How to Sell Restaurants in South Florida

Selling A Restaurant in South Florida

Restaurants are bought and sold quite frequently in South Florida. Other than salons, they are by far the most popular type of business ‘listing’ that one sees in the marketplace of businesses for sale.  Common restaurants for sale in South Florida include sushi restaurants, pizzerias, and casual dine-in restaurants. An experienced business broker will anticipate a buyer’s questions and concerns when listing a restaurant, price the restaurant correctly, and navigate buyers through the unique due diligence process associated with many restaurants. In general, selling a restaurant requires obtaining a clean set of historical financial records, determining a fair valuation with the assistance of a business broker experienced in restaurant sales, and maintaining strict confidentiality during the sales process.

Valuing Restaurants for Sale

In general, small restaurants sell for a multiple of 1.5 to 3 times the annual adjusted owner benefit (or true economic profits derived by a working owner). Restaurant chains may sell for higher multiples because there is more earnings power and leverage. The key is to price the restaurant correctly when it initially appears on the market. There are many overpriced restaurants on the market by misinformed sellers (and brokers). Likewise, there are many underpriced restaurants on the market which do not factor in the adjusted owner benefit to its valuation.

 Factors Determining Restaurants Valuations:

  • Longevity and past track record of financial success for the restaurant.
  • The rent, lease terms, and location of the restaurant.
  • Level of the owner’s involvement in the success of the restaurant.

Historical Financials

The first key factor to consider when evaluating the value of a restaurant is its track record of success. The historical financials such as profit and loss reports or tax returns will be of paramount importance. Has the restaurant been consistently turning out healthy free cash flow? Has sales and profits been on an upward path lately? With restaurants, troublesome times can snowball into larger and more sustained problems, so a careful consideration must be given to the financial history.

Capital Expenditures

Examining the financials of a restaurant also shows whether the restaurant frequently incurs large capital expenditures. Capital expenditures (or cap-ex) represents expenses for fixed assets (such as equipment or leasehold improvements) that are in use for more than 12 months.  Depreciation (which expenses a portion of capital expenditures over time) of a restaurant is added back as a non-cash charge when computing the adjusted owner benefit of a restaurant. But if further capital expenditures will be necessary in the future, then buyers will face future cap ex costs that are necessary to maintain its tangible assets. In such a scenario, the maintenance deductions taken from capital expenditures should reduce the adjusted owner benefit of the restaurant.

Rent

A general rule of thumb for most restaurants is that the total rent (including CAM and sales taxes) should be less than 10 percent of total sales. If it is above this amount, then the restaurant will have a hard time turning a profit. This is because most restaurants also spend, on average, about 33% of sales on the cost of goods sold (such as food and beverage) and spend another 33% (on average) on payroll. So if rent is 10 percent of sales that means the owner is left with 24% operating margins after rent, COGS, and payroll. This is not a lot of room for error, and there are many other expenses associated with running a restaurant!

Long Term Lease

The leasehold rights of a restaurant is the right to occupy commercially leased property for a specified period of time. Many buyers will want a long term lease to ensure they have plenty of time to reap the rewards from their investment. They also want to ensure they will not be thrown out by the current landlord (or a subsequent landlord).  Having about 4-5 years left on a restaurant lease is a minimum requirement for many buyers. Further, buyers of restaurants will need to effectuate the transfer of the lease as a contingency of the sale. A cooperative landlord who wants their tenant to succeed will greatly help the sales process.

Level of Owner Involvement

  • Lastly, the level of the owner’s involvement in the restaurant greatly affects its valuation.
  • The higher the level in which the operations of a restaurant is run on an ‘owner-absentee’ basis, the higher the restaurant’s valuation when it comes time to sell.
  • For example, many owner-operators of pizzerias stand next to the ovens for up to 80 or more hours per week.
  • Many buyers will not want to put forth the same level of work, or simply can not do so.
  • They must then pay extra salary for employees who will replace the owner’s productivity.
  • This situation generally results in a lower valuation on such restaurants.
  • Conversely, some restaurant owners have more passive roles.
  • They generally oversee the operations and make sure the bills are paid.
  • Since these restaurants have managers and trained staff in place who basically run the day to day operations, the valuation will increase.

Owner is the Chef

A common situation in restaurant sales is where the owner works as the main chef. The recipes of the restaurant are always transferred to the buyer as part of the intangible assets, but some owner-chefs are so talented and unique that they are virtually irreplaceable. Here, the restaurant is usually sold to other chefs or restauranteurs who are confident enough that their menu will be received warmly by the customers. The restaurant’s value is diminished since the skills of the owner-chef is not transferable to the buyer. In general, buyers of restaurants will pay a premium where the owner-operator is more hands-off and non-critical to the success of the restaurant.

A high valuation for restaurant sales is predicated upon healthy profits, a track record of success, reasonable rent relative to sales, and a situation where new ownership can continue its success. This makes for a successful restaurant sale!

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your restaurant.