Three Tips to Improve the Value of Your Restaurant

Restaurant Sales: Competitive Marketplace

Restaurant owners may have many reasons for wanting to lead a less stressful life by way of selling their business. Whether faced with unreliable employees, higher food costs, or unhappy customers, restaurant owners often find themselves burned out and ready to sell. Indeed, there are currently over 100 restaurants for sale in Palm Beach County alone. The wide variety of restaurants for sale – from small ‘mom and pop’ diners to multi-unit chains – creates a very competitive marketplace for sellers. This means that buyers may pick and choose the best restaurant that fits their own budget and desires, while restaurant owners must stand out from their competitors so they can gain an edge over similar restaurants for sale. Let’s explore three tips which can significantly improve the value of any type of restaurant in today’s business environment.

Tip #1: Create Brand Not Dependent on Owner

The key to maximizing the value of a restaurant is creating a stable and growing income stream that will remain intact after the sale when the owner is no longer involved in the restaurant. A restaurant’s income stream derives from its customer base and its ability to generate profits given its business model and operating cost structure. The branding of a restaurant may take many forms. A unique menu, cleanliness, friendly and dedicated staff, strong online reviews, and a well known location with high visibility all may contribute to a restaurant’s brand and hence its ability to generate sustained and growing profits that are not dependent on the owner. A repeat customer base that patronizes a restaurant because of its brand is a restaurant’s strongest intangible asset that ultimately creates value when it comes time to sell.

Separate Owner from Brand

Any business – including restaurants – will sell for a premium valuation multiple of its adjusted owner benefit when the owner is relatively absentee and uninvolved in the day to day operations. Generally, an absentee-owned restaurant enables the buyer to avoid the costs and sweat equity of replacing the owner after the sale, while also avoiding the risks of losing customers or employees when the seller leaves. This leads to a higher selling price since the buyer will be assured that the income stream of the restaurant will remain intact after the sale. Separating the owner from a restaurant’s brand may come about by gradually hiring and training staff members to manage the day to day operations. If the restaurant owner is the head chef or cook, then buyers lacking the confidence or experience to replace the owner will probably look elsewhere.

Tip #2: Ensure Clean Financials

A key way in which a restaurant owner may obtain the best possible price and terms when selling is by having a financial statement (such as set of historical tax returns or profit and loss reports) which accurately incorporates all of the restaurant’s sales and business expenses. When all income is documented and when all expenses are reported, buyers will be much more likely to believe the presented financials and make a fair offer. For example, revenue from the restaurant’s Point of Sale (POS) system should match the revenue reported in the tax returns. It is important to note that restaurant buyers are unlikely to be able to obtain external financing – particularly financing backed by the Small Business Administration (SBA) – unless the seller has a clean and coherent set of historical financials. A deeper and wider group of possible buyers (or liquid market) for a restaurant ultimately leads to a better purchase price and terms.

Tip #3: Long Term Lease with Presentable Location

  • A third way in which restaurant owners may improve their valuation when it comes time to sell is by ensuring that their lease is in good standing and extended for as long as possible.
  • Location is absolutely critical in the restaurant industry, and since moving restaurant locations is often impractical, buyers do not want to invest and risk a significant amount of capital without a long term lease in place.
  • A long term lease is typically at least 3-5 years, preferably with options for additional terms.
  • Any amounts owed to the landlord, or any disputes about the lease between the seller and the landlord, should be resolved prior to selling.
  • In the restaurant industry, rent should not constitute more than 10% of total sales, with an ideal range between 5-8%.
  • Since the sale of a restaurant should be kept confidential, the landlord does not need to know about the sale until a deal goes “under contract” with a buyer who has made the assumption of the lease a contingency to close.
  • The lease should be examined prior to the sale so the seller knows what fees (if any) may apply upon the transfer of the lease, along with any other conditions the landlord may have in allowing a buyer to assume the lease.
  • As the landlord is typically responsible for maintaining a restaurant’s exterior premises, it is always helpful to ask for needed upgrades and repair projects to be completed prior to showing the restaurant to buyers.
  • Restaurant owners should also ensure that the interior of their restaurant – especially the kitchen – is as clean and orderly as possible in order to make a good impression on potential buyers.

Creating a strong brand and income stream that is not dependent on the owner, maintaining a transparent set of financial records, and ensuring that the premises are in good condition with a long term lease in place are three tips for restaurant owners seeking to improve the value of their business. Prior to selling a restaurant, it is always best to receive a professional business evaluation from a business broker with experience selling restaurants.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.