more time running the restaurant while his son was in school.  Working at a full-time career and working in the restaurant soon became extremely stressful.

The stress and loss of motivation, along with a family illness, spurred the Johnstons to sell.  At the listing meeting, two pertinent questions were asked, 1) is your hood, floor drains and refrigeration exhaust in working order with valid permits and 2) what are your gross sales & net sales? These are the two most import issues regarding readiness for sale and determining price.

All the equipment and permits where in order. Thus, replacement costs were determined for the furniture, fixtures and equipment (FF&E).

Unfortunately, they didn’t have organized books and records.  Plus, a fair amount of sales where in unrecorded cash.  Once they reviewed the documentation they had and came up with annual totals for sales and expenditures, a legitimate profit and loss statement was created that a buyer could understand.

Because they hired staff to work the hours the family couldn’t, their net profits were negatively affected. The profit and loss statement was then adjusted to show what the restaurant would earn if the restaurant was owner-operated.

There was still the problem of the cash revenue. Some of the cash was pocketed as profit and some was used to pay employees and for inventory purchases.  It was expressly explained that onus was on the seller to prove the cash sales to a buyer.

Once there was a legitimate the profit and loss statement and the FF&E replacement cost was established, an asking price was determined based upon a multiple for restaurants selling in Los Angeles.

Twenty-one days after the listing was launched, an acceptable offer was presented.  The buyer was not exactly a good match, as he was looking for an investment and not a hands-on owner-operated restaurant.  However, the buyer was enthusiastic and he wanted to pursue the sale.  The Johnstons agreed. During the due-diligence period, the buyer wasn’t convinced of the cash sales. He made a formal request and was released from the offer.

Within two weeks another acceptable offer was presented.  This time the buyers were a family, the Garcias[2], who wanted to run the restaurant as onsite owner-operators.  They understood the concept of cash sales, however they needed proof.  Thus, the Garcias spent more time with the Johnstons during the due-diligence period.  Through an on-site visit, they gained confidence in some of the cash amounts that were stated.  However, it was not enough to justify the full asking price.  Together a price was negotiated with which everyone was comfortable.  The deal closed within 90 days from the time the listing was launched.

If a restaurant is marketed to the correct audience and can prove its net income, the right buyer is out there.  There is a lot that goes into selling a restaurant, much more than many other types of businesses.  The above story is just one example of restaurants I’ve sold. We currently have over 3,000 buyers in our database alone.  For a free consultation, please don’t hesitate to call me. Shelli Margolin-Mayer, Restaurant Broker: (310) 882-2200 ext. 128.  http://www.bizex.net/business-broker/shelli-margolin I’m happy to help.

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Put yourself in the Buyer’s shoes and price your business accordingly.  First of all the asking price and terms have to make financial sense relative to the historical earnings of the business along with future positive outlook for the business and  its industry.  In a great many cases, it’s the asking price that is preventing the sale.  Next take a look at the terms.  If the business has been approved for SBA financing then terms shouldn’t be a problem.  If the sale doesn’t qualify for outside financing and the seller wants more than 50% down payment then you are likely to have a problem.  Ask the business broker to show how the business would cash flow for a new owner.

Goodwill will likely be the most valuable element of your business.  A credible Confidential Business Review will substantiate the value to a Buyer and increase the likelihood of getting a reasonable offer.  Make sure that the business broker has been able to create a Confidential Business Review of the business that paints  an accurate picture of what is going on with your operation.  There should not be any significant gaps that would cause a serious buyer to wonder why relevant information is not included.  That is one of the best ways to turn off a good buyer.  While no two businesses are exactly the same, they do share many common elements and the buyers want to compare these elements from business to business.

Finally, make sure you’re getting the word out to the right buyer. Have a complete understanding of what the business broker is doing to market your business.  Sometimes an owner will know of something that would help the marketing efforts of the broker and should let the broker know right away.  This might be something like a particular trade journal or industry conference.  Don’t forget that this is a team effort.

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The number of retail liquor licenses, especially Type 47 (full liquor license for restaurants) and Type 48 (full liquor license for bars and nightclubs) that can be issued in a county is restricted.  The limited supply of liquor licenses and the lengthy process to get an ABC license approved make businesses with permit to sell alcohol highly desirable and valuable.

When buying a business with beer and wine or full liquor license, the transfer of ABC license from one person or entity to another person or entity is called a “person-to-person” transfer.

Generally, this is how it works:

When an offer is accepted, the buyer and seller must open an escrow account before the application for transfer is filed with the ABC. The escrow company will file a notice of intended transfer with the office of the county recorder for the county where the licensed establishment is located.  Next, the buyer and seller will fill out the transfer application form with the information of the seller and the buyer and all of the required business information regarding the business entity requesting the liquor license transfer.

Immediately after filing an application, a public notice of application for ownership change must be posted on the premises for 30 days. The escrow company will also publish a notice of the application in a newspaper of general circulation in the area in which the business is located.

