With so many restaurants closing, the market is flooded with businesses for sale. But John Burfitt discovers there are some rules that can guarantee the selling process can be a winner for all.
It is a much-quoted statement that the biggest purchase most of us will ever make in life is to buy our own home. For the modern restaurant owner, the second-biggest investment is not, however, the family car, but is their business. And just as few people would ever sell the valuable asset of their home in a rundown state and without all its paperwork in order, it is surprising how many restaurant owners don’t apply the same rules when it comes to putting their own business on the market.
“I am always astounded by the number of people who will just put their business up for sale, without any planning, without much thought about getting the house in order and without even having a business plan in place,” says James Eling, managing director of Marketing 4 Restaurants. “If you are really serious about selling, then step outside your business and look in, and ask yourself one tough question—‘Would I really want to own this business?’ “You might be busting yourself just to keep the place afloat, but you must look at it as a buyer will. This is when you need to be your own toughest critic.”
According to a report published in The Age newspaper, almost 1500 restaurants in Victoria closed their doors over the past 12 months. This is in addition to the 2000 national restaurants that shut up shop in the previous two years. The result of such a dramatic trend is more businesses being for sale, at a variety of price points and to varying degrees of success. Jesse Gerner of Melbourne restaurants Añada and Bomba well knows both sides of the tale. In the past, Gerner has successfully—and profitably —sold two businesses, but reveals he is currently in the process of watching friends attempting to sell their own. “They put their business on sale for $350,0000 and four months later, it is down to $100,000 and still hasn’t sold,” he says. “That is a sign of the market at the moment and it is flooded. “We all get emotionally tied to our business and overvalue it, but in the end, you have to meet the market and know that it is the figures that are going to sell it.” The value of a restaurant is usually determined by four main factors: location, presentation, financials and management.
But even with all those details in order, selling a restaurant is never a fast process. On average, a restaurant takes three to four months to sell. Putting the wheels in motion to have it ready to take to market, however, needs to be started long before the For Sale sign goes up. While some advisors claim proper planning needs to begin nine months out, there are others who insist an exit strategy needs to be in the business plan before the doors have opened on the first day. “The biggest mistake that is made is a failure to plan from the beginning, with a good business plan that should at least touch on an exit strategy,” Stewart MacDonald, of client service consultancy Eon Strategic, says. “There should be a robust plan sitting on the shelf waiting to be implemented when the time is right.” Deciding just when that time is, is like asking how long is the proverbial piece of string; the answers vary from case to case. Jesse Gerner describes the best time as “when you are in your prime and the place is really rocking”. James Eling says it is “when you have built up something that has value”, while Jonn Close of CETN calls it, “when you are ready to make the move”. Once that decision is made, the important step to getting the business into market-shape is putting all the paper work into place. “This is the time to get the house in order and have all the records and systems in place, ready to be examined,” Jonn Close says. “The business must show it’s in such a condition to achieve a desirable sale price, and you can deliver a value proposition with what you offer.”
Top of the agenda has to be all the financial records. “If all the verification of your business results is sitting shoved in a cardboard box and what you are offering is all froth and bubble, then you can’t expect a return on investment for what you do not have evidence of,” adds Close. “You need to have point of sale records, profit and loss statements and basic bookkeeping. You also need to show the lease is available and how long it is signed for, if there is an available DA (development application) and any other collateral that supports the value of the transaction. No-one will buy if they have any doubt whatsoever of the true value. “What you are offering comes down to these things—assets, revenue, profit and goodwill. If you can’t prove you are profitable, you are unable to expect to be paid for goodwill as it can’t be proved. The best-case scenario is a reduced value for the assets.
Get it right the first time or you are wasting your time selling.” Making sure the business books verify all assertions, not to mention not hiding important factors such as being in liquidation, is what James Eling labels as “crucial”. This is part of the process he referred to as “stepping outside your own business and looking in”. “If you can not account for all the cash coming in and out, then there is a problem,” he says. “If you tell a potential buyer what the takings are, they want to feel confident that is a real number and not some wild projection. “This really is a time to stop hiding and instead be completely transparent. You have to make your business look like a good one to buy, well organised and easy to run, compared to all the others on the market.” As in any business deal, success in selling comes down to good timing. Various trends and cycles come into play, and the seller has little control over them.
However, the one aspect of timing the seller does indeed have complete control over is the personal choice of knowing when you have had enough. “If you stop loving it—and this is a tough game we are all in—then let it go before you let it run down,” says Gail Donovan of Melbourne’s Donovans restaurant. “I have seen far too many people who let their business go because they are over it. By the time they want to sell, it is far too late. “If you are tired, start preparing now to move on. Eventually when you have everything in order, you sell up and get out of it on your own terms—and that is what everyone should be aiming for at the end of the day.”