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 seco