How Do I Prepare To Sell My Restaurant

Listener Question: I am reaching retirement age and will likely sell my three restaurants within the next two years. What are some things I can do to prepare my restaurants for sale?

Answer: I put together several basic steps you should take to ensure that your business is ready to be sold:

Click here to download the Unit Profitability Matrix Template and Due Diligence Checklist.

  1. Get your books in order. You will generally need at least three years’ worth of financial information. You will make a better impression and due diligence easier if you have formal, professionally prepared financial statements (accountant-reviewed or -prepared vs. internally generated statements). I have found that tax returns alone will not suffice. In addition, any Buyers evaluating your business will generally require at least a years’ worth of Point-of-Sale information.
  2. Understand the true profitability of your business.

The buyer is going to analyze recurring cash flow. Therefore, I have prepared a free resource that you can download to help a potential buyer understand your business. Click here to download the Unit Profitability Matrix Template and Due Diligence Checklist. It is critical that you can demonstrate to a potential buyer your prime cost (Cost of Goods + Labor) and earnings at each unit.

Most privately-held businesses claim a variety of nonoperational expenses. Make sure you have supporting documentation for these expenses. Are there any add-backs or one-time expenses? “An add back, for the uninitiated in M&A numbers, is an expense that is added back to the profits (most often earnings before interest, taxes, depreciation, and amortization, or EBITDA) of the business for the express purpose of improving the profit situation of the company.” For example, there may be kitchen renovation expenses or unusual legal expenses.

  1. Consult your tax advisor. Your financial advisor tax advisor will be a big help in producing reports and evaluating options concerning deal structure. You need to understand your personal and business tax situation fully. Do you have prep sheets, recipe cards, employee handbook training material, job descriptions, marketing plan, etc.?
  2. Make a good first impression. Your operation needs to be running well. Look at your operation and determine what areas need improvement. Buyers will visit your restaurant, and you want them to see that you have processes in place, not full-out chaos.
  3. Organize your legal paperwork. Review your operating agreement, permits, licensing agreements, leases, customer and vendor contracts, etc. Organize them in digital form so they can easily be shared with a potential buyer. Before sharing any information with a potential buyer, make sure that you have a non-disclosure agreement (NDA) in place. An NDA is a binding contract that prevents sensitive information from being shared with others.
  4. Take an objective look at your management team. Are you absolutely vital to your business? That will lower the value of your company. Buyers want the business to run without you. You need to have a good restaurant organizational chart with excellent management at each unit. After the sale, who will the buyer be able to turn to for help running the business’s day-to-day? You should have a succession plan and org chart before going to market. Cultivate a loyal workforce because new owners don’t want to deal with employee turnover. “Experienced workers bring stability and help generate sales and profits.”
  5. Know your reason for selling. After you or your broker tell a potential buyer what a great opportunity is to buy your restaurants, they will ask “If it’s so great, why are you leaving?” Buyers are always curious why a restaurant owner wants to exit a successful business. Therefore, you should practice your reason for selling and be prepared to articulate it in detail to each potential buyer.
  6. Make a list of potential buyers. Most restaurant sellers are baby boomers. Make a list of other multi-unit and ambitious single-unit owners who want to grow. Your brand is the easiest way for an operator to diversify and add units. Another group of potential buyers are older millennials who are eager to strike out independently. This is not a complete list but it is a good start to brainstorm with your trusted advisors. All buyers will be looking for businesses with proven cash flow and great systems in place. They want to buy companies they can improve and grow the ROI.
  7. Know what “your number” is. You know that you want to sell but determining how much your restaurant is worth can be a difficult question. As a restaurant owner, you have invested a lot of money, time, and sweat equity into your business. However, I have noticed that owners sometime have visions of what the business was or what it could be in the future. Neither are going to get you more money for your restaurant. The value of your company is what the business is worth TODAY. Future profits are for future owners. Take the emotion out of the pricing decision, consult with your trusted advisors and set a realistic market price.
  8. Keep your eye on the ball. Do not let your restaurant performance decline because you are too focused on the sale. I have also seen owners emotionally check out before the sale is complete. If your restaurant’s profitability goes down, it will give buyers additional negotiating power to lower their offers.

Click here to download the Unit Profitability Matrix Template and Due Diligence Checklist.


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