The Pros and Cons of buying or selling a restaurant as an Asset Sale can be a Win-Win situation for both parties. In an asset sale, the seller retains possession of the legal business entity name and stocks, and the buyer only purchases the company’s assets.
The assets include equipment, leasehold improvements, Goodwill, trade secrets, trade name, telephone number, website address, social media accounts, and lease assignment.
Restaurant Valuation – Two Methods
1st Selling a restaurant that is profitable with good books and records. The restaurant buyer can anticipate receiving a paycheck from the restaurant ownership. For example, restaurant nets a profit of $100,000 a year, the restaurant buyer can expect to receive that income.
2nd Selling a restaurant that is not profitable, open for less than 2 years, has terrible books and records is an Asset Sale. They are priced pennies on the dollar. A quick way to spot a restaurant for sale that is an Asset sale is to look at the cash flow or EBITDA. If these numbers are missing or show a $0, chances are good the restaurant for sale is an Asset Sale
Pros and Cons of buying or selling a restaurant as an Asset Sale
Pros for Restaurant Seller
- Can close quickly (if franchise training is not required)
- Requires cash buyer-don’t have to worry about lending
- Can ask the landlord to be removed as lease guarantor
- No longer has to worry about restaurant ownership
Pros for Restaurant Buyer
- Will receive the equipment free and clear of any UCC liens
- Easy to convert to a new concept
- Saves thousands of dollars on build-cost
- Can benefit from Goodwill like previous owners Google Reviews, website, and social media followers.
- Buying a restaurant for pennies on the dollar
- Transfer cost fee is less than the original new store franchise agreement cost
- The majority of Asset Sale deals are restaurants that are still open and have employees.
Cons for Restaurant Seller
- The listing price is usually a lot less than build-out expenses.
- A more significant number of restaurant sellers will take a loss to get out of restaurant ownership.
- Harder to sell a restaurant that is not profitable or shows a small amount of profit.
- Cash buyer required because banks will not finance an unprofitable restaurant for sale.
Cons for Restaurant Buyer
- Buying a restaurant that might not be profitable is risky
- Buying opportunities can be challenging to price correctly
- Lease Assignment is agreeing to the previous owner’s lease terms and obligations,
- Becoming a guarantor on the lease
Asset Sales can be a perfect opportunity for existing restaurant owners to expand or for new restaurant owners to save money on opening a new restaurant.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dallas Restaurant Broker Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.com.Read More
EATS Restaurant Brokers is growing and has expanded its headquarters to Dallas, Texas. One of the nation’s specialized Business Brokerage firms, EATS Restaurant Brokers, has obtained a Real Estate Broker License in Texas and now are Restaurant Brokers in Dallas, TX.
Dominique Maddox worked with one of the nation’s largest Restaurant Brokerage Firms for seven years before starting his Restaurant Brokerage.
EATS Restaurant Brokers was established in Atlanta, GA, in October 2019. Less than two years later, EATS Restaurant Brokers is moving its headquarters to Dallas, Texas.
EATS Restaurant Brokers are among the few and far between Restaurant Brokerage firms that hold a Brokers Real Estate license in multiple states and hold a Certified Franchise Executive (CFE) designation.
Dallas Restaurant Broker Dominique Maddox, President of EATS Restaurant Brokers, said, “ Texas is a tremendous state for us to expand and grow our restaurant brokerage firm.
I’m excited to add the Lone Star state to our list of targeted markets for future growth. I have sold multiple restaurants for sale in Texas while living in Atlanta. Texas has one of the largest restaurant resale markets in the nation, with over 600 restaurants listed for sale now. “
Texas has substantial growth in the restaurant industry; the state has one of the fastest-growing population numbers in the nation. Dallas Restaurants, Houston Restaurants, and Austin Restaurants are known across the country. It’s an exciting time to be in the Restaurant Business in Texas.
EATS Restaurants Brokers is excited about living in Texas and connecting people with opportunities in the restaurant industry. We can help you sell a restaurant or buy a restaurant.
