In the next several episodes of The Restaurant Dealmaker Show, Steve will be discussing the 10 essential principles a buyer needs to know in purchasing a food and/or beverage business as discussed briefly below.
Please REGISTER HERE for our upcoming Restaurant Dealmaker show to hear an in-depth review of the items indicated below. Thu August 24th at 11:30am
1. How can the buyer make sure he/she is paying the right price for the business. – review of
1) the Assets in Place Valuation Method,
2) the Going Concern Valuation Method or Sellers Discretionary Earnings (SDE) Method and
3) the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Method.
There are three basic methods for valuing a business. The first valuation method is the Assets in Place Valuation Method and is used for valuing a business that is either not profitable, marginally profitable and/or could be profitable but the seller is not including the name, menu and proprietary items with the sale. The second valuation method is the Going Concern Valuation Method or Sellers Discretionary Earnings (SDE) Method and this method is used for valuing a business that is profitable and the buyer is keeping the name, menu and proprietary items of the business. In some cases, a third valuation method called Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Method is used when the owner is not working directly in the business and has management running the business. During the Restaurant Dealmaker show I will be discussing in depth the formulas for calculating the value of each of these three valuation methods.
2. Realizing the advantages of buying an existing built-out food and/or beverage business versus building one from scratch.
There are definite advantages and disadvantages of buying an existing built-out food and/or beverage business versus building one from scratch. I will discuss these in depth during the Restaurant Dealmaker show. My summary will detail why the advantages of purchasing an existing built-out food and/or beverage facility far outweighs the disadvantages and makes more sense economically versus building one from scratch.
3. Having an understanding of the operations, marketing, financial, and legal aspects of the food and/or beverage business as well as understanding how to deal with people.
It is important for anyone purchasing an independent non franchised non chain food operation that they have experience in the operations, financial and administrative functions of a food and/or beverage business. During the show I will discuss in detail the specific experience requirements a prospective buyer should have in the above areas in order to be successful in the food and/or beverage business.
4. How much money does a buyer need to open and operate a food and/or beverage business?
If a prospective buyer is purchasing a existing going concern business for $150,000, they will need a total of approximately $279,000 to purchase and operate the business which includes the following: a. purchase price – $150,000, b. salable inventory (food, beverage, cleaning, and paper supplies) – $10,000, c. security deposit for landlord – $15,000, d. escrow fees and closing costs – $2,000, e. sales tax on furniture, fixtures & equipment – $7,000, f. miscellaneous fees – health department, business license, ABC fees, etc. – $5,000 and g. a working capital reserve – $90,000 (6 months of projected labor cost – $15,000 monthly payroll times 6 months = $90,000).
In the above example if the buyer is closing the restaurant for several months after purchasing it to do $100,000 of remodeling, they will need a total of approximately $409,000 ($279,000 + $130,000 = $409,000) which includes the following: a. $279,000 per the above, b. remodeling costs – $100,000, c. rent during the remodeling – $15,000 and c. training costs to hire new employees $15,000.
5. How does a buyer get approved by the landlord?
This step is usually one of the most challenging aspects of getting a transaction completed. Unless a buyer is operationally and financially qualified, he/she will not get approved by the landlord and the prospective buyer will not be able to purchase the business. During the show I will discuss in detail the landlord requirements and some creative methods to overcome landlord objections for approving the buyer.
6. How does the buyer evaluate the location to make sure it is the right location for the proposed concept assuming he/she is not purchasing an existing successful concept?
You’ve probably heard the expression location, location, location. In my over 20+ years of restaurant ownership experience, I have learned how true this expression is. During the show I will discuss in detail the criteria for evaluating a strong location.
7. What are the basics in negotiating a good tenants lease and/or assuming an existing lease?
The basics of a tenant’s lease include as follows: a. term of the lease, b. monthly rent, c. yearly rent increases, d. use clause, e. single net, double net or triple net charges, if applicable, f. guarantor requirements, g. option(s), h. lease transfer requirements including assignment and/or sublease options, i. lessors and lessees’ liability, j. insurance requirements for lessee, k. holding over provisions, l. destruction and eminent domain provisions and m. formula for determining market rent during the option period. During the show we’ll discuss the above items in detail.
8. Understanding how to complete the due diligence process in the purchasing stage – financial review, physical inspections, lease, transfer of licenses, franchise approval, financing, etc.
It is imperative that buyers complete a thorough review of the items indicated above. In the Asset Purchase Contract there are specific time frames spelled out to give the buyer adequate time to complete the following:
a. physical inspections of the business,
b. complete their review of all the financial records of the business,
c. negotiate either an assignment of the existing premises lease or a new lease,
d. transfer of licenses (ABC license, etc.), if applicable,
e. financing approval, if applicable and
f. franchise approval, if applicable.
9. What is the availability of the labor market for the buyers proposed location.
Irrespective of artificial intelligence (AI) replacing some employees they are still needed to operate most food and/or beverage operations. It is important that your location has access to a strong market of qualified employees to satisfy customer expectations for excellent service.
10. Is the concept and physical plant post Covid friendly.
Hopefully Covid is behind us, however customers have become very cognizant of adequate spacing inside the food and/or beverage business. Additionally, they want the option of outdoor seating with proper spacing. Options for take-out and delivery options for many concepts are in high demand with customers as well.