Selling A Restaurant In 2021 (Plus Anytime) (Ep 137)
Jaime Oikle of RunningRestaurants.com & Roger Beaudoin of Restaurant Rockstars jumped on a live session and hit on the checklist of items you'll want to consider if/when selling.. Check it out...
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Selling A Restaurant In 2021
I’m with Roger Beaudoin of RestaurantRockstars.com. This episode is going to be all about selling a restaurant in 2021, and it's going to be interesting in a lot of ways because my first instinct is to say, “I would never want to sell a restaurant right now. It's probably a terrible time. We went through COVID and the pandemic, but we are finding that to be the opposite, which is a surprise factor in Rogers going to talk about his learnings and what he's going through selling his restaurant. Before we even get into it, what's going on?
Business is picking up. It's amazing how much opportunity is happening as we pull out of this pandemic. All of our businesses, whether it be restaurant-operated, Restaurant Rockstars, it's like everybody laid low for a while and now things are coming back and they are coming back in force. States are loosening the restrictions or dropping them entirely. People are going back to restaurants in force, and there's lots of space for lease out there. There are restaurants for sale out there. It may be a good time to buy a restaurant. It's certainly a good time to sell one. That's a seller's market in so many states and parts of the country. Lots happening.
Roger Beaudoin
Let's go to it and we will try to be short and sweet, or maybe we will get into it and stay long. We are not sure we don't know exactly. We have some bullet points we want to talk about. Let's see where this goes. Roger is a long-time restaurant owner in the state of Maine. Successful restaurant. Why are they successful? I'm sure we will hit on lots of those aspects, but you sold that restaurant, moved away from it, and all of that.
A few years ago, he will tell you exactly how he got back into the business. He bought a restaurant with plans to renovate and do this and do that. COVID hit, the pandemic hit. Change, pivot, move forward, and so forth. As we are coming out of the pandemic, out of nowhere, you get an offer and a couple of knocks on the door saying, “Would you be interested in selling?” What was your action? You tell me.
It was mixed at first because we were approached by a commercial broker with no plans to sell the business. Anyone who's read your episodes before any of our recordings knows that the real gem of my property was this beautiful barn that we plan to turn into a wood-fired pizzeria and a bar. Our neighborhood is exploding with new subdivisions.
I was close to pulling the trigger on a very expensive pizza oven from Italy, and we are starting the whole planning process to open it literally in a couple of weeks. All of a sudden, it made us think, and when we started exploring this, that particular person didn't end up moving forward. Instead, we talked to a broker because they said, “The market's on fire right now. We are selling businesses. We have closed on three deals. You might want to look at it.”
They threw out a price that we thought was great, and we were like, “Let's take a look,” and we were willing to see what happened. We didn't list it for sale. We didn't put signs on the building. We will get into some of these ins and outs but we started getting showings right away and a lot of activities started happening almost immediately. We said, “Let's move forward with this and see what happens. We are under contract to be sold. We pivoted yet again in the business. Planning to expand the business and then deciding to sell the business and who knows what the next opportunity is. That's the keyword, opportunity.
Was it a surprise to you, though, that the broker said, “The market's on fire?” Did that take you back a little bit?
I knew that the residential market was on fire and it's crazy because our particular area of Maine, very close to the coast, has experienced a tremendous amount of people moving from out of state to Maine when COVID hit and during COVID and all that stuff. How is there suddenly selling for hundreds of thousands of dollars more than they were worth pre-pandemic? The amount of showings and offers, we are talking about multiple offers. I have heard that it's not uncommon to get 15 or 20 offers on a house and people are paying $2,000 more than what the seller thought it was worth. It's a crazy residential market, but apparently, the commercial market is on fire as well.
I'm seeing the same thing where else outside of Orlando. The same thing as a residential market. It’s exploding. I was surprised because we know there are lots of properties that are available for lease and lots of opportunities, and lots of people have gone out of business. If you are a restaurant operator and you read this and go, “It can't be a good time to sell.” We are seeing a lot of things in the market.
What Are You Selling?
