Before becoming a Business Broker in 2002, I was actively involved in the restaurant industry as an owner/operator of my own chain of Mexican Restaurants. Along with my father/business partner, we started numerous restaurants from scratch, as well as buying existing ones. We converted all of the restaurants we bought to our own concept, so we really never paid for goodwill. Some restaurants we kept (the good ones, of course), some we sold, and for the few that were not saleable, we let the lease expire and did not renew. You can say I have been in all sides of the fence as a buyer, a seller, as an owner/operator, and now as an intermediary specializing in the sale of restaurants. Since 2002, I have been involved in over 100 transactions involving restaurants, bars, delis, cafes, catering, and other food service businesses.

As with most business sales, the sale of a restaurant is a challenging one. It becomes even more challenging if there is a liquor license involved; if there are too many operating restrictions on that license; if the restaurant is in a poor location; if the rent is too high; if half of the equipment is not working; or, if something else is a problem. And on top of these issues, restaurateurs are not well known for keeping good financials. This presents a special challenge to a Business Broker because the majority of restaurants will not show a profit on the tax returns or income statements (if they do show a profit, it is always a small one).

So, how do you explain that to a potential buyer, that a restaurant's asking price is $500,000 but does not show much of a profit on the books?

One way I deal with this question is to not deal with this question at all. I sell my restaurants to other experienced restaurateurs only. The experienced restaurateur will know how much money he/she can make in a given restaurant if you just provide sales and lease information. They have the experience and know how, and they will probably not care or give much attention to the current owner's tax returns or income statements. They will plan to run their own show, and to control expenses their own way. As long as they are able to verify sales, they can work the numbers backwards and arrive on what their SDE will probably look like; most of my restaurant listings these days will only show revenues on the financial summary.

Here is another reason to sell your restaurant listings only to experienced restaurateurs and current and former restaurant owners: You have probably heard from friends and family that operating a restaurant is very difficult. Well, it is very true, and it continues to get more and more difficult as competition intensifies food cost and labor expenses increase, greedy landlords continue to charge outrageous rents, etc. I don't know about you, but I have a difficult time selling a restaurant to someone that has never owned or at a minimum worked in a management capacity at a restaurant (I don't prefer to sell to the latter one, but sometimes it becomes inevitable, especially for the smaller restaurants). Even people that have extensive experience in the restaurant industry will find it very difficult and challenging to operate one. I personally want all my clients to be successful in their future endeavors. Put another way, you really don't want to put a square peg in a round hole if you can avoid it.

Based on my many years of experience in buying and selling restaurants, I have identified some basic criteria that allow me to determine if the restaurant has the potential to be sold or not. For those restaurants that don't meet these basic criteria, I simply pass on the listing.

The first criterion is LOCATION. I categorize locations as first-, second- and third-tier. A first-tier location would be a very busy location, high traffic, booming businesses in the area, mid to high income population. A second tier would be a location that is still busy but the population is low- to mid-income, and the businesses in the area are not as glamorous. Some restaurants in these second tier locations are very busy and will sell to the right buyer. By the way, I only take listings that are located in the first and second tiers. It is hard to sell a restaurant that is in a bad area no matter what the price is.

The second criterion is RENT. Obviously, first-tier locations will command a higher rent than second-tier locations. But still, the rent has to be within reason, and not exceed 10% of gross revenues for any given restaurant concept. I have seen many successful restaurant owners paying up to 15% of gross revenues in rent and still managing to be very successful, but I believe they are the exception rather than the rule. If the rent is outrageous, I run away from it as quickly as I can.

The third criterion is CONVERSION POTENTIAL. Can the restaurant be converted into another concept that will not compete with other restaurants within that particular center? When I write the business profile for my restaurant listings, I always suggest conversion potential to other concepts/foods to a potential buyer. Unless the current concept is doing extremely well in that location, most of the restaurants that I sold have or will be converted to other concepts. I will pass on a restaurant that has very limited conversion potential especially if it is not doing too well.

The fourth criterion is the CONDITION OF THE EQUIPMENT. If the equipment is in bad shape and needs to be replaced, that in itself is not too bad, but the price has to be adjusted accordingly. The owner cannot command top dollars for the restaurant if half of the equipment is shot.

My fifth and last criterion is ASKING PRICE. Since most of the businesses I sell have representations of revenues only, the asking price is based on a percentage of revenues. Most restaurants will sell on a percentage of 30% to 40% (.30-.40 X). The restaurants I list for the most part have revenues of at least $500,000 or more per year. Anything less than $500,000 in revenues, I walk away, unless it is an Asset Sale and we are basically just selling the equipment and the location at a very reduced price.

Having said all this, the last piece of the puzzle on how to sell a restaurant is in the writing of your profile. Assuming that the basic criteria have been met, and you got the listing, now it is time to go out and find the right buyer. The profile has to be written in a language that a restaurateur can understand. Which means that you have to have emphasize revenues, rent, location, price, conversion potential, condition of the equipment, etc. (your basic criteria).

