So you want to sell your restaurant...........

Most of you know that I do business brokerage (In addition to owning pizza businesses for the last 19 years) All of us are likely to want to “exit” at some point. What should you be thinking about as that time approaches?

  1. How do buyers look at businesses? How can you position your businesses in the best light with that in mind?

  2. What should I be changing in advance of a sale and when?

  3. How do I talk about this with my employees, vendors, bankers and customers?

That is far from all but it is a good place to start. Here are some thoughts:

Buyers are concerned with how much money they will make, how difficult the business is to run, whether they can trust the information being provided to them and whether the price they are considering makes sense. With that in mind, you should focus on making your business profitable and transparent. How do you do that?

  1. Stop taking “benefits” from the business about TWO YEARS before you want to sell.
  2. Make sure all sales are declared and all reports match the tax returns etc.
  3. Answer all questions from the buyer honestly. Nothing will scare them off faster than feeling like they are getting the run-around.
  4. Work with a professional to present your business results and arrive at a value. You may not like the news, but an overpriced business will probably never sell. (More than half of all businesses listed for sale never actually sell)
  5. Make sure your financial presentation matches your tax returns. If there are things to “add back” make sure they are documented and easy to understand. Don’t worry about having some things like your family cell phone paid by the business. Buyers will understand that. Do worry about paying your home utilities through the business. Buyers do not like that kind of thing.
  6. A seller that will cheat the government will cheat a buyer. Don’t monkey around with your declared sales or cash wages.

More later.

Once your business is being marketed for sale the word will get out. How fast and how far depend on how it is marketed. I find that many sellers are concerned and don’t want employees, vendors and customers to know the place is for sale. As you might imagine, this can make it pretty hard to market the business opportunity!

One mistake that is easy to avoid is DON’T list your business with a realtor! A distressing number of realtors (both residential and commercial) are willing to take business opportunity listings even though they have no competency in the area and they provide a disservice to both buyer and seller. They have no ability to assist with determining and communicating value, they often do not understand how small business works and therefor are challenged to present one, they don’t even know the basic components of a business opportunity sale or how to close it.

This can be confusing because most business brokers have a real estate license. (Just because most business brokers have the license DOES NOT mean that people that have the license are business brokers!) The reason BBs have the license is that in most states the license is required to broker any transaction which includes a real estate related transaction such as a lease assignment, new lease or the sale of real property and one or more of those things often accompanies the sale of the business opportunity.

Getting back to the initial point… how the business is marketed and balancing the need to create awareness in potential buyers with concern about unwanted publicity. 1st of all: The word will get out. Your employees WILL hear about it. Your vendors likely will too. Your customers mostly don’t care. How you seek buyers will have a lot to do with how the word gets out. A residential broker will put the listing on the local MLS and probably in the local paper etc and want to put a sign in the window. These things guarantee that the word will spread to your employees, vendors and customers… but do not guarantee that the word will reach potential buyers! The worst of both worlds.

There are a bunch of online resources for marketing your business. If you have done a few google searches you will have found them. Bizbuysell, Bizqest, Businessforsale, restarauntforsale and more. You can even list your business on there yourself. They run about $100 per month each. The good news is that the inquiries come directly to you and you don’t pay commission. The bad news is that the inquiries come directly to you and you get what you pay for. If you go in this direction, you will notice that the brokers tend to put the listings out there on multiple sites. For example, if you list a restaurant with me it will likely be on 4-5 sites. So, there is a lot of overlap. These information sources are only in front of people who are looking for a business. It is possible to market the opportunity without naming it (even though in most cases people who want to can figure it out especially in smaller markets).

Over 10 years of doing this here is what I see in managing these inquiries: For a typical listing that runs for 6-12 months I will get about 30 inquiries. When I receive them I respond with a request for information about the potential buyer and for them to sign a non-disclosure agreement. About 20-25 of them will sign the NDA and respond to some questions about themselves. The next step is a phone call or a meeting where I will ask them more questions about themselves including how much money they have, what their timeline is… etc i.e. are they serious about looking and able to close a deal or just entertaining themselves? About half of the people that signed the NDA will go through this next step. Up to this point the potential buyer has not received the financials of the business or even the name. After this conversation or meeting, if it looks like the process is moving forward they receive those things. Of the 10-12 that have a phone call or meeting about 5-6 get the info. Typically 2-3 of them will pursue further information and 1-2 will write a letter of intent.

