Selling Your Restaurant: What Every Restaurant Owner Should Know.
This post is perfect not only for restaurant owners thinking of selling, but also for owners who have never considered putting their restaurant on the market. No matter what stage of ownership you may be at, it’s good to know how restaurants are priced and what the selling process entails well in advance. I have two stories that exemplify this point.
A Case in Point
My first story is a about restaurant owners who approached us at Santa Rosa Business & Commercial. They were ready to retire after several decades of successful restaurant operations. They had met with their CPA who told them their business was worth $700K. The business it may have been worth $700k on the balance sheet and under the protocols the CPA used to determine value. But that number was very far off from what the restaurant should list for on the open market.
I go into the process of how a list price is determined in Episode III, but here’s a quick refresher. For a successful restaurant with good cashflow, the restaurant should list for two times the three-year weighted average of the seller’s cashflow.
Basically, if a seller is earning about $150K annually, the restaurant should list for $300K. And in the case I outlined above, that was exactly what the restaurant should have listed for. This information was a shock to the restaurant owners, and they decided to list it for $500K. This was less than the CPA’s valuation, but much higher than the restaurant’s most probable selling price. What happened was the first list price did not attract a buyer, so it was lowered several times. By the time COVID hit, the restaurant still had not attracted a buyer. As a result, the restaurant closed down, and now the space is available for lease opportunity.
My Personal Experience as a Seller
For various reasons, I was ready to sell my restaurant before I could sell it for the amount I actually wanted. This meant that for me to sell my restaurant, pay off my investor, and walk away with a certain amount of money, I needed to wait to list it until I’d paid the debt down and increased the cashflow. But because I knew what my restaurant would sell for, I could calculate when and if I wanted to sell it.
Takeaways for Sellers
Embedded in these examples are two important things every restaurant owner should know, namely, the proper list price for their restaurant, and the fact that selling the restaurant is a process that takes time. That said, the sales process is not well suited for someone who is in a distressed situation and needs to sell immediately. (There are other sales processes that may be appropriate for those types of sellers, but that is not what I’ll be talking about today). In general, the industry average for a restaurant to get into contract with buyer is about eight months from the time that the advertisement for the restaurant sale is posted. And in many cases, it can take a bit longer for a listing to attract a buyer. But the good news is that most restaurant listings will sell.
There are two things to note about the selling timeline. Once a restaurant with an ABC license (beer and wine or full alcohol) is in contract to sell, the escrow process is generally a minimum of 90 days. This time period can be shorter if the ABC license isn’t being transferred, and it can also take longer. This is due to several time-consuming processes.
For example, a lease assignment or new lease has to be negotiated with the landlord, health department business transfer requirements have to satisfied, and the ABC license transfer alone takes between 60-90 days. The biggest takeaway here is that restaurant seller should know that the sales process is exactly that, a process. They should work closely with a qualified restaurant broker to budget their time, mental energy, and expectations accordingly.
Macro-Overview of the Sales Process
Below is a macro-overview of the sales process. I’ll go into more depth on this subject in a subsequent blog post when I discuss restaurant buyers.
Restaurant operator finds a restaurant broker ( discuss the importance of working with a qualified broker in a previous post)
The broker collects 3 years tax returns, copy of the lease, and relevant profit loss statements and calculates the most probable selling price (more on this in a previous post).
- Broker and Seller determine the list price.Notice that I haven’t mentioned a facility tour by the broker. Although this should be done, and it’s always best for broker and seller to meet one another in person, the actual facility can have little bearing on the list price of a restaurant. I’ve seen ramshackle restaurants and bars sell for top dollar while beautifully equipped and well-kept restaurants sell for much less. Why is this the case? Restaurants prices are determined by cashflow—how much money the assets generate, not necessarily the condition of the assets. This is why it is nearly impossible for a restaurant seller to recoup an expensive build out. The way to recoup start-up costs is to operate long enough to depreciate those costs and generate at least 3 years of strong cash flow.
- Seller signs a listing agreement (generally 1 year)
- Seller pays the commission 10% with a minimum. Industry average is 12-15% for a business broker
- Broker packages the sale
- List of Furniture, fixtures and equipment
- Approved marketing packet Confidential Business Memorandum/Business profile
- Broker posts advertising—Most listings are confidential*
- Broker fields buyer queries/collects NDAs
- Broker schedule and attends facility tours
- Broker writes or accepts an offer
- Buyer makes initial deposit to escrow and starts due diligence
- Health department
- Once these look good or contingencies are removed, submit liquor license transfer
- This starts the clock ticking 60-90 days original vs transfer type 41 vs 47
- Buyer secures bank account, EIN, and Seller’s permit
- Training can begin inside of escrow
- Satisfy all health department requirements
- Buyer can begin training
- Seller provides vendor lists, and employee information
This point is huge and really something that you should understand. Many brokers, not the brokers in Santa Rosa Business and Commercial, will not co-broker. And what that means is they’re going to take a listing from you, the seller, or owner-operator, and they’re not going to work with any other office in that sale. In other words, they’re going to be a dual agent representing both the buyer and the seller.
Now dual agency is fine. In fact, in most cases, we are dual agents, because there is a lot to know and coordinate to get the buyer and seller through the process. As you can imagine, it’s so much easier to act as a project manager between the two parties.
But the only person that an exclusive brokerage benefits is the broker, because they’re going to be capturing the entire commission of that sale. So, here’s an example. If I post a listing, and a residential real estate agent brings a buyer to me, they may not be qualified to represent the buyer. I’ll find this out by asking questions like: “Have you ever transferred a liquor license? Have you ever gone through the Health Department process?” In most cases the answer will be no. As a result, I’ll recommend that I pay them a referral fee so that I can represent the buyer. This is great because it benefits the seller, and it broadens the net of all these different buyers.
If I find listings online for qualified buyers, and the broker’s response to me is, “We don’t co-broker,” it’s maddening. And I can almost guarantee you the seller is back in the kitchen slinging hash, and they have no idea that their broker just said no to a potential buyer because their broker won’t co-broker. That is bad and just might be the biggest takeaway from this post.
Hopefully, this blog has been informative for you. If you have any questions about pricing restaurants or the sales process, feel free to reach out to me.
Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco NorthBay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, and she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.