By doing all this you will attract the experienced restaurant owners/buyers seeking to start a new concept or expanding their existing ones. At this point, you don't even have to say much about the restaurant; it will sell on its own. They have sold the location to themselves before even talking to you.

By the way, it helps to have a positive attitude and get excited about the new buyer's concept and potential as much as he/she is. If you don't, the buyer will see that in you and get discouraged. You see, all they need sometimes is some words of encouragement without you sounding that you are only interested in the sale. Maybe throw in some ideas on what you would do to attract more clients, or what kind of concept would work well in that particular location. If you don't have restaurant experience and can't come up with ideas, I suggest you read a good book on restaurant marketing. Remember to emphasize that it is your own personal opinion and should not be taken as a given or guarantee that it will work.

One final word – if you do get a non-restaurant person calling you on a restaurant listing you got, discourage him or her quickly and sell them another business instead. You really don't want to spend too much time with this person. Believe me; you will never get past the landlord with a buyer with no restaurant experience!

By Bob Peterson

What would you do? I had been working with the Seller for two years, one buyer had gotten almost to the finish line and dropped out; others looked and said, “Not enough information,” or words to that effect and dropped out.

But I believed in this company, believed in the profit potential, and believed that the Sellers were pursuing this transaction because they were tired and just wanted to retire.

Finally, in January 2007, a signed Offer to Purchase. But… (isn’t there always a “but”?), the Buyer was unable to close until June. Then, July.

My Seller was patient. After all, he had made a good living and acquired a healthy net worth from this business over 30 years. He had convinced me that the business would produce a healthy top line and a moderate bottom line if sold to the right Buyer. My judgment was based on long experience in the construction business and respect for the Seller. Not on the books, because the books were designed for the owners’ convenience, not to facilitate a sale. Information was sketchy.

Let’s review the impediments, the misfortunes and the mistakes. The first Buyer knew nothing about the construction business. Despite successful small business ownership, when it came to retainage, bonding and union employees, they soon determined that the business was above their heads. Probably right.

Most buyers had no money. My Sellers were unwilling to finance people who ought to have the money; but they had some interest in nurturing a good, younger buyer. This could have been the chance of a lifetime for someone, or so I thought. No one was coming forward.

Then, in December, the right Buyer showed up. We could wait until summer to close. All we had to do was produce a reasonable backlog, and an adequate amount was already “on the books.” The price we agreed to was more than the price the Seller thought he would get when we started talking two years before, the result of better records and some good years.

When it came down to closing, the Buyer’s insurance physical indicated cancer. The week before closing, the backlog fell apart when a key job was cancelled.

What was happening!! The bank said closing would be on Friday, then Tuesday, then next Friday. What a nightmare.

Finally, the Buyer decided to forge on ahead. I don’t know what prompted him to proceed when all the signs pointed to another failure on my part. But it happened and the Seller was completely taken out with no carryback.

Three months later, here is the situation: the backlog is fine. Further tests proved no cancer. Whew!

We projected a 25% margin and modest growth. In the first 12 weeks, the business has developed more net margin than was expected for the full year. The bank debt will be paid off in a year. Growth that we thought would be 10% is expected to be nearly 100% in the first year.

The Seller is working hard to make the business successful for the Buyer, without any financial incentive—he wants to make a “good deal.” The Buyer’s experience gives him a running start.

My belief that this was a good business, despite all the signs trying to tell me to back away and give up, turned out to be conservative. This is a terrific business and a terrific deal for both the Buyer and Seller. Persistence paid off. Once in a while, you need to have validation of your initial judgment.

I have found that there are significant misunderstandings about the SBA 7-A loan program. Buyers, sellers, accountants, attorneys and even business brokers have misconceptions. Actual SBA requirements are set forth in what is referred to as the SBA Standard Operating Procedure (SOP). Lenders must meet these requirements. Most lenders have policies that exceed the SOP requirement. You can obtain a complete PDF file of the SOP 5010 by going to: http://www.sba.gov/library/soproom.html. There can be significant variation from lender to lender. I want to focus on a few major issues.

Cash Injection
According to SOP, the amount of cash injection required for a business acquisition is really zero. Many lenders typically require 20%. However, some will accept 15% and even 10%, even if no real estate is available. Some lenders will allow cash injections as low as 5% if an established manager is acquiring the company, and 100% financing is available for some medical and dental practices. This does not mean that brokers should focus on injections below 20%. However, if the transaction is strong, and you have the "right" buyer, a lower cash injection can work. Earlier this year we financed two young partners with excellent food franchise management experience to open their first unit with only a 10% cash injection. Since opening that unit, a resale in the same chain came on the market, and the lender is again accepting a 10% cash injection. The 20% figure is the norm, but not a rule.

