Selling Your Restaurant: What Every Restaurant Owner Should Know – Part II
Given a list price, how much money can the seller expect to walk away with at the close of escrow? This depends on the details of the purchase agreement. Typically, the restaurant inventory is purchased in addition to the purchase of the business. By inventory, I mean the items in stock that go into making the product. This could be dairy, meats, beer, wine and spirits, and other to go items. It could also include cleaning products, which are sold in addition to the purchase price.
Escrow Fees and Expenses
For a restaurant with an ABC license transfer, the escrow fees and expenses will be about $2500 total. The buyer can pay or the fees can be split—it’s very rare that a seller would pay.
The Broker Commission
The seller will pay the broker commission. This will be 10% of the sale price or a minimum amount.
Also, if the seller has any outstanding debts to taxing agencies, this must be factored in. This could be the CDTFA, EDD or the Franchise Tax Board, rent owed to the landlord, or payments owed to vendors. Most of the time these will result in demands for payment in escrow and be deducted from the seller’s proceeds.
Take the example of a $200,000 sale:
- Less say the amount is $20K for the broker’s commission.
- Add inventory; let’s say $10K.
- Buyer is paying the escrow fees and expenses, but generally there are some things that pop up like prorated personal property tax. (This amount is generally small.)
- Demand from the CDTFA (Board of Equalization—sales tax) for $5,000
In this case, the seller disbursement would be $185,000.
One thing to note—if the seller doesn’t take care to close out tax accounts properly, it can hold the disbursement of the seller’s proceeds. Again, this is a good reason why you should work with a qualified broker.
Marketing the Sale
Why is a business broker paramount? First of all, the advertising websites that a business broker subscribes to are expensive.
In contrast, conventional real estate agents use MLS, which offers no confidentiality. Commercial real estate agents use MLS and LoopNet. However, LoopNet is for the sale of real property, not businesses. As you can see, neither commercial and residential agents don’t have the marketing access to reach buyers.
In addition to the expensive sites, such as BizBen, BizBuySell, Business for Sale and BizQuest, we’ll advertise on Craigslist and social media outlets. But it’s always done confidentially.
Once the advertising is posted, sellers won’t necessarily hear from brokers much. At this point, the broker will be busy fielding buyer’s communications (texts, emails and phone queries and there are MANY of these.) We also will be busy collecting non-disclosure agreements and scheduling and attending facility tours.
Again, this is where a broker is worth their weight in gold. The industry average for restaurant buyers moving forward with the purchase of a restaurant is 2%. Believe it or not, that means that only 2% of the buyers who contact me will actually go through with the purchase of a business.
Why is this percentage rate so low? Many people harbor interest in opening a restaurant. Most brokers have a very strenuous vetting process, which may only benefit the broker. What I mean by this is even the seemingly most unqualified buyer may, in fact, be successful. But making this work out may take more time on the broker’s side.
Once a buyer is found, the broker writes an offer or a letter of interest. The reason for an LOI is to save time with contracts and counter offers. If there are a lot of details, this aspect needs to be worked out.
The contract will include:
- Escrow fees/expenses
- Covenant not to compete
- As-Is sale
The Due Diligence Period
The seller’s due diligence is minimal. It includes the confirmation of buyer’s funds to purchase the business and terms of the lease. The landlord will often assign the lease, and the seller will sit in second position (like a guarantor) until the end of the current term.
Here are some points concerning the buyer’s due diligence period:
- Lease- This can take a long time because there is no incentive for the landlord or property manager to move quickly. This fact is true even if seller isn’t paying rent, because the landlord will put a demand into escrow.
- Health department –The change of ownership site review requirements varies from state to state and from county to county. It can be a lengthy process.
Once these look good, contingencies are removed.
If a restaurant sale involves the transfer of the ABC license, then the escrow process is actually shorter than the license transfer. Bulk transfer escrows takes between 30 and 40 days whereas an ABC license transfer takes between 60-90 days after the application is submitted. An experienced and engaged broker should be working with the buyer (vs sending the buyer to consultant who will charge up to $2500) to have the transfer application packet complete. It should be ready to go during the contingency period, so the escrow period isn’t longer than it needs to be.
After the contingencies are removed, the seller can share sensitive and proprietary details of the business, such as vendor and supplier lists. This means that buyers should start completing the credit applications for the vendors and suppliers. This is also the time buyers and sellers should arrange for a meeting with employees to introduce the buyer and discuss the change of ownership. Because the buyer will be taking ownership under a new entity, employees will receive their last paycheck from the seller the day before the close of escrow. The buyer will make new hires the day of the close of escrow.
Oftentimes, buyers will also start training prior to the close of escrow so they are ready to hit the ground running at the close.
No matter if you’re a buyer or seller, I hope this information has been helpful for you. In next month’s blog post, I’ll be discussing the sale process from the buyer’s perspective.
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.