You were talking with another client of yours about going through the process and that gave us the push to do a short session here about selling because Roger is going through a talk to other folks going through it and we have a checklist of things to think about. Let's go there. It all starts from the beginning. Your first note here is very simple. What are you selling? Is it the real estate, the name, the goodwill, or the profits? When you think or talk about that, what should the operator be thinking about what they are selling because they are thinking, “It's my restaurant and I love it and it's great,” but it goes beyond that. Tell me.
We need to differentiate whether we are selling a business as a going concern or if the owner-operator who's selling owns the real estate property. I have made three sales now where I own real estate. Those are more complicated transactions than selling an existing going concern business. There are some differentiated factors on what to look at.
When we say, “What are you selling,” do you have real estate for sale? There's going to be a significant amount of value attached to that. The majority of the value is going to go to the property and then the goodwill. What is that worth? Have you been in business for twenty years and you have got a raving fan base with a database with 10,000 or 20,000 names in it?
Do you have repeat business and powerful marketing in place? All this equates to goodwill. The location is important too, and that goes along with goodwill. If you are in a busy location and you have walk-in traffic, you have a huge parking lot but lots of drive-by traffic, that adds value. A liquor license is a huge piece of it and liquor licenses vary in cost depending on where you are in the country.
Here in Maine, a liquor license is very inexpensive. It's $1,500 a year. Crazy. If you are in New York City, Miami, or LA, it's not uncommon to pay half $500,000 for a liquor license. It's that much of a difference. There's value to a liquor license, but depending on where you are, you need to find out what a liquor license costs.
There's also furniture, fixtures, and equipment that has a certain amount of value. When you are working with a lawyer and a CPA, when you have a sale on the table, you need to determine what they call an asset allocation between those different things. If it's real estate, how much value is going to be placed on the sale price of the real estate? How much is going to be placed on the going concern business as it exists? How much is going to be placed on the liquor license, the furniture, and the equipment? All those things have an asset allocation value as a percentage of the sale price and depending if you are the buyer or the seller, it could be a tax advantage to you and a disadvantage to the other person and vice versa.
It's a meeting of the minds, so it's a win-win situation for both. The seller doesn't take a huge tax hit on capital gains, and the buyer doesn't end up spending too much. All that stuff is pretty important. That's what you are selling. You need to know what you have got. Maybe there's an existing space for sale. It's a restaurant that's been operating for a couple of years, but a chef wants to buy it, but he wants to change the name and start a whole different concept with a different menu, so that's going to affect the value of that particular property.
That potential buyer is going to say, “I don't want to pay that because I don't want to keep your concept and I don't care about your name. All I want is your equipment and the space.” You can see how you know how this is going to vary depending on what you have, what you are selling, and what your goals are to sell.
I was jotting down notes and we can get into it separately later, but the valuation methods. Some of our most popular content is the question, “What is my restaurant worth?” Everybody wants to know what my restaurant is worth out there in the marketplace. We will get to that in a little bit because if you are an operator, you are probably thinking about an exit strategy down the road. You can't do this forever, or you may want to grow it or sell it. You may want to do it forever and pass it on to your family. Either way, you should be thinking about the process of maximizing the value.
Magic Dust Of A Successful Restaurant
That's something that you do well in your past businesses. You make sure that the value is baked into the business by having a profitable system in place. Let's talk about that for a little while. Let's say you are not ready to sell, but you might think, “Let's get ready for 6 months or 1 year.” What are some things somebody should be thinking about now in terms of systemizing and showing profitable income statements and so forth? What do you get?
The very first thing that a buyer gets is financials. Not that every restaurant has what they call audited financial statements that are certified by a CPA who's looked them over because we have all heard those horror stories of this restaurant or this business has two sets of books. One says this to make it look great, but this is the reality so you’ve got to be careful at what you are looking at.
Generally, you are going to look for three years of financials but are backed by three years of tax returns that verify this is the actual income of the business. That's important. A new buyer wants to look at the maintenance history of the space and the equipment. They are going to look at the age of the equipment and what value it has because, let's face it. You don't want to buy a property where you suddenly need to spend $100,000 on replacing all this cooking equipment. You want a turnkey operation that is ready to go and needs very little, if anything.
That was not the case when I bought my business. We needed to spend extensive money on renovations, equipment repairs, equipment improvements, and all that stuff that happened over time and then we continued that through the pandemic. When we talk about systems, I believe there are three fundamental systems that every restaurant operator needs to be aware of, on top of, and execute on the property. I called the magic dust of a successful restaurant.
