Owners of too many restaurants for sale learn the hard way that listing at the wrong price is the single largest reason listings don’t sell. Here are the steps in an accurate restaurant valuation.
Selling your restaurant begins by assembling the right information. An expert restaurant broker will need information from you before he can value your restaurant. If he doesn’t, beware of his expertise. Pricing your business without data is like a doctor diagnosing cancer over the phone. An accurate listing price is dependent on the restaurant valuation and will require analysis of the following items:
1) A year to date profit and loss statement on the restaurant or sale reflecting current conditions.
2) The latest year’s tax return that is available.
3) A list of the furniture, fixtures and equipment that will transfer in the sale
If possible, send this to the broker in advance of your meeting so he has time to do an initial workup on the business for your valuation.
Meet with the restaurant broker to review the financial information. Do not worry if the tax return or profit and loss statement shows negative earnings. A financial analysis will include reconciliation of “add-backs” or owner compensation that you received on the business to adjust for owner benefit. The person performing the restaurant valuation will ask questions to verify all the potential earnings for a new buyer including:
1) What income (salary, distribution or other) was paid directly to you or a family member?
2) What other expenses benefited you directly (such as restaurant paid health insurance, life insurance, or car lease)?
3) Were there any “one-time” or extraordinary expenses for last year (air condition or roof replacement, accounting expense associate with an audit or legal expense associated with a lawsuit)
Walk the restaurant broker through the business so he can view it from a buyer’s point of view. He will also want to understand the condition of the furniture, fixtures and equipment. Listing a restaurant is not performed over the telephone. While a lot of research can be performed online, a broker needs to view the location, adjacent businesses and physical property. How can he or she explain the benefits of your listing to others without seeing it in person? He will also need to take photographs, a key selling feature for your listing.
Once these steps are complete, the broker should have a listing price for you. Expect that the restaurant will always be worth more to the seller than to anyone else. After all, you invested your blood, sweat and tears into building the business. If you’re in a low cash flow or negative cash flow position, you will probably be looking at a loss. That’s why it’s even more important to list at the right price and sell quickly. The more time it stays on the market, the longer you’re losing money and tied to the obligation on the lease.
An expert restaurant broker will be able to justify the pricing he recommends for the business. He can also share “comps” or comparable property sales with you. An expert in the field of restaurant valuation should have access to national comparable sale databases as well as access to local sales.
Once you’re comfortable with the valuation, move forward and list the restaurant as quickly as possible. Shopping for another broker that will give you a higher valuation can be a mistake. First, less experienced brokers may take the listing at the higher price. Ultimately, that means it will sit on the market until you ultimately reduce pricing to the level that will sell. Secondly, your listing becomes “stale” after sitting without offers for a period of time.