What Buyers and Sellers Need to Know to Buy or Sell a Food/Beverage Business

What BUYERS NEED TO KNOW to buy a food and/or beverage business and what SELLERS NEED TO KNOW to sell their food and/or beverage business during these challenging times.

Why are these challenging times?

As many of you know these are not the most stable times in our economy. Many food and beverage operators are still feeling the scars of Covid. The new norm for office workers to work home most of the week and maybe come to the office once or twice a week is creating a dramatic decrease in the customer base in downtown areas. With less traffic many businesses that depended on these customers have been forced out of business. This includes the downtown areas of San Francisco, Oakland, Sacramento, San Jose, Los Angeles, San Diego, etc. The overall food and beverage industry is faced with the increasing cost of goods, utilities and supplies outstripping the operator’s ability to offset these increases in menu price increases thereby reducing their already reduced margins. There is more emphasis today on outdoor seating and a strong emphasis on take-out and delivery service. The extreme weather conditions faced in California have negatively impacted this customer flow due to the cold, snow, rain, and wind. Adding to the above challenges include the high cost of interest rates and the results of the Ukraine invasion by Russia. This has resulted in increased costs of materials ranging from food, gas and other materials formerly coming out of Ukraine and Russia and shipped to many parts of the world. The vulnerability of the US economy going into a recession also underlines the insecurity of the consumer market which means many consumers have less discretionary income to eat out.

As a result of the above-mentioned factors food and beverage business buyers and sellers need to evaluate these before entering into a sales transaction in addition to the standard due diligence items indicated below.

What are the major items BUYERS NEED TO KNOW before entering into a sales transaction to purchase a food and/or beverage business.

1. Analyze the market – A) What is the scope of competition? B) What is vulnerability of new head on competition to your concept coming in the area you’re choosing? This could cannibalize your market share.

2. Determine the viability of your concept – A) Study the demographics of the trade area (trade area is a geographic area from which a community generates most of its customers). Try to make sure the customers you are trying to reach have interest in your type of menu and will respond positively to your menu pricing. B) Does the physical plant have adequate outdoor seating? C) Is there a meaningful component of take-out and delivery sales for your concept?

3. Lease analysis– A) Can the buyer get some free rent or landlord contributions for tenant improvements the buyer wishes to make? B) Can the buyer minimally obtain a base term of 5 years and a 5-year option with the future rent spelled out? C) Can the buyer eliminate having to personally guarantee on the lease and if not, can he burn off (eliminate) his personal guarantee in the near future?

4. Is the business eligible for SBA financing?– With an SBA loan the buyer only needs to come up with as little as ten percent (10%) to twenty percent (20%) of the sales price in cash.

5. How accessible is the labor market to staff the business? – This is a major concern today due to the extreme shortage of labor in many California markets.

6. Does the business meet governmental regulations? – A) Does it meet the requirements of the American Disabilities Act (ADA)? B) Does it meet the requirements of the change of ownership health department inspection which is required in many counties? C) Are there any restrictions on the days and hours of operations which would limit your sales and profit potential? D) What are the other health and safety requirements?

7. What financial due diligence is required? – A) Six months of your projected labor cost based upon past experience is a good metric for determining the amount of working capital needed for unexpected expenses such as sales and profits not meeting projections, major unanticipated events such as earthquakes, fires, floods, pandemics, and major negative changes in the economy, etc. B) Know How much funds are needed to run your business. C) Know how much money you need from the business to live on. D) Put together a conservative pro-forma (projected) income & expense statement for the next several years.

8. Complete other due diligence items – A) Review the financial books and records of the business for at least the past three years. B) Complete the physical inspections of the premises to assure all the physical elements of the premises (electrical, plumbing, all mechanical systems, etc.) meet code requirements. C) Review the premises lease documents. D) Make sure all employees are legal and meet labor department requirements.

9. Have Systems in place – Make sure all operational systems are in place such as having standard operating procedure manuals (SOP’s) in place for all major job classifications for the front of the house (food servers, bus persons, hostesses, etc.), back of the house (cooks, dishwashers, etc.) and for all management personnel (hiring and firing procedures, cash management and banking procedures, inventory control, ordering and purchasing procedure, etc.).

What are the major items SELLERS NEED TO KNOW in entering into a sales transaction to sell a food and/or beverage business.

1. How much is my business worth in today’s marketplace? Work with a seasoned restaurant broker to have him/her complete a Broker Opinion of Value reviewing your past four years of financial operating results.

2. Can your business be pre-qualified for an SBA loan? If your business qualifies, the buyer can purchase your business with as little as 10% to 15% cash down which will significantly expand the buyer pool which means you have a stronger chance of obtaining the price desired. ntly expand the buyer pool which means you have a stronger chance of obtaining the price desired.

3. Lease liability– Can you be removed from any personal liability on the lease when the lease transfers if the lease transfer is an assignment? If a new lease is obtained by the buyer make sure you execute a lease termination agreement with your landlord effective at the close of escrow to make sure you have no continued lease liability.

4. Study the tax impact of the sale with your accountant – Will you have enough money to retire with after paying any taxes due on the the sale?

5. If you have PPP money, EIDL loans or any other related PPP grants or loans what will be your continued liability after the sale? EIDL Loans have been an issue in many deals currently. There are misunderstandings on the seller’s side because they have personally guaranteed the loan or own other businesses, that they can simply retain this loan and pay it down after selling their business and closing escrow. In fact, the Government has tightened the reins quite a bit. All EIDL loans must be paid off before escrow can close. In rare cases the EIDL can be assigned to another business, such as another restaurant unit in a restaurant chain, owned by the same entity or person. One other possibility is to have the buyer apply with the SBA for assuming the EIDL Loan. The success rate for this assumption approval is quite low, some brokers have suggested less than 20% success rate. The applicant must show financial strength, as well as experiential strength within the restaurant industry to qualify for assumption.

6. Be prepared for the buyer’s due diligence– A) If the buyer wants to keep the employees how can you assure the buyer that the employees will stay with them? B) Have your financial records well organized so the buyer will have confidence with the financial history of the business. C) Make sure the physical plant shows well and if there are deferred maintenance items have a plan to address the situation.

7. What are your Plans for retirement?– If you are not ready for retirement what are your plans after you sell your business? From experience talking to former sellers, it has come to my attention that newly retired people sometimes have difficulty adjusting to a less active schedule.

To obtain more information pertaining to selling or buying a restaurant, bar, club or other food related business (convenience store, deli, commercial kitchen, catering kitchen, food truck, etc.) or other related commercial buildings please contact Steve Zimmerman at steve@restaurantrealty.com