To learn more about restaurant resales or to receive a complimentary restaurant valuation, visit our website at www.EATSbrokers.com. EATS Restaurant Brokers assist buyers and sellers in the market to buy or sell a restaurant.Read More
Restaurant Sellers vs. Restaurant Buyers have different mindsets when it involves buying or selling a restaurant. When a restaurant owner decides to sell a restaurant, the primary goals are to get the highest sales price, highest net proceeds, remove the lease as a guarantor, and close quickly.
A restaurant buyer’s focus differs slightly from the sellers and is directly focused on the terms, conditions, and stipulations on an Asset Purchase Agreement.
An asset purchase agreement between a buyer and a seller explains the terms and conditions related to purchasing and selling a restaurant‘s assets. The Asset Purchase Agreement will automatically satisfy the restaurant owner’s needs when filled out correctly. The agreement will document the listing price and closing date.
The restaurant buyer needs to confirm that they are comfortable with the conditions and terms of an Asset Purchase Agreement before signing and setting up an escrow account. The escrow deposit is a good faith deposit that can range from $10,000-$50,000. The buyer’s deposit is protected by the stipulations documented in the purchase agreement.
Dallas Restaurant Broker Dominique Maddox says, “restaurant buyers should make sure they have a trained Restaurant Broker prepare an Asset Purchase Agreement on their behalf. A Restaurant Broker knows the stipulations to add that give the buyer’s escrow deposit the most protection.”
EATS Restaurant Brokers has encountered several buyers that have lost their escrow deposit because they had an untrained Restaurant Broker prepare an agreement for them.
A restaurant buyer should make sure to cover the basics of a Purchase Agreement:
- Due Diligence Period
- Landlord Approval Stipulation
- Bank Lending Approval-if lending is needed
- Escrow Deposit Amount
- All UCC liens should be removed from Equipment
- Sales Tax Clearance letter supplied by the seller before the closing date
- All Equipment should be in working order
- Franchisor Approval stipulation-if restaurant is a franchise for sale
- Who pays for the Transfer Fee?
- Who pays for restaurant remodels if required by franchise?
- Closing attorney contact information
- Restaurant Equipment included in the sale
- Inventory- paid outside of purchase price or included in offer price
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Restaurant Broker Dominique Maddox at 404-993-4448 or by email at firstname.lastname@example.org. Visit our website at www.EATSbrokers.comRead More
What should you know about a Commercial Lease Assignment before signing the lease? The lease assignment can be short and brief, but it has a tremendous impact on the capability of a restaurant owner selling a restaurant in the future.
When buying or selling a restaurant, it is essential to evaluate the strength or weakness of a commercial lease assignment language.
A restaurant owner that wants to sell a restaurant can easily be stopped by the language in their lease that covers the possibility of a lease assignment to a new tenant.
What should you know if you are negotiating a lease assignment language for a commercial lease? This blog presents a brief breakdown of some of the key points involved in a lease assignment.
When a tenant’s lease interest is assigned to a new tenant/buyer, this is called a lease assignment. The current tenant has already agreed to terms with the landlord; once the new tenant signs the lease assignment, they are now responsible for the lease terms. The landlord’s standard practice is to keep the previous tenant on the lease as a guarantor and add the new tenant.
Most negotiated leases will contain a provision requiring that landlord’s consent to an assignment is necessary, but such approval will not be unreasonably withheld. The tenant will likely also try to include the landlord’s obligation to not unreasonably delay or condition its consent, according to Attorney John G. Kelly.
Dallas Restaurant Broker Dominique Maddox says, “Selling a restaurant has multiple tasks/assignments that have to be completed before restaurant ownership is transferred. Practically every commercial lease will have detailed requirements for the assignment process.
Landlord approval for a lease assignment is a critical part of the selling process. The majority of restaurant owners are clueless about the provisions in their lease for a lease assignment”.
EATS Restaurant Brokers list language to know in a commercial lease regarding a lease assignment
This fee is payable to the landlord before a tenant can transfer the rights to a commercial lease. The amount is usually not negotiated between landlord and tenant, most leases landlord input whatever number they want.