Number one is cost controls and profit maximization needed to understand your critical numbers and need to have a system in place that tracks. What's your food beverage in labor cost? What’s your daily break even? These are the key tell tails whether you have a successful operation or not. Is your bank account growing or are you filling your seats and it's scratching your head wondering why you are not making any money?
That's important. A new buyer is going to look at that business and expect to see that. Guest counts are important. The buyer wants to know. What's the traffic on a daily basis? What's the traffic on a Monday versus a Saturday? Is there any downtime? Are you closed any days because there's no business? All of that is important.
The first system is the cost control and profit piece. The second system would be what I call building your dream team, and staffing is the biggest challenge that every restaurant owner, operator, or general manager is going through right now. If you can build a dream team and train them to serve and sell, provide amazing dining experiences. This comes through recognition, rewards, and training. I'm a huge believer in training.
When you are looking for people, it's not about hiring. It's about recruiting. It's about incentivizing people to make referrals of people who are looking for jobs or might not even be looking but fit your organization. I have always paid incentives to my key people to bring people in, and I have paid incentives for those people if they last a couple of months and if they do a great job. I'm going to give them a very generous bonus for meeting those expectations.
When building a dream team, is not just about hiring. It is about incentivizing people to refer others looking for jobs or those who fit your organization.
It's all about training, recognition, and rewards. That's the second system. The third one we call marketing firepower and affinity where affinity is defined as a powerful sense of loyalty belonging to that business. It's about building not only new business but getting those new customers to come back again. They give you great, positive online reviews.
Build a business where your staff and your customers are both brand ambassadors for your business, making friends with your customers and driving new business in the door every day. Those are the systems, the cost piece, the profit piece, the staff training piece, and then the marketing piece. If you have those three, you have a great chance of transforming your operation.
Why Sell A Restaurant
Let's go back a little bit and we will go forward after that. If you are looking to sell on what Roger walked through. You are hoping those pieces are already in place of your restaurant. Good cost controls, having a great staff team, building the team, and having marketing. That's going to make your business much more valuable to sell.
Some people may need to sell for various reasons and you are not going to get a premium, but if you are doing the things that Roger talked about, you are going to get a 3X or 4X premium over the other folk. Let's go back and talk about the why. Why think about selling? It's a big part. It can be anything from retiring to moving to not wanting to do it anymore. What are some of the things you have seen for the whys of long-time restaurant operators like yourself?
That could be a catch-22 in some regards because a buyer wants to know why the seller is selling and a seller doesn't necessarily want to tell the true story all the time. If it is a health issue, then of course. If it's a retirement issue, sure. “I don't have any family members that will take over this business. That's why I'm selling. I'm 75 years old. I have been running this place forever. I'm ready to retire.” That type of thing. Those are legitimate reasons, but then there are also these fire sales situations where “My business isn't successful. I can't make it successful. I need out. It's killing me,” and then suddenly that's going to affect the valuation of that business.
If a potential buyer senses there's blood in the water, they are going to pounce on the offering price. If they are interested in your business, it will be far lower than if they think it's a successful turnkey cash cow type operation. Why you are selling is going to come up. It's best to obviously be truthful about it, but you can see the difference in the answers there depending on what's going on.
Restaurant Selling Stories
Do you want to talk about your story at all? Let me know and then I'm sure people want to get into the valuation stuff. We can also talk about things, and you have already talked about this. Is it confidential? Are there announcements? Is it in the background? There are so many things to talk about. I will let you guide the next little bit. Where do you want to go?
My first two restaurants sold because we wanted to change our lives after twenty years and move out of state. My restaurant was a turnkey operation. It was only open seasonally. We had lived in a small town for twenty-plus years. We started focusing on building Restaurant Rockstars, which became a higher priority for us versus running this restaurant, which ran itself because we had a dream team of staff in place. We had managers that treated the place like they owned it.
I started getting worried mostly about the liability. My flagship restaurant sold almost $1 million in 4 months a year in alcohol alone. I know that we created this mug club that had over 1,200 people that belonged to it and suddenly, people that used to come in twice a month. We are now coming in 3 and 4 days a week. There's that whole responsibility thing where you have loyal customers who have been patronizing you for years, and they are more like friends than their customers, but maybe they drink a little too much.