Different brokers have different approaches. Some send the financials to anyone that signs an NDA. This is something important to ask. When do you send confidential information to potential buyers. To me, it would be a red flag if the answer is “only after they sign an NDA” as an NDA does nothing to actually qualify the buyer.

One thing to keep in mind is that buyers who buy actually purchase the business they first inquired maybe 20% of the time if that. In other words they contact me about one listing and end up purchasing another some time in the future… most often because once they inquire we capture the contact info and when a new listing comes out that is a good match they find out about it directly from us. It also means that when I take a new listing it gets in front of about 4,000 potential buyers that have registered with us over the years.

Once the business is being marketed I always suggest that the seller let at least the key employees know about it. In the end they will find out because someone will mention it or when potential buyers are visiting etc etc. Having them find out by word of mouth is disrespectful of employee and they don’t like it. It also creates uncertainty which gets them thinking about job security… better to have the conversation up front! Most buyers are very concerned that employees would leave so addressing this up front is a better way to go.

Vendors are interested… but in the end they are mostly interested in making sure the new owner keeps buying from them. This is not something to worry about if they find out through the grapevine. If asked just tell them the truth. They may actually be a good source for a buyer! A manager of another place might ask a food rep if they know of any places for sale!

I don’t suggest going out of your way to let customers know but if one finds out and mentions it I just tell them, that “yes, we are interested in selling. Do you know someone looking for a good opportunity?” The chances are good that the reason they know (assuming the business is being marketed buy a business broker and not a realtor) is because they are looking or someone they know is looking and found it.

Don’t be afraid of people finding out, just take care that the people who find out hear about it the way you want them to!

Walk into someone else’s restaurant. Look around. What do you see? What creates an impression in your mind about how the place is doing? Is it well run? Does it appear to be prosperous? This is the experience your potential buyer has when they enter your place for the first time. Is your place telling an experienced set of eyes what you hope it would?

When you are preparing to sell you need to “merchandise” your business. Keep it clean. Ride your employees about appearance. Most buyers will “secret shop” your business so do what you can to make sure they have the experience you hope they do.

Clean up the books. Declare all sales. Pay ALL wages through the books. Stop charging meals and travel and “supplies” to the business. Stop taking groceries home and focus on improving the bottom line. Make sure your lease is in good order. When a buyer looks at the books they are looking for three things:

 1.  Revenue and profitability.
 2.  Revenue and profitability TREND.
 3.  Transparency and apparent reliability of the financial reporting.

Number 1&2 speak directly to the value of the business that a buyer might be willing to offer. (See my other posts from a couple of years ago on the value of pizza restaurants). I like to talk about how the revenue and profitability (Seller’s Discretionary Earnings) indicate a range of likely values for a business. The TREND is perhaps the single most important factor in where inside that range the likely transaction value will end up. Compare two locations each that did 500K with $100K SDE for the owner in the last year: In the first one the numbers for the previous two years were 440K/80K & 470K/90K in the other they were 560K/120K & 530K/110K. Do you see why the first one will sell for more?

#3 goes directly to the confidence necessary for a buyer to pull the trigger and go through with a deal. It is not that complexity cannot be overcome, but why provide a reason to object if you don’t have to?

Are there any industry benchmarks on the percentage difference between typical listing price and the final sale price?

Also, if a business is sliding down 5% because of lack of interest in business from the sellers and personal issues between the business partners (sellers), how will that impact the sale price, in terms of SDE multiple?

When I pulled the data set I used to write the posts on value, the median comparison for selling price to listing price was 89%. That is of the listing price at the time of the sale. For example, if a business were listed for $300,000 and then the asking price dropped to $250,000 and then the business sold for $225,000 the selling price would be 90% of the asking price in this data set. I prefer to have buyers price no more than 10% above a price they are willing to take. Beyond that, I think the risk of a potential buyer not pursuing a deal is greater than the risk of leaving money on the table. I will decline listings where the seller wants to ask more than 20% above what I think a business can sell for.

A declining trend is just one factor but it is an important one. 1st question would be how long has the trend been in place. A one year drop in a data set that mostly goes up might cost you some of the premium above median value but a multi-year down trend would likely take the probable selling price below the median.