The assignment fees usually range from $0-$10,000 (listings for sale under $2 million); it really depends on the landlord and the language in the lease. The lease assignment fee majority of the time, is paid by the seller.
EATS Restaurant Brokers tip: Read the lease before signing and know how much the assignment fee will cost you.
Landlords have several different qualifying metrics a tenant should pass before getting approved for a lease. The lease assignment language should not be as strict as the current lease for a new tenant because the business is up and running, usually generating sales.
Depending on the landlord, EATS Restaurant Brokers has seen lease assignments that automatically approve a new tenant if they keep the lease space the same franchise brand. But also seen lease assignment language where the new tenant has to have as much or more liquid assets as the previous tenant. This can be an unreasonable requirement if the first tenant is financially well off when signing the original lease.
The renewal option gives a tenant the right to extend a commercial lease expiring in the future. Lease options are usually extended by 3 years, 5 years, or 10 years.
Renewal options should have specific language on the conditions required for a tenant to extend an expiring lease. Many leases need a tenant to give 90-180 days’ written notice to confirm if the tenant plans to extend the lease.
Restaurant owners who are trying to sell a restaurant and lease are about to expire might think they will just have the new buyer sign the tenant.
If the window to provide a landlord with a written notice has expired, the landlord has the right to refuse to agree to a lease assignment.
EATS Restaurant Brokers Tip: The restaurant owner should know how far in advance written notice to extend the lease is required to the landlord.
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.comRead More
As an Independent Owned Restaurant, how do you increase restaurant value for resale besides good food and environment? Independent Owned Restaurants for sale usually sell for less than Franchise Owned Restaurants.
Franchise Restaurants for sale provide a potential buyer with systems, training, and brand awareness to customers; these are non-tangible items that improve resale value.
The best time as a non-franchise restaurant to start thinking about organizing and operating your restaurant like a franchise is at the very beginning. Start thinking about training manuals, required training time for a position, social media presence, and misc.
60% of Independent owned restaurant operators will fail within three years of opening the doors for business. 80% will close within 5 years. The reality of opening a restaurant is you should always have an exit plan.
When it’s time to sell a restaurant, how does a non-franchise restaurant for sale increase its odds of selling a restaurant to a new buyer?
Dallas Restaurant Broker Dominique Maddox says, “ my suggestions to improve value are create a story behind the establishment, cook from scratch, have fantastic food, and create systems easy to follow.
After ten years of selling restaurants, I have found that non-franchise-owned restaurants for sale that are not unique and organized usually don’t sell.
EATS Restaurant Brokers provides TIPS to improve value!
- Story behind establishment: Have a story behind your restaurant; people relate and remember stories. This is one of the best ways to build brand loyalty from customers. Make sure your customers can read your story by posting on the wall, website, cups, etc.
Has the restaurant been passed down from generation to generation? Did a unique passion project inspire the owner to start the restaurant? These are exciting stories that make a restaurant unique. Key take-away people remember stories!
- Create Systems: The POS system should be updated to record all valuable sales information. POS systems are useful tools to analyze to improve restaurant profitability.
Create Training Manual: A manual with all the training material needed for a new operator is a valuable tool. The manual should have the job descriptions for each position. The manual should describe the process and time requirements for new hires.
- Unique Food– Do you have a unique cooking style, use exciting ingredients, how is the presentation? Outstanding food and experience will always get customers talking about a restaurant. Word of mouth referrals is the best and cheapest way to grow your restaurant.
Create a unique style of cooking that customers have to visit your restaurant to enjoy. Besides the type of cooking is the taste of food. The best non-franchise restaurants cook from scratch.
Create a menu book that lists all of the cooking recipes, measurements required and cooking time.
The suggestions listed in this blog are intended to help an Independently owned restaurant owner sell a restaurant business in the future. These tips should help the restaurant operator stand out from the competition.
Reasons for selling a restaurant can differ from restaurant owner to owner. Everyone has a specific reason that they want to sell a restaurant.