There's that fine line between telling Joe. “Joe, you can't have another beer because you had too much,” and this guy has been your customer for fifteen years. There was that whole fine line between overserving someone and following the rule of the law, and then there was that nightclub incident. Maybe a lot of people remember the state of Rhode Island so many years ago or somebody set off some pyrotechnics and set the whole place on fire and a whole lot of people died.
I had a 350-seat restaurant with rock bands playing three nights a week. We are packing the place and we are selling a lot of alcohol. I started to stop sleeping well at night, thinking, “What if this happens? What if that happens?” That was a prime reason for me to sell that particular property and then we were going to move. My wife wanted to move across the country. It became the perfect opportunity to shift gears and focus on a new business called Restaurant Rockstars with the latest purchase before the pandemic. We were looking for an opportunity.
It could have been a commercial property. It could have been multi-unit apartment buildings with a lot of different deals, and here's this restaurant that has a lot of potential. Yes, it needed some improvements and you know, some TLC, some new fresh paint and a lot of that and then we saw that barn and we are like, “We can do our old restaurant on a little smaller scale, and here's these exploding subdivisions all around us within a nine iron shot.” We saw an opportunity. The business had two apartments over. That was another source of cashflow.
When you are buying something, it helps to have multiple sources of cashflow to support that business until it gets going or maybe it's a cash cow and that's icing on the cake to have apartments that contribute to that cashflow. We are going to totally plan on doing that barn business and then we started getting approached with people interested in buying.
The pandemic is wearing off, people are going out again, Restaurant Rockstars is taking off again and all these new opportunities are on the table. The pandemic required a lot more hands-on work on our part and now we no longer have the time to put in that business when we need to focus on Restaurant Rockstar. That's the reason for selling and it varies with every different business and every different case.
Transition And Turnover
It does. Let's go back to the staff part, which everybody knows is a big issue now. I was out traveling with some short staff at restaurants, and it took me a long time to get service. It's a little frustrating. I know everybody is going through that pain, but as it relates to selling a restaurant, you talked about having staff and managers in place. How big is that component of it? If I were buying a place, it's going to be an ongoing operation, and I want to keep the people who already know the secret sauce. How do you bake that into a sale? Is it an agreement? Is it non-compete? Is it something of that nature? What have you seen?
Every case is different because there would be buyers of your property that, again, are looking for a turnkey operation. They are looking at your business as an investment. They want to know that there are managers and staff in place willing to stay and that you can close on the sale one day and reopen for business the very next day with very little, if any, interruption of service to the customer base.
That begs the question of going back to why you are selling or what the value here is. Some business restaurants require an owner who's been a hands-on person for 15 years or longer or even if it's 5 or 10 years. That business is the personality of that owner and the customers come in and they are used to seeing that owner and the place can't operate without that owner because they don't have the systems in place.
They do everything and they tell the staff what to do and suddenly, a buyer sees that and now suddenly, I have to be a hands-on person to take over with this person left off, or is that seller willing to stay on salary to ease the transition? This is all important stuff. Will the staff head for the lifeboats when they find out the businesses for sale thinking? “I don't like change. We might hate the new owner. I'm going to go find another job right now.” It's like all of these questions come up.
The flip side of that coin is the buyer is going to bring their team in and doesn't need the old team or maybe they cherry-pick the team and say, “I need this person, but I don't need that person, and I'm going to interview the whole staff and figure out where I can fill in where I might need or maybe I don't need anybody and I'm going to change this whole concept. Maybe I'm going to close the place down for a month and do a complete renovation where these people aren't going to have jobs anyway,” and all this comes up in the minds of the staff.
As soon as they hear the places for sale that leads to the Do you list it for sale and make it obvious? Do you put a huge sign on the building saying, “For sale,” to attract as much attention as possible or do you try to keep it quiet? When you are in a small town, people talk and people hear things. You don't want customers coming in hearing scuttlebutt on the street and then suddenly talking to the staff, “I hear the place is for sale. What's going on?” The staff have no idea until they hear that, and it might be a rumor or fact. The honesty with the staff when you are thinking about selling is a real fine line, whether you put the sign on the building or not is a real fine line. All these things come into play.
