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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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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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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What Is a Typical Restaurant Business Worth?

The worth of a restaurant is predicated on what someone will pay to buy that restaurant. As restaurants come in as many shapes and sizes as do their owners, determining worth is complex. In the most general terms, value can be established through either a multiple of annual sales or by its assets.

Restaurant Categories

Restaurants fall into two major categories: full-service and limited-service (or quick service). Then there are many subcategories such as, fine dining, casual dining, dinner house, bar & grill, deli’s, fast food, pizza take-out and the list goes on. Within those categories are independently owned, franchises, corporate owned, single location to international multi-location. Thus, “typical restaurant” cannot be rationally defined.

Profit vs. Assets

Let’s look at individually owned and operated restaurants. In the most simplistic terms… there are two ways in which a restaurant can be valued, whether they are full-service or limited-service. The first is by a multiplier of annual profits for successful operations. For a restaurant that is not making a profit, its worth is determined by its fixed assets, known as Furniture, Fixtures and Equipment (FF&E) or an asset sale. Whether or not a restaurant is making a profit, the fact is that the market is going to be the ultimate determination of what any restaurant is worth.

Multiplier for Restaurants Earning a Profit

Prior to the current recession, profitable restaurants were valued at two to three times their annual profits (or Discretionary Earnings) plus inventory. However, currently in the Los Angeles area, it appears that profitable restaurants are generally worth a 1.5 to 2 multiple of Discretionary Earnings plus inventory. The more successful the restaurant is at making a profit for the current owner, the more valuable it is for a buyer. This is typical for any business.

No Profit, No Problem

If a restaurant is not turning a profit, there still is value to a buyer. The biggest barrier to entry in the restaurant industry is the initial build-out costs. If a restaurant has a permitted and functioning hood, flood drains, three-part sink and a permitted refrigerator unit, and it’s in a good location, then the restaurant will generally sell. If it has a liquor license, the restaurant will sell for more! This is true also for a profitable restaurant also.

At Cost Equipment Value

The value or worth of a restaurant that is not making much of a profit is in its working-permitted equipment and other assets. The owner must determine the at cost value of each piece of functioning equipment and other asset. Then put it all together in a list to ascertain the current worth of the restaurant.

Enlist a Professional

Whether trying to determine the worth of your own restaurant for financing purposes or to put it on the market to sell, your opinion of value will most likely be tainted by emotions and the price you want vs. the actual market worth.  For financing intentions, talk to a commercial lender before you start the loan process.  When contemplating selling your restaurant, enlist an experienced business broker. They can help you determine market value and discreetly bring you qualified buyers, so you can your spend your time and money running your restaurant and living your life.

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There are several reasons for appraising a restaurant, along with many nuances to the appraisal itself. Let’s review how a prospective buyer can appraise a restaurant for purchase. There are three general ways that restaurants’ sale prices are established: based on profits, assets, or “key costs,” referring to its location value. The buyer should be aware of whether the restaurant is making a profit and what furniture, fixtures and equipment (FF&E) are included in the sale. If a restaurant is profitable, a buyer can take a financial approach to the appraisal. If the restaurant is not turning a profit, it still has value in its equipment. In some cases, a restaurant is sold for key costs: its location, property/lease value and entitlements.

Instructions:

Profitable Restaurants

1 Review all the financial data available. This includes a minimum of the past three years’ tax returns, profit and loss statements, and any additional records of cash sales (cash sales often are not reported on tax returns or elsewhere). Note that cost of goods sold (COG) is usually around 20 to 40 percent of revenues depending on the type of restaurant.

2 Obtain a list of all FF&E that will be included in the sale price. Although the sale will be predicated on the annual profits, the restaurant can’t operate without equipment that has the required permits.

3 Review the entire lease thoroughly before signing it. Understand the monthly rate and any common area maintenance (CAM) fees, along with any other charges and fees. Also, review the term and option to extend.

4 Use a multiplier of the annual profits to determine the restaurant’s value. In a good economy, the rule of thumb for profitable restaurant value is two to three times the restaurant’s annual profits (or discretionary earnings) plus inventory. In a bad economy, it is more likely a 1.5 to 2 multiple of discretionary earnings plus inventory.

