How to sell a Restaurant

By: Jose C

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!