In regular life, you do not hear the word scuttlebutt enough. I like hearing it. It's good. I want to hear more. I hope this is the word of the week. I love it. I'm remiss in saying this, but there are a few folks out there, whether you are on Facebook, YouTube, or LinkedIn. Thanks for joining us. We are trying this for the first time so you should be able to put in a comment. If you have a comment or a question, try to put it into the platform that you are on and we should be able to see it here and we can bring it into the thing and try to answer it.
Valuation Process
If you do want to do that, let's try. It may or may not work. We will give folks a chance to do that, but let's talk about the valuation stuff. What's a fair value for the price? You touched on it a little bit. You sent me some notes that mentioned multiples of cashflow and average percentage of gross sales. Those are some of the common ways. What are you seeing now? You don't have to talk about your confidential stuff, but you can use it as a reference point. What should people be thinking about mostly when they think about, “What's my darn restaurant worth?”
If you have real estate, it's a whole different ball game than if it's a business for sale. Essentially, you need an evaluation of that real estate. A broker is going to have a list of comparable sales in the past six months, which is going to be accurate for similar square footage or similar usages. If you are in a busy city, restaurants do turn hands. People do sell real estate and that type of thing.
That gives you a basic idea of what the real estate value is worth or what the land value is. In certain parts of the country, land might be $20,000 an acre and other parts of the country might be $100,000 an acre and in other parts of the country could be $500,000, depending on where you are at. Land has value, and then the building that sits on the land has value. You need an appraisal to give you an idea in this market what real estate is worth.
When we are talking about the business, generally, restaurants sell for a multiple of cash flow. This is the most common method. Let me define cashflow if you have a profit and loss statement. The bottom line is called net income. If this business is making any money, you start with net income and then you are going to add back all the things that you as an owner have taken out of the business that have a cash value that is a benefit to the new owner.
The new owner can decide whether or not they are going to pay themselves that salary that you paid yourself. Do you have a company car? Is the new owner going to want the company car? Health insurance, life insurance, manager and employee bonuses. All these things are addbacks: net income plus owner salary plus this benefit, and that is cashflow.
That's the amount of free and clear cash that the business spins off on a yearly basis. If you can show a history of it paying for this stuff. That's a very valuable number for a buyer to look at because that gives you an idea. Is this business successful or isn't it? It's 1 to 3 times the cashflow of the business and then adding assets to that as well.
Meaning what's the furniture and the fixtures worth on top of that? That will give you a rough idea of your business's value. That's the most common method, followed by the second method, which is a percentage of average gross sales. If your business makes $500,000 a year. It could be 30% to 40% of that plus the value of those assets.
I always think it's a good practice to put numbers together, crunch those numbers, and run spreadsheets. Think about what your proceeds would be at different sale prices, less any debt that you owe on either the equipment or the building. Less expenses such as broker commissions and closing costs. All this stuff affects what you are going to end up with once all is said and done.
You settle on this price to sell your business. Someone agrees to pay you that price. Now you have to subtract your debt. Maybe if you have a partner and they have an ownership stake, then they get that percentage of the proceeds after commissions after taxes after closing costs, and all this stuff. You may settle on a nice number, which may be a much smaller number when you end up with that cash after all is said and done. That's the valuation method.
I always suggest that anyone who's interested in this explore it with their CPA and their attorney because they are the experts. They are the ones that can advise you on valuation and asset allocation we talked about earlier and then what they believe your business is worth based on looking at your financials and running that cashflow statement I talked about. You can do this stuff yourself, but it's always great to get an expert set of eyes to look at it and say, “You miss this. You are throwing off more cashflow than you thought. Don't forget X, Y, and Z,” so always consult the professionals.
A lot of people are too deep in their own business to feel like it's worth $1 million because I want $1 million from it. That's not the reality. You get an attorney, broker, or CPA who will ground you in the reality of the business and what it is worth in the marketplace. You threw out some multiples there. You use 1.5 to 3X.
Rough rules of thumb.
We touched on this right and you are going to get that 1X multiple or 1.5 if you don't have an optimized situation. You are going to get 3X, 4X, or potentially even more if you have what Roger has talked about as a turnkey system that is proven to be profitable year over year. You are going to get a premium for that. If you are reading this because you are like, “I might want to sell in a few years.”