Retirement– The baby boomers are ready to retire and enjoy the last chapter of their life in peace without the stress of restaurant ownership. The Covid-19 pandemic and worker shortage have baby boomers listing restaurants for sale faster than in the past.
Failing Restaurant– 60% of restaurants will fail within three years after opening the doors. 80% will close the doors permanently within five years of opening up for business. Restaurant ownership is a rewarding but demanding business to survive in for multiple years.
Lack of Capital- The restaurant business is all about the numbers and ratios to total sales. Many restaurant owners have to use personal capital to keep a restaurant operating. Liquid capital can quickly disappear from bank accounts when it comes to restaurant ownership; money is one of the most significant driving factors for restaurant owners to sell a restaurant.
Burnout– The restaurant industry is a lifestyle that most people cannot handle over an extended time. Restaurant owners can be asked to work 10-12 hour shifts and always be on call for problems.
Divorce- Several restaurants for sale on the buyer market are due to parties getting divorced.
Illness- To be successful in the restaurant industry, you need to stay healthy and active. The restaurant hospitality industry is for the strong mentally and physically and, individuals can endure long hours and stressful situations. Illness is a significant factor in the decision-making when it’s time to sell a restaurant.
Family – Time with the family or lack of time with the family is a big motivator to sell a restaurant. The kids grow up fast, the babies start walking before you know it, the time at night before bed with your soulmate means the world to most.
Bored-Depending on the type of restaurant owned, some restaurants have lots of downtown during non-peak hours. Restaurant owners whose sales are low and can’t attract customers can get bored with restaurant ownership.
Overwhelmed-Restaurant owners have to wear multiple hats when owning a restaurant. One minute they can be ordering inventory, next minute dealing with a busted leak in the ceiling, POS machine not working, and workers are calling out for work. Juggling multiple tasks and responsibilities can be overwhelming to even an experienced restauranteur.
Stress- The restaurant industry is notorious for sending people to the hospital. The stress related to the long hours, the bills adding up, labor work shortage, can lead to health-related stress issues for many individuals.
Additional Issues outside of Top 10 list:
All equity tied up in restaurant assets
The restaurant business is too risky
Want to focus on other business or core business
Outside factors (political/economic)
To raise capital/funds for another business
For more information on the restaurant market and other available consulting services or restaurant valuations, contact Restaurant Broker Dominique Maddox at 404-993-4448 or by email at firstname.lastname@example.org. Visit our website at www.EATSbrokers.com
What restaurant numbers should you know if you own a restaurant or want to buy a restaurant? Every independently owned restaurant is unique, while franchise concepts have common similarities. How do you compare the two different restaurants if you want to buy or sell a restaurant? Analyzing the Financial and Operational ratios is a great starting point.
What numbers should be significant to a restaurant owner that wants to sell a restaurant or a buyer that wants to buy a restaurant? Some key impact ratios compared to annual sales are food, labor, lease cost, and Sales per square foot.
Dominique Maddox, a Restaurant Broker at EATS Restaurant Brokers, says, “when analyzing Profit and Loss statements to provide a restaurant valuation, I always pay cost attention to the critical impact ratios.
The numbers and ratios can help explain the heartburn or opportunity in a restaurant.”
EATS Restaurant Brokers shares RATIOS to consider list:
Food Cost: Food cost as a percentage of food sales (costs/sales) is generally in the 28% to 32% range in many full-service and limited-service restaurants. Ratios can fluctuate depending on the type of restaurant.
Upscale restaurants can range up to 35%-40%, while pizza concepts can range from 20%-25%.
EATS Restaurant Brokers Tip: Food costs seem to always be higher at absentee-owned restaurants than Owner/Operator restaurants. The employees don’t operate the restaurant like an owner that manages the day-to-day operations.
Labor Cost: Payroll cost as a percentage of sales should not exceed 30%-35% of total sales for full-service restaurants and 25%-30% of total sales for limited-service restaurants. This percentage includes payroll taxes, insurance premiums, and other employee benefits.