If all goes well until the posting period ends, at this point, the buyer must deposit the remaining balance of the purchase price with the escrow holder and close escrow.  The escrow company forwards an ABC form to the local ABC district office to declare that purchase consideration and contingencies have all been completed. When the license is transferred, the ABC returns the counter-signed form to the escrow agent as a signal that the consideration in the escrow can be released to the seller.

This transfer procedure takes at least 60 days and each process may vary depending on both parties’ situations.

For more information on the sale of restaurants or bars with alcohol license, contact Restaurant Business Broker Mina Singson at 310-882-2200 x 125 or email msingson@bizex.net

References:

www.abc.ca.gov

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One of the biggest risks for a buyer is whether the business will survive without the seller’s presence, knowledge and relationships.  I want to give you some actual examples of businesses I have both recently sold and am in the process of selling.

I have a client who wants to sell his insurance business.   He has done a wonderful job creating and running his one man business.  However, when selling his business he has a big problem.  The only asset that he is selling is the relationships he has with his clients.  You would think that very few buyers would be willing to take that risk. However, after listing the business for less than 2 months, I have already had over 300 inquiries. The challenge has been to bridge the gap between the business opportunities and the inherent risks of this type of transaction.

The key to selling the business is the Earn-Out structure.  An Earn-Out is a contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future goals.  In the insurance example, the buyer would pay 50% up front to the seller of the agreed offering price. After the 1^st year, he would pay an additional 25% based on how much business is generated from his book of business during that year. After the 2^nd year, he would pay the final 25% based on the business generated from his book of business for that year.

This arrangement gives the seller a vested interest in making sure that his clients stay with the new owner.  It also takes away some of the risk to the buyer. If some of the clients do not transfer over, then the buyer will end up paying less for the business.

I recently sold 2 businesses where the buyers saw a great opportunity to make money but were buying businesses that they did not have any experience in.  Once again, we structured the sales with an Earn-Out.  This time the purpose was to make sure that the seller had a stake in the business while training the buyer. The seller realized that the better he trained the buyer, the more upside he had in the final price. The buyer liked the arrangement for that reason and also because it he could retain some of his capital and use for other purposes. The Earn-Out in both of these cases was structured with equity. The buyers bought 80% of their respective businesses with a contract to buy the remaining 20% over a 2 year period.  The final result was a win for the buyer and a win for the seller.

Please feel free to contact Dan Munter at dmunter@bizex.net if you would like to discuss this further.

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Many of the steps below may seem like no brainers.  However, often restaurant owners are so engrossed in their day to day operation that they over look simple things that can drastically effect how buyers will perceive their restaurant.

It is crucial to look at your restaurant through the eyes of a buyer and ask yourself some key questions:

• Are your books & records organized?
  • Can a buyer clearly understand how much profit you make?
    • Is your profit provable on paper?
    • Do you have cash sales?  Can you easily prove those sales to a buyer?
    • Can you show on paper what your costs are (food, labor, waste, etc)?
• When the restaurant is closed to the public, what does it look like?
  • Is it clean?
  • Are the chairs, tables and décor in good shape?
  • Is the kitchen spotless and free of clutter?
  • Are the bathrooms spotless?
  • Is all your equipment operational?
• When the restaurant is open, how well does it function?
  • Is your staff friendly & knowledgeable?
  • Is the environment pleasant to customers?
• Are all your permits and licenses valid?
  • Is the restaurant in compliance with the County of Los Angeles’ new food handler’s regulations?
  • Do you have any outstanding violations?

If you answered no or wavered on any of these questions, then you need to take corrective measures before you place your business on the market.  In order to sell your restaurant for the best price, all of the aforementioned elements need to be in place.

Coherent financial data is vital.  There are ways to mitigate messy books and records.  However, if buyers can’t determine your revenue, costs and profit, then selling your restaurant becomes extremely difficult and you most certainly won’t get the price you want.

Buyers will want to tour the restaurant when guests and staff aren’t around in order to ask questions and assess the furniture, fixtures and equipment (FF&E).   You’ll want to take whatever steps are feasible to make the restaurant as presentable as possible.   Buyers need to have a positive emotional response on first sight. The cleanliness of a restaurant affects the overall desirability and thus the ultimate price.

While you are cleaning, take a second look at your staff and overall operations.  Buyers will be scrutinizing how your restaurant runs.  If they are sophisticated buyers, they will not only come in to get the costumer experience, they will send others to check out the service and environment too.

During due diligence, the potential buyer will want to see your permits and licenses.  You’ll want to make sure they are all valid and any violations are corrected well before the due diligence period.  If they aren’t in order, your risk losing the sale.

There is a lot that goes into selling a restaurant, much more than many other types of business.  For a free consultation, please don’t hesitate to call Restaurant Broker, Shelli Margolin at (310) 882-2200 ext. 128.  I’m happy to help.

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