Broker Vs Non-Broker
Do the systems that Roger is talking about get in place so that you can sell for 3X or 4X versus if you have to fire sale on you have to do a 1X type situation, which is not the exit strategy that you are looking for by any means? Let's go to brokers and non-brokers. We sold a house ourselves. I can take pictures of my house and put them on the web these days. I could probably sell a house. In a business, I feel like it's a lot more complicated. Is that something you don't want to take on your own? What do you think?
In my very first sale, an employee bought my business, which required no broker fees and it was a very high selling price which then equated to a very high commission, which would have come off my proceeds and all that stuff. We did talk to three different brokers. They do their due diligence. They come in. They look at what they have. They take photographs. They put these very elaborate sales proposal books together that outline what the business is if it's property involved. What is the square footage, the place's floor plan with the traffic counts?
They spend a lot of time doing business whether you list with them or not, but if you do go with a broker, you have this powerful sales tool that comes down to any press clippings you have received in local newspapers or magazines. It's a complete marketing tool for your business, and chances are you can do it yourself, but not to the level of a professional who does this.
It includes all the financials. The three years of profit and loss statements and the cashflow statement. It's all there. Whether or not you go with a broker depends on how much time you have because this is a very extensive process. It's nothing you can decide on one day, you are for sale the next day and then a month later, you are done. No. This is a very elaborate and very extensive process. I do recommend going with professionals. I'm going with a professional now who happens to have her finger on the pulse of the market. She has her ear to the ground and knows lots of different potential people looking for businesses like mine and she brought immediate traffic to take a look at the business.
I probably had 4, if not 5, different parties looking at it. We ended up getting 2 offers and at least 3 of those parties looked at it multiple times. I don't think I could have done this on my own, and I certainly didn't want to put a huge for sale sign on the side of the building waiting for what happened. However, timing plays a part, too. Do you want to sell immediately or can you sit on this for a year and wait for the right buyer to come along? You have to consider all those factors?
The first business I sold did not require a broker because the person who had worked for me for years had owned other seasonal businesses in the summer, like bartending in the winter and going snowboarding, but had the resources behind them to purchase my business. No due diligence is needed at all.
I knew the place was a cash cow. I knew the place rock and roll had worked there for years. I knew it was a turnkey operation because you could step into it and continue to say, “He doesn't run his business. The same managers are in place.” He still bartends at my old business because he loves to bartend, and he's the social guy who owns the place that pours on the drinks. He goes snowboarding five days a week. That was the old sale and then the new sale was relying on a broker.
Non-Compete
It's one of those things that you might sell your restaurant once or twice in your life if you are an operator versus a broker. That's what they do. They are doing that year in and year out, so they know the ins and outs, so it is a case to work with the experts there. Assuming that makes sense. We will start winding down here. Rogers sent a great list of notes and we probably should build this out into a bigger thing because we went off the cuff to do this.
If you have comments, throw them in there. Feel free to try to put that in there. I'm curious if you say hi. I want to see if it pops into our interface. Go ahead and do that or tell us where you are from. That'd be great to see. One of your notes talks about a non-compete. If I was buying your place, Roger, and you are a great operator, I wouldn't want you to open up next door a month from now and grab all the customers. What should folks think about non-compete?
Most buyers are going to look for one, especially if it's a super successful enterprise because again in a lot of areas of the country, there's lots of real estate for sale. There are lots of leases that are open and who knows maybe this seller wants to cash out because they have another idea in mind or another concept that's a big hit. They are ready to get rid of this concept and then across the street, there's this perfect space for sale. They are going to open up another restaurant and they are going to compete directly with me for the customers.
They have a loyal following. They might take all their customers with them to the new restaurant because people love this guy and what he does or this gal who runs this amazing restaurant. A non-compete is important if you are a buyer. When I sold my former properties, I had a 4-year non-compete within a 30-mile radius of my restaurant. I was not allowed to open another restaurant. I was not allowed to consult anyone else's restaurant and help them do anything.
