Restaurant Industry Is Now In A ‘Buyer’s Market’
It is no secret that the coronavirus was not kind to the restaurant industry. Indeed, approximately 1 out of 6 restaurants closed within six months of the start of the pandemic. Many restaurants have since rebounded, often by emphasizing take-out or delivery. Nevertheless, there is an unusually high level of available restaurant space for lease because of all the restaurant closures, and an unusually high level of restaurants for sale because so many struggling restaurant owners have put their restaurants up for sale. This high level of supply creates an advantageous market for buyers (hence a ‘buyers market’), which must be understood by today’s restaurant owners. Let’s explore how to sell your restaurant in this ‘buyer’s market’.
Give Restaurant Fair Asking Price From the Start of the Sales Process
- When listing a restaurant for sale in a ‘buyer’s market’, it is imperative to price it correctly from the start of the listing process.
- Many factors come into play when pricing a restaurant for sale, including the historical financials, level of owner’s involvement, lease, location, and physical assets.
- The restaurant should be evaluated based on what it is currently doing at the time it is placed on the market for sale.
- Every buyer will want to know the extent of the recovery after the virus, and will not want to pay a purchase price based on what the restaurant was doing before the start of the virus.
- The asking price should thus be a fair appraisal of what the restaurant is currently worth.
- If the asking price far exceeds the restaurant’s actual value, then it is highly likely that the vast majority of buyers will simply not be interested.
- After all, this is a ‘buyer’s market’ where the buyer has an inordinately high level of empty restaurant spaces to choose from along with an inordinately high level of restaurants for sale to choose from.
- It is far better for the restaurant seller to start with a reasonable asking price so buyers will see that the restaurant seller is serious about selling.
- Serious asking prices attract serious buyers.
Use Current Run Rate of Sales and Profits When Pricing Restaurants in A ‘Buyer’s Market’
The level of sales and profits that a restaurant generated in 2020 will quite likely not reflect its true worth. This is because most restaurants were not operating at full capacity during the height of the pandemic and for many months of 202. It is not fair – from the seller’s perspective or from the buyer’s perspective – to use historical financials from a time period when the restaurant was forced to close or not operating at full capacity. A restaurant must be valued based on the sales and profits it generates when it is allowed to fully open and when customers are not afraid of dining indoors. In such unusual circumstances, it is only fair to value a restaurant based on its current run rate of sales and profits after it fully reopens. The current run rate of sales and profits consists of the restaurant’s for a brief period of time such as a few months (not the full year), and may be annualized so a buyer may get a more realistic picture of the restaurant’s post-virus performance.
Example of Determining A Restaurant’s Current Run Rate After the Virus
- Let us suppose that Jim owns a seafood restaurant in Palm Beach County and desires to sell his restaurant.
- In viewing Jim’s financials in order to determine the best asking price for his restaurant, the business broker notices that the restaurant’s sales and profits in 2020 decreased substantially from 2019.
- In fact, sales went from $1M in 2019 down to $500K in 2020 because the restaurant was closed or not operating at full capacity for much of 2020.
- However, Jim mentions that sales in mid-2021 are now averaging about $80K/month, which is about in line with 2019 sales.
- It is thus imperative that the business broker uses the current run rate of sales ($80K/month) in order to evaluate the restaurant.
- On an annualized basis, Jim’s seafood restaurant has sales of $960K/year (80K/month x 12).
- When determining Jim’s owner benefit (inclusive of depreciation, unrecorded sales, the owner’s salary, or the owner’s personal expenses paid for by the restaurant), it is best to also use his annualized owner benefit for the same current run rate time period.
Market the Restaurant to Correct Audience During A ‘Buyer’s Market’
A ‘buyer’s market’ means that it is more important than ever to market and advertise a restaurant listing properly to as many buyers as possible. One way this can be accomplished is by targeting E2 Business Visa buyers. Such buyers gain entry into the United States by purchasing a business. Certainly, such buyers may be persuaded to purchase restaurants so long as the restaurant qualifies for the Visa. Additionally, buyers from the northeast (such as New York or New Jersey) are moving to south Florida in record numbers. This is great news for sellers of restaurants, as it means there are many more buyers. Such good fortune must be taken advantage by a professional business broker, and the recent New York transplants to Florida must be heavily targeted in advertising campaigns.
Sellers of Restaurants Should Focus on Running Their Restaurants
The best thing a restaurant owner can do to help the sale of their restaurant is to focus on running their restaurant. A restaurant owner should not be focused on selling their restaurant. That is the job of the business broker. A sale is far more likely to occur if the restaurant owner is improving the sales and profits of the restaurant on a day to day basis. Buyers will give a higher valuation if the restaurant is showing improvement in customer service, quality, and ultimately in sales and profits. In a buyer’s market for restaurants, it is more important than ever for the seller to focus all their energies and talent on running their business. Let the professional business broker handle the sale.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.