EATS Restaurant Brokers Tip: Generally, you don’t want to see management salaries, including kitchen managers, assistant managers, and General Managers’ salaries to exceed 10% of gross sales.
Build-out-cost: The sales-to-investment ratio should be at least 1.5 to 1. This means a minimum of $1.50 in sales should be expected for every $1 of startup costs, according to www.Restaurantowner.com.
This means if you spend $300,000 on a restaurant build-out, the location should be able to generate at least $450,000 annual sales. The best restauranteurs know how to keep build-out costs at a minimum to increase the Sales-to-investment ratio.
EATS Restaurant Brokers Tip: Buying an Asset Sale restaurant is an excellent opportunity to save money on the initial build-out cost.
Rent and Occupancy: The ideal range for rent expense is 6% or less of total sales. This ratio includes costs such as common area maintenance (CAM) and other occupancy expenses.
Many operators are satisfied with an occupancy cost of 8% or lower. Once a restaurant owner-occupancy cost reaches 10% or higher, the charges start to deduct from the owner’s net profit.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.com.Read More
EATS Restaurant Brokers decided to create a Restaurant Seller and Buyer Meeting-Tips for Success checklist. The initial meeting between the buyer and a seller can dictate how the working relationship will be in the future.
The goal of the initial meeting is to familiarize both Restaurant Seller and Restaurant Buyer, view the back of the house, buyers get an opportunity to ask probing questions and review restaurant financials. The most straightforward deals are when the buyer and seller like and respect each other. When the personalities don’t mix, the restaurant closing process could be filled with turbulence.
Dominique Maddox of EATS Restaurant Brokers says, “ The best method to minimize differences in personalities is to keep the deal flow managed by a specialized trained Restaurant Broker. When Restaurant Sellers and Buyers communicate directly without a skilled Restaurant Broker, a deal can crumble quickly”.
EATS Restaurant Brokers 7 Tips for a Successful Seller and Buyer meeting.
- Buyer and seller should both have face masks on, even if social distancing is done.
- Walk around the restaurant to get the seller talking and to get the buyer more comfortable. Great way to break the ice between parties.
- We recommended starting with the back of the house (BOH) to show the kitchen area and cooking equipment. This task can range in time depending on the size of the restaurant and restaurant owner explaining items.
- Sit down for a meeting- This is a great time to introduce each party to start talking about why one party wants to sell and the buying party to explain the interest in buying.
- The sit-down meeting allows the buyer to ask questions about the restaurant operations, restaurant equipment, lease, employees, financials, and willingness to negotiate on price.
- Restaurant sellers should be prepared to explain the Cost of Goods (COGS), Labor, Sales, and potential to increase sales.
- Buyer should review financials before meeting with the seller. The buyer should come to the meeting with prepared questions to ask the seller.
- Follow-up questions after the meeting should be directed to Restaurant Broker to share with the seller.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at firstname.lastname@example.org. Visit our website at www.EATSbrokers.com.Read More
How to validate a For Sale by Owner sales numbers can be a challenge for buyers. A For Sale by Owner listing is a person that decided instead of hiring a Restaurant Broker; chose to represent themselves.
People decide to represent themselves as a For Sale by Owner for several reasons: they don’t want to pay a commission, think the restaurant sales process is simple, and lastly, the clueless restaurant owner that educates themselves on Google.
EATS Restaurant Brokers provides 3 Ways to validate For Sale by Owner sales numbers:
1st-Request a copy of Sales Tax Filings–This represents the gross sales amount the restaurant owner reported to the state government. Restaurant owners who keep accurate books and records pay the correct amount owed for sales tax.
Independent-owned restaurants have many restaurant owners who do not report the correct amount of gross sales to reduce their sales tax bill. Restaurant buyers should only look at the amount reported to State Government.
Sales Tax filings amount can fluctuate from state to state. The statewide sales tax rate is 4% in Georgia, but local rates typically vary from 7-8% (4% for state, plus an additional 3 or 4% for local).