Now that my non-compete has long since expired. I'm consulting in the same neighborhood as a client of my former restaurant. That's the importance of that. Going back to the asset allocation in addition to goodwill and the value of the business. There is a value to that non-compete. It could be $5,000 or $10,000 of value could be equated to the non-compete agreement. Consultant attorney and a CPA, but that's the ins and outs of why what it is, and what it does.
Stability Of A Lease
That makes sense, like 4 years, 30 miles, or something like that. You know you want to make sure the person doesn't restart right next door to you. You probably have the same set of notes there. What else do you want to hit on that we haven't hit on? The stability of a lease if you are selling a business and you are leasing a space, what's going to happen if I'm a buyer? I want to know how stable this lease is. In a couple of cases, I have seen a successful restaurant get booted out of space because the landlord or the owner thinks a higher and best use is to turn it into condominiums and then goodbye restaurant.
You have built a business. Maybe you spent 3 or 5 years there. You have a loyal clientele in this neighborhood, and suddenly, you are being thrown out. Now you get to go find another space, but your other space might be miles away. You might have to rebuild that business entirely. I have seen it happen. What is the stability of the lease? Is that lease signable to a new buyer of that business? Is that a five-year lease? Is it a long-term lease? Is it expiring next year, and do you have no idea or guarantee that the landlord will renew with this new owner?
That affects your value significantly. That's due diligence that a buyer needs to do, but it has had them off in the past. As a seller, you want to be able to show with confidence that this is a stable space. I have been here for several years. The landlord is an agreeable person. Whenever there's a problem, he fixes it. As much of that you can document as possible for a potential buyer, the better, as well as, “What's the term of the lease? When does my existing lease expire?” Is the landlord willing to renew and what would the renewal term look like? Is he going to jack up the rent by $10 a square foot or is it a stable lease with a stable price? All these things affect the value.
Hold Paper And Finance A Deal
We got our buddy Dale, the lease coach. He's great with this stuff, and one of the things Dale would talk about if we were talking about the flip side of this if you were starting a restaurant and getting a lease space is making sure you negotiate points like this ahead of time. Don't take the boilerplate lease language. Have stuff in there that gives you a successful exit strategy. I don't know them offhand, but it is transferable with the right to do this and that without getting hit by fees and so forth. Build that right into your lease. It's super important stuff. Check with Dale and his team on things of that nature. What else, Rodger, from your list to checklist might you want to hit here?
What else that we didn't talk about was as a seller how willing are you to hold paper and help finance a deal? In certain business climates, there are certain lenders that are willing to lend to restaurants are considered risky businesses to lend against. It will help grease the wheels of progress if you are willing to hold a portion of that debt. You would be in a subordinate position to the bank, but again, are you willing to do this or do you want a total cash deal where you can walk away and a bank or even the small business administration backs that loan and you don't have to worry about it? I have seen it in both cases.
If you happen to be in a position to do it. A lot of times, it can be a very profitable technique because if you were to take out $500,000 of cash from the sale, what would you do with that? You can put it in the bank yourself and make 0% or you can put it in the stock market and hopefully make money, or you could finance it. When you finance that, it could be a very profitable cashflow stream, assuming all the worst-case scenarios don't happen, like bankruptcy. If you are in a position to do that, it can be a very good cash stream. Do you find that to be the case?
True.
Due Diligence
I'm looking at other notes that talk about the financials you hit on. Capital improvements and equipment. What else do you think you might want to hit here?
We have talked about that. It's going to take time, but nothing is more important than doing your homework and doing your due diligence, whether you are a seller or a buyer. If you are trying to sell a business, the more transparent information that you can provide a potential buyer, the greater the competence they are going to have in your property.
Nothing is more important in selling a business than doing your due diligence.
If you have got a full list of inspections of that property that are recent. If you have a full maintenance list and invoices for everything you have done to maintain that property, Everything from the equipment repairs to the ANSUL system inspections to the septic pumping and all this stuff. If you can give it to the guy, this is what I have done. I don't neglect my business. I take care of it. I have a maintenance plan in place. This is what we do every single week and month for maintenance. All of that goes a long way.