Unprofitable Restaurants

1 Examine the hood, floor drains, three-part sink and permitted refrigerator units to make sure they are functioning. The restaurant industry is probably one of the few industries where you can sell a business that isn’t making a profit, as the biggest barrier to entry is the initial build-out cost. A restaurant will sell for its permitted and functioning equipment or sometimes for its location and entitlement to operate at that location.

2 Determine what, if any, FF&E are included in the sale, as the restaurant build-out and obtaining the permits for equipment is expensive. Appraise the hood, floor drains, three-part sink and permitted refrigerator units. Ranges, ovens and other equipment are valuable, too, but they are easier to replace without requiring permits. The FF&E should be appraised upon replacement costs in order to determine the value. Don’t overlook the employees; they are often an important asset to consider too. Get a good understanding of their salary and benefit structure

3 Make a thorough review of the lease or the real estate purchase agreement. Make sure the zoning and alcoholic beverage licenses are all in order, before you sign any binding agreements.

Tips & Warnings

It is always a good idea to enlist the aid of a professional. An experienced business broker will provide well-rounded guidance in the appraisal and purchase process. A buyer can engage attorneys and accountants, but a business broker is much more cost-effective. Also, consult your local Small Business Development Center (SBDC). SBDCs are funded by the U.S. Small Business Administration and offer free and low-cost business assistance.

References

• “CNNMoney”: What’s My Restaurant Worth?; Ingrid Tharasook; December 2007
• Quantified Marketing Group: Restaurant Financial Analysis
• The Appraisal Foundation
• QSR: Valuing Your Store

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Many experts are predicting that a huge wave of businesses will become available over the next decade or so as baby boomers look to sell. As the economy continues its climb into a full-blown recovery (we hope), it just might be the perfect time for you to fulfill that lifelong dream of buying a business.

If you can find the right business that is the right fit for you, I think this is a great time to buy!

Overall, I think it’s a pretty good list.  When we create a Confidential Business Review (CBR), we try to address these questions up front before you even meet with the owner.

Some of the questions not asked by Inc., which we think are important include:

1. Can you as a new owner successfully run and operate this business? If not, the other questions don’t really matter.
2. What do you bring to the table? Ideally, we want people who bring more to the table then the owner.  You don’t have to duplicate their strengths but you do need to have strengths that are applicable to owing the subject business.  These tend to be the true success stories.
3. What are the challenges facing the company? Odds are good that this is why the owner wants to sell.  If your not the solution, your probably better off letting someone else take over the company.
4. Do you have a business plan? Most SBA Lenders require a new owner to have a business plan, for good reason.  People with plans generally outperform those who don’t.  Furthermore, if you know what your doing, creating a plan is easy.  If you don’t, you better get help or start questioning the value your really bring to the table outside of your life savings!
5. Are you an Entrepreneur? Only about 2% of the population own a business, making them a rare breed.   Most of them feel like they have to own a business regarding of ROI, wealth or “prestige”.  On the flip side, if your not an Entrepreneur, you might find out the hard way that owning a business is a lot harder and demanding then you imagined.

There is a saying in our firm.  Matching the right buyer with the right business is how we define success.  We hope that all buyers, whether they use a broker or not, take this advice to heart!

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Now look at the business that you started fifteen years ago.  Isn’t it doing the job today that you built it for in the first place?  You’ve taken care of it, invested in keeping it current, it does the job it was designed to do; so, why in the mind of the buyer is it worth less than what you think?  The first reason is financially driven.  Just like selling the used car, there is a market for used businesses.  Look up the specifics on any used car and you’ll find a range that the car will sell for.  The same is pretty much the case for a business.  The second reason is emotional.  The buyer does not have fifteen years of their life invested in your business and doesn’t care what it took you to get it to this point.  You may have invested more money over that time into this business than it is even worth today.  The same is most likely the case with that used car.  The car has gotten you down the road literally and the business figuratively.

So if you love that old car and can’t sell it for what it is worth to you then why sell it at all?  Maybe your life needs have changed and you need a truck instead of a car.  Maybe there just isn’t room in the garage now that you’ve gotten a new car.  Whatever the reason, it must be compelling enough to cause you to let go.  The same is true for the business.

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