2017 is starting out to be another busy year for Restaurant Realty. We are seeing more activity from sellers who are in high rent and high wage increase areas as sellers are finding they can’t increase their menu prices to offset their increased costs so consequently profit margins are being reduced and/or eliminated. Additionally we are seeing a number of baby boomer sellers in their late fifties, sixties and older that are finding it difficult to keep up with the physical demands of the business and are forced to sell.
Buyers are always plentiful and they are looking for either seasoned cash flow businesses or for sellers that are in trouble financially and need to get out. For the later opportunities buyers are looking to purchase businesses for a small percentage of the sellers cost.
Please find below a summary of the specific buyer and seller motivations for buying and/or selling in 2017.
Buyer Motivations for Buying
- Lease Opportunities – Occasionally there are situations where an operator has gone out of business and the landlord has taken back the premises of a fully equipped restaurant. Operators with a strong operational and financial background could have an opportunity in this situation to get the use of hundreds of thousands of dollars of built out assets for no key money and obtain a new long term lease directly from the landlord.
- Converting Under Performing Assets to Profitable Businesses – The failure rate for independent non-franchised non- chain restaurants is approximately 80% in the first five years. Consequently there are many excellent opportunities for experienced operators to buy fully equipped restaurants for a fraction of the operators initial investment. The new operator will typically put their own stamp on this purchase by making some physical changes and implementing their new concept by changing the name and menu, etc.
- Seller carry back financing is being provided. In some situations when a seller needs to sell they may be receptive to financing part of the purchase price. If this is the case the buyer can obtain financing for no upfront cost with terms and conditions below market rates.
- Long term below market leases – In some situations landlords are highly motivated to get rid of problem some tenants that are frequently delinquent on their rent and are a nuisance to them. In this case the landlord may offer the new buyer with a strong track record a below market lease opportunity to rid themselves of the difficult tenant.
- Sellers having to sell at reduced prices due to partnership disputes, health issues and relocation issues. I have completed numerous valuations for attorneys that are representing either disgruntled spouses or other partners that do not get along and want a dissolution of their partnership. Consequently they are forced to sell to the other partner or to a third party buyer. Additionally some sellers are forced to sell due to a serious illness or they need to relocate due to unforeseen family issues.
Seller Motivations for Selling
- Selling businesses with unique entitlements for a premium. There are some locations such as a bar with a type 47 liquor license at Venice Beach in Los Angeles County where they have not issued this type of license for many years and they will not be issuing new ABC type 47 licenses in the future which drives the price of the license alone to a high six figure value. Also ABC type 47 and 48 liquor licenses are selling for $250K to $400K in some counties which are not issuing new licenses and buyer demand is high in these areas. We have sold some night clubs at high prices as again the counties of these businesses were not allowing any new entertainment venues in the future.
- Selling high demand businesses at strong pricing – Type 48 license bar businesses, breakfast & lunch businesses and profitable franchises fall into this category. There is strong buyer demand for bars in many different counties as they are much more profitable then restaurants due to lower cost of goods and labor costs and are easier to operate. Also most counties will not allow new bar operations or issue the required licenses so if someone wants a bar they need to purchase an existing bar. Established profitable breakfast and lunch businesses are also desirable as they are viewed as life style businesses as the owner can have a reasonable personal life as he is finished by 3p daily and in many cases breakfast and lunch businesses are only operated five days a week. Successful well established franchises whose franchisors have strict policies against cannibalizing locations (not over building franchises in the franchisees trade area) will sell for higher multiples then independent non-franchised non chain operations as the risk factor is much less and only 20% of successful franchises go out of business.
- Eliminating lease liability – In a sale the lease will either be terminated at the close of escrow when the buyers new lease goes into place or the sellers lease will be assigned to the buyer. In the case of an assignment the seller will have continued lease liability unless the following occurs: a) the seller can negotiate an elimination of lease liability with the landlord at the close of escrow, b) the seller can negotiate a burn off of the lease liability after the buyer has performed after a period of time or c) the seller can pay the landlord a negotiated amount (6 months rent, etc.) to eliminate any further lease liability.
- Eliminate negative cash flow– The sale of a business that is losing money will eliminate the sellers on-going negative cash flow and in some cases, terminate the sellers continued lease liability.
If you are interested in selling or buying a restaurant, bar, club or related commercial property please contact us by going to our website – www.restaurantrealty.com. If you are a Buyer go to either the Buy section or Listing Section and if you’re a Seller please go to the Sell section.