Inspections are super important. If you are selling real estate, chances are the buyer will bring in their people who are going to want to inspect all the building's critical systems. The HVAC, the electrical, the ANSUL, and the equipment. There's a septic inspection unless you are in town or city sewer. These remote communities have their septic systems. If they are not maintained, they can fail, which could be expensive. You can provide as many maintenance records as you can, lists of equipment, capital improvements, and all these things you hand that person. This is what I have done here. This shows that person, “I don't need to put a new roof on the place. That guy did it two years ago.” You know I'm going with that.
Keep good records and have that stuff in place.
Marketing plan. We never hit on that. A turnkey operation has proven what marketing brings in the customers. If you have a turnkey marketing plan that says, “I have spent X amount of money on this and it delivers a five-time return. I have tried this and it failed. Don't go there.” If you can show them that you have done your homework and that you have got to dial in the marketing plan, then that's turnkey. The more turnkey you can provide that is proven to work backed up by facts, the better. All that adds value.
Free Consultations
Let's go to somebody. They are existing operators and have gone through the pandemic. They are not sure of the future path because it's still a little bit in question and they are thinking about selling in the future. I know you help clients with this thought process. What does that look like? If I were to give you a call Roger and say, “I heard your stuff. I have been thinking about selling or interesting selling,” how do you advise them and who do they call? How do they get in touch with you? What does that look like?
I love having these free consultations. I dedicate time every week to either my podcast listeners or restaurants that hear about me that have a challenge or a pain point they want to talk about. They can reach me Roger@RestaurantRockstars.com. Ping me an email and say, “I'd love to chat,” and we will set up a Zoom, and we will do face-to-face and we can talk about anything that you want to talk about for 30 minutes. No obligation, of course.
Systemizing Your Business
That's easy. Roger@RestaurantRockstars.com. Get in touch with Roger because he's been there on multiple occasions for years. I have seen it. It would be a good opportunity to pick somebody's brain who's been doing it. I am sharing thoughts on the sale process as we start and wrap up here. What have you got?
We touch the systems, but I can't emphasize enough the importance of systemizing your business. If you have a little time, if you have 3 or 6 months or even longer before you are thinking of doing this, I tell everybody. Now that the pandemic is coming to an end and business is booming, customers have higher expectations than ever.
With the pandemic coming to an end and business are booming, customers have higher expectations than ever.
If you have been lucky enough to survive this pandemic crisis that's been so challenging through the good graces of the government money and all the things that have helped us through all this. Now is the Time to transform your operation, maximize value, and have those systems in place that are turnkey so that a potential buyer can take over and that place goes on by itself without the owner being there then the value is maximized versus limited if the business is over-dependent on you.
We do have a full set of turnkey systems available. Everything we talked about was about that three magic dust formula. The service, the training, the cost controls, and the marketing. All of that exists at RestaurantRockstars.com if you are looking for those systems. Now is the time to do it because customers have high expectations, and if you are thinking of selling, maximize value. Do the best you can for yourself and put in the time because it will be worth it on the other end.
Episode Wrap-up
RestaurantRockstars.com. That's Rogers's website. You can check out the products that he does have that talk about this. That helps operators systematize, sell, market, and so forth. All that is available right there on the website. Our website is RunningRestaurants.com. If you check us both out, we have Running Restaurants on our side. We have resources that help operators as well.
There are 100 articles at this point and 100 hours of webinars seminars and sessions like this to help operators with the tips they need. Thanks for joining us, folks. We appreciate it. We talked about selling a restaurant in 2021. What that looks like in the weirdness that is still the COVID pandemic but the surprising light in two ways is that the country is coming out of that fuzziness and it is starting to kick and you are starting to see that, which is making it an interesting market for both existing operators and folks that want to sell. Last quick wrap, Rog. What have you got?
Thanks everyone for reading. Jaime and I are both passionate about this business and we love helping operators succeed. Now is the time to rediscover that passion. If you have been beaten up badly by this pandemic, which most of us have been, things are so optimistic now. I want to see everyone rediscover the passion of why you got into this business in the first place. Get inspired and motivated. Put your best foot forward, train your staff to deliver amazing dining experiences, dial in your critical numbers, and make sure you are making money and having fun because that's what this business is all about delivering amazing experiences to your customers.
Good wrap up, Rog. Thanks, folks, for joining us. We will be in touch soon. Stay tuned to our website for more. We will see you soon.
Thanks very much, Jaime. Thanks for reading.
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