Age of equipment, condition of the lease, competition in the market, cost of opening a new business in the market and several other factors play into this as well.

Great info. Thanks.

When you think about it, the universe of people buying businesses is pretty small. Not that many get sold so it follows that there are not many real buyers out there!

The timeline for selling can be quite long. The average time on the market for a business that actually sells is about a year. Remember, less than half of businesses listed for sale EVER actually get sold. Here is a typical timeline for the sale of a business and some comments about various parts of the calendar: (Inquiry, Listing, Marketing, Contact, Meeting, Site visit, Offer, Due Diligence/Financing, Closing)

  1. Seller inquiry to list business. I get referrals from bankers, attorneys, other people who have sold in the past, people I know around the community. Once someone asks about it, we get together to talk about the process. If they decide to go forward sometimes they list right away, other times they want an opinion of value first.

If they want to list right away the time from contact to listing might be a week (time to set up appointment, meet once and and then get back together to sign the listing agreement).

If they want an opinion of value first (most common) I need three years tax returns, YTD P&L’s for current year and prior to start with. After I have had some time to work with them I need a second meeting to go over questions and then a few days to get the report completed followed by another meeting to discuss and sign the listing agreement. I charge a fee for the opinion of value (not a full blown appraisal of the business) which I credit to the listing if they sign the listing.

Typically, depending on how long the seller takes to get me the info the time from contact to signed listing is about two weeks.

  1. After the listing is signed it typically takes another week to complete the CBR (Confidential Business Report) and the listing live on our company website and several online marketing portals such as Bizbuysell, Bizquest, Businessforsale etc. Now we are live. (Typical time elapsed: three weeks)

  2. Marketing time… now the clock starts ticking. The fastest I have ever had real offers is about two weeks. Often I have seen offers withing 6 months, other times it takes a year or longer. Much is determined by the price and also by the type of business. There are a LOT of buyers who are looking for specific kinds of things and quite often they are not willing to look at restaurants at all. (Typical time elapsed 4 months-Year)

  3. Contact! A buyer inquiry comes in. I respond typically the same day or the next (for ones that come in overnight) with an email thanking them for their interest and providing links to our website and to an online NDA. I also explain that I will need the NDA signed and either a meeting in person (preferred) or a phone call to learn more about the buyer, their finances and timeline and to discuss the business opportunity in general terms. The purpose is to confirm that the interest is real because close to half the people that inquire are not actually planning to buy a business. It is also to find out if they have the money to realistically pursue a deal. Quite often they don’t.

Quite a few of the contacts never respond to the email asking for an NDA and a meeting. Others don’t respond until I send a follow-up a week or so later if I never saw the NDA. Of the ones that sign the NDA quite a few never set a time for a meeting or a call. The typical thing is that, for the ones that go through with a meeting or call, the time from contact to meeting/call is about a week.

  1. Meeting/call. This is when I consider that we have an actual prospect. About half the time this meeting/call is the end of the process. We either learn that the “buyer” does not have enough cash, has an unrealistic timeline or ends up not really interested in the business when they learn more about it. This is a good thing! Better to find out now than to be distributing confidential information and spending time on chasing info etc for a deal that is not going to happen. For the other half this is the point where I send the CBR to the prospect and they take some time to look it over. The CBR includes a multi-year financial summary derived from the tax returns and a discussion of the Seller’s Discretionary Earnings and the associated “add-backs”. If they are interested, I typically hear back from them within a few days and talk again to answer questions, chase more info. (Typical time elapsed from Contact 1-3 weeks)

  2. Some times the meeting/call takes place with a visit to the business. I try to do this outside of operating hours. If that has not happened, now is the time to visit the business and meet the seller. I like to get prospect and seller together first for breakfast or lunch to talk and then go to the site. If the prospect is from out of town it can take some time to set this up. Often there are some specific questions that come up during this meeting and take a day or two to chase down answers and get them back to the prospect.