2nd-Request a copy of Tax Returns filed with the IRS, confirm tax returns are the correct ones reported to state government. Tax Returns provide vital information regarding the Gross sales and net profit of a restaurant.
Dominique Maddox, a Restaurant Broker for EATS Restaurant Brokers, says, “I would recommend requesting a Request for Transcript of Tax Return(Form 4506-T) form. Filing this documentation allows the buyer or bank to request tax returns directly from the IRS.
I have experienced instances were the tax returns provided to the buyer did not match the tax returns the IRS had on file”.
3rd-Request a copy of the POS Sales report– The POS Sales report can help buyers understand and simplify the restaurant sales breakdown.
4th- Count the number of customers during peak hours– This is the least recommended method for confirming a For Sale by Owner’s financial numbers. Some buyers like to visit and sit around for a while to monitor the customer traffic count and buying habits.
EATS Restaurant Brokers Tips when buying a restaurant from a For Sale by Owner:
- Inspect the equipment during the due diligence period. Confirm that the restaurant owner owns the equipment and is not leasing it or the landlord owns it.
- Make sure the closing attorney does a UCC lien search days before the closing.
- Ask Restaurant Seller to provide a Sales Tax Clearance Letter before closing.
For more information on the restaurant market and other available consulting services or a complimentary restaurant valuation, contact Dominique Maddox at 404-993-4448 or by email at email@example.com. Visit our website at www.EATSbrokers.com.
Restaurant Sales Transactions fall apart for a collection of reasons. Some of these issues can be resolved before they derail a deal from closing, but several problems are discovered along the way.
Once the restaurant seller and buyer have agreed to terms and signed an Asset Purchase Agreement, the due diligence period will start, and the buyer will deposit $10,000-$30,000 in escrow with a closing attorney. The due diligence period for a buyer is similar to a monopoly get-out-of-jail-free card. This gives the buyer the right to cancel the agreement for any reason and get their 100% escrow deposit back.
Due diligence on a main street restaurant sales transaction usually ranges from 10-30 days.
A main street restaurant can be described as a business that:
- Have less than $3 million in sales revenue.
- Have a restaurant valuation of $1 million or less.
- Have adjusted earnings or EBITDA of $1 million or less.
The more information I can collect upfront can help me resolve future issues that might happen. I have been specializing in selling restaurants for over 8 years now, and I encounter new problems every day helping a buyer and seller arrive at the closing table”.
EATS Restaurant Brokers provides the Top 2 Reasons Restaurant Sales Transaction fall apart?
The Restaurant Seller does not tell the truth and is not upfront with important information.
The restaurant owners know the restaurant’s pros and cons better than anybody (or they should). The individual can be upfront with information or hold back valuable information, hoping it will not come back and hurt the deal.
When working with a restaurant brokerage, sellers are usually required to sign a listing agreement that indemnifies the Restaurant Broker from any future liens or lawsuits because they are only representing the information provided by the seller.
The biggest lies or half-truths a seller will provide will cover:
- Books and records-Profit and Loss Statements and Tax Returns
- Tax liens or UCC liens
- Kitchen equipment working status
- Partnership status
- Franchise required training
- Their current financial situation-includes monthly lease status (do they owe landlord money for back rent?)
Buyer changes mind about buying the restaurant
Owning a restaurant is a lifestyle choice that buyers have to realize before they buy a restaurant. During the diligence period, the buyer will start to poke and analyze the restaurant under a microscope. The buyer begins the buying process with tons of enthusiasm and thoughts of being a successful restaurant operator.
The buyer can easily change their mind once they start noticing errors and mistakes in the financials provided to them to analyze. Restaurant buyers will look at the kitchen equipment with a heavy microscope and detect if the restaurant kitchen equipment is outdated or not working.
The most significant issues for buyers to cancel contracts during the due diligence period:
- Books and records were not accurate
- They don’t like or trust the restaurant seller
- Can’t agree to terms with the landlord
- Can’t attend the required franchise training
- Spouse disapproves
- The restaurant lifestyle and hours are not a good fit
- Want to renegotiate the sales price and terms
- Can’t get approved for bank financing