Collateral
According to SOP, the lender is required to make an effort to take as much personal collateral as is available, if the business does not collateralize the loan. However, if the business has minimal assets, and the buyer has no collateral, there are many SBA lenders who will still approve such a loan. Our firm arranged financing for the acquisition of a non-franchised collision repair business. The tangible assets of the business were worth less than $100,000, and the buyer had little real estate collateral. A loan of $1.2 million closed the business resale transaction. Collateral, if available, will be taken, but is not required to secure an SBA loan, according to the SBA.

Business Experience
A few years ago, some lenders initiated a requirement of 3 years direct industry experience on the part of the business buyer. This is not an SOP requirement. Many lenders, though they require that the buyer have the business acumen to operate the business, do not have a direct industry experience, or profit-loss responsibility requirement, per se. Siegel Capital often closes loans for buyers who do not have direct business experience. In April of this year we closed a loan sent to us by a business broker in the Carolinas. The buyer was moving from out of town and acquiring a Lumber Yard (no real estate involved). He had never owned his own company, nor had any direct business experience. His SBA loan was for $1.3 million, and not fully collateralized. Direct Business Experience is a lender requirement, not an SBA SOP requirement.

Summary and Conclusion
SBA lending criteria of all lenders must meet or exceed requirements set forth in the SBA Standard Operating Procedure Manual. For brokers or borrowers to make the most of the program, they need to understand what criteria have been adopted by the lenders. Brokers should avoid assuming that one lender's requirement will be the same with another lender. For properly priced cash flow business resale transactions, lenders do exist with no, or limited, collateral requirements, the amount of the cash injection can sometimes be negotiated, and direct business experience is not a universal lender requirement.

By: Alan Melton | Small Business Coach & Associates  
If you are like most business owners, you would like to sell your business one day for top dollar. You need to know the value of your business in order to grow the value.

Businesses have "three values." The book value is typically determined by your accountant. The book value is your business equity; assets minus liabilities. Secondly the academic value is the method determined by a professional business valuation. This approach determines value with a formula based on your company's hard assets, cash flow, industry averages and multiples. The third method is what is referred to as the fair market value. The fair market value also takes those items into consideration, but then considers what buyers are really willing to pay.

For many small and mid-sized businesses hard assets such as equipment, vehicles, land, buildings, and inventory are limited. Some small businesses have no hard assets at all. In this case the business value is based on intangibles like employees, business processes, customer lists, location and business relationships.

If you want to maximize the fair market value of your business, it's critical that you leverage both tangible and intangible assets.

• Make your business an expression of you: develop your niche. Make your business unique. Don't try to be everything to everyone. Many buyers will pay a premium for a niche that has barriers to competitive entry.
• Attract, hire and develop key employees. Make yourself dispensable to the day-to-day operations. Buyers won't pay a premium if the business relies on you for its success. Some buyers won't buy at all. Delegate responsibility to key employees and involve your key staff members in the planning and decision-making process. Demonstrating that your company's success is reliant on your capable, well-trained employees, rather than you will pay off at the time of sale.
• Build relationships with customers. Make sure your employees have those relationship too. Your name recognition, customer awareness and your reputation are all part of your business value; these are important components of goodwill. Even if your company doesn't have many hard assets, your customer relationships are key. 
  
• Diversify your relationships with all stakeholders. Make sure your largest customer is less than 20% of your total revenues. Don't be too dependent upon one vendor. Build a strong brand in your community.
• Maximize your revenues and your bottom line. The larger your business is, the better chance you have of selling it. A potential buyer also wants you to "show me the cash." As you know, in the business world cash is king. Be sure you are driving all income to your bottom line. Hire a business coach or broker to recast your financials, showing all discretionary income.
  
• Document everything the business does. Ensure that job descriptions, company standards, operation processes, and strategic plans are documented. Documented records and plans will give buyers a greater sense of security that they will be able to continue your successful business. This will also help your buyer obtain financing. 
  
• Give your business a "face lift." Like real estate, curb appeal is important with businesses too. Clean things up and make sure everything is organized. Painting, cleaning, landscaping and carpeting can make a big difference. A well-maintained facility will help you to make a good first impression. Even consider making this investment with leased space. Doing these things will express a sense of quality and competence with prospective buyers and your customers too.
• Get rid of unproductive assets. Sell off or dispose of unproductive assets or obsolete inventory. Remove from your balance sheet and your premises any assets that are for your personal use.
• Develop an exit plan. Look at your business through the eyes of a buyer. Bring in a professional to help you prepare your business well in advance of selling. Doing these things will communicate pride, quality and strength. Work on these tangible and intangibles in advance, and you will put more money in your pocket now and increase the likelihood of selling later.

Unfortunately many business owners reach a point where they burn out and become "emotionally divorced" from the business before a sale is made. They put themselves in a position of weakness. That's the worst time to sell! It's important to work hard on your business until the sale is complete.

Finally, line up a team of key specialists who will help you get the highest value and the most protection when you sell. Hire a good exit planner, attorney, accountant, and a business intermediary to name a few. You only have one chance to sell your business; do it right!