  3. Offer/Letter of Intent. If the interest is real at this point it is time to throw a number and a proposed closing date out there. For a buyer to get more information from this point they need to state that they are interested in buying, propose a price and what date they are able to close as well as whether they are dependent on financing. Often some specifics regarding the training agreement, covenant not to compete, specific inspection items and the lease are part of this as well. A letter of intent is a non-binding offer that gets the deal points out on the table. Once buyer and seller are both nodding on the deal points in the letter it is time to a Purchase Agreement or Contract to Buy & Sell. If they get attorneys involved at this point the whole process slows down but the typical time from LOI to contract is 1-2 weeks. Buyer puts earnest money on deposit with the closing/escrow attorney now. (Now we are 3-6 weeks since the first contact from the buyer)

  4. Due Diligence, Finance, Lease Assignment, Inspections. After there is a contract we get to work. The purpose is for the buyer to confirm the the information they have so far which they used to decide the deal made sense and to grind through the financing details and make sure the LL is on board with the lease assignment. In all the deals I have done, only one took less than 30 days for this part (all cash buyer). Most take 30-60 days but I am in the middle of one right now that will be 100 days assuming it closes as scheduled.

Bankers will tell you that SBA loans take 5-8 weeks but my experience has been that 10 weeks is a better bet because the 5-8 weeks they quote is from the date the package is complete which I have never seen happen faster than 3 weeks. Buyers communicate with insurance broker to obtain coverage, meet with key employees etc.

I can work with a closing attorney (hired mutually by buyer and seller) to crank out the training agreement, non-compete, bill of sale for vehicles etc a lot faster than the loan process or even the lease assignment. Typcial time from contact to closing is now 7-14 weeks.

  1. Closing! A day or two before the closing the buyer moves cash into the escrow account for closing. Inventory is taken and the final settlement sheets for buyer and seller are prepared and provided to them for review at least the day before. The lease assignment is prepared and agreed to by all parties. A long to-do list of changing over utility accounts, setting up credit with vendors takes place shortly before the closing. Closing is kind of anti-climatic. We meet to sign lots of things including the disbursement authorization for the escrow attorney who sends the money everywhere it needs to go.

After closing there is most often a training period of a month or so where the seller is available to the buyer.

Hope that helps someone with realistic expectations about this process.

What kills buyer interest?

Why is it that sometimes a buyer inquires about a business, signs the non-disclosure, comes to take a look at things and then walks away? This will not be surprising to long time Think Tankers because we witness this process over and over when people show up and start asking questions that reflect these issues. In face, we just saw a round of it in the last few weeks.

  1. Screwy books. Undeclared sales and cash wages. Sellers want a buyer to trust that those dollars exist. (They are also asking a buyer to take on substantial risk that a gov’t entity may have an interest in the FFE through a tax lien!) Nothing will make a good buyer walk away faster and for good reason. A seller that will cheat the gov’t (which actually has strong recourse available to them) will cheat you in a minute.

  2. Evasiveness in responding to questions about the business. A buyer should be able to sit down with the seller and ask what they want to know once they are qualified. After they have made an offer they should also have access to all documents to support the answers provided. When sellers get squirrely about providing this information a smart buyer walks away.

  3. Lease problems. No time left on the lease and no assurance of renewal or a new lease is a deal killer. A lease that is in default is another. Buyers need to have confirmation from the LANDLORD that all is good. A broker can and should run that down for you but if that is not happening you should ask for confirmation of the lease status from the landlord and walk away from a deal where you can’t get it.

  4. Customer service ratings… those awful review sites. Everyone gets a dinger from time to time. Smart buyers look these things up. It should not be a deal killer because poor reviews are an opportunity to grow the business but I have seen buyers walk away from a perceived problem in this regard. If you are planning to be selling your business it is always a good thing to those last bunch of reviews be positive!

  5. Unreasonable seller positions on price or deal points. Sellers that read somewhere that they should be getting 3X this or 4X that. Over and over again I see sellers with absurd expectations about what a business should sell for. In fact, I do not list or turn down more listings over this factor than any other. If the equipment is really old a seller should expect to get a lower price than they would if the stuff was all shiny and new. Most buyers are pretty sharp. They take the trouble to get informed and will walk away from stupid prices most of the time.

  6. Unattractive place to visit. Back to the point that I made in an earlier post. What is the buyer seeing when they walk in the door? If the place is messy or smells bad most buyers will pass.

  7. This should really be number 1… buyer does not actually have the money to do the deal. I try to weasel this information out before even showing the business or releasing information but sometimes they get past me with the right story. We get to the point of the thing and the “buyer” is asking for 100% seller financing because they do not actually have the money! These deals do go through from time to time so I guess I can’t blame them for trying but if I know a seller is not going to go that way it would save us all time to find out early.