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Unloading Units

Sometimes the ticket to growth is getting rid of underperforming property. Here's how to sell the right way.

Maybe you have units that are underperforming, are in locations that no longer fit your growth strategy or demographic profile or for some reason have started to drag you down. Maybe you need an infusion of capital to fund expansion. Whatever drives the decision to do so, selling a restaurant can be almost as complex as buying one and there are no great rules of thumb for getting it done.

In fact, according to Jerome Thissen, president of National Franchise Sales, “The only rule of thumb is that if you try to follow one you’ll get your thumb cut off. There’s an art and science to it. Every situation and every seller is different in terms of why they’re selling, what they have to sell and how their sale might be structured.”

Clean house

One rule that does apply, however, is that selling a restaurant is a process that should begin months before the “for sale” sign goes up. You may be eager to dump it and move on, but neglecting to spruce the place up and take care of deferred maintenance turns off buyers.

Steven Zimmerman, owner of Corte Madera, California-based Restaurant Realty Company, notes, “Simple soap and water go a long way. Get the graffiti off the restroom partitions, make sure the light bulbs are all working, clean the carpets and wash the windows. Equipment should be cleaned and working properly. If something’s broken and you don’t need it to operate, get it out of there to avoid raising red flags. The mechanicals—heat, ventilation, air conditioning, plumbing, etc.—should all be in good working order, too.”

When buyers see items that need fixing, they wonder about things they can’t see. Anything being sold “as is” must be noted on a disclosure statement and ultimately lowers the price. “A lot of sellers, particularly of underperforming units, don’t want to spend another dime to fix a place up. But they always pay for it in the long run. They have to adjust their price and it often takes longer to sell,” Zimmerman says.

Get the landlord on your side

Situations in which the seller owns the property are considerably less complex than the majority of restaurant sales for the simple fact that there’s no landlord involved. In fact, it’s the landlord that realty pros point to as the most common deal killer.

Usually, that’s because of lack of communication or failure on the seller’s part to get the landlord on board early. “Get the lease resolved so it will be attractive to a new tenant in terms of years left, extensions and rent,” Zimmerman says. “If a buyer might have to make physical changes, discuss that with the landlord right away, as well, especially if the business is located in a multi-use building. He or she is going to want whatever goes in to be compatible, at least on the exterior. And potential buyers are going to want assurances that they’ll be able to do what’s needed to make the space work for their concept.”

Most buyers want a minimum of five years on a lease, plus a five-year extension in order to get their return on investment. If they’ll be making a significant investment above the sale price in the property, they’ll likely want more than 10 years minimum.

It’s also a good idea to have change of ownership inspections done by the health and fire departments, Zimmerman says, especially if you’ve been in a location for a long time or it’s an older facility. “Standards are updated and stricter for new tenants. Sellers should fix as much as they can of what comes out of those inspections before listing, or they’ll need to include those things on the disclosure statement.”

Organize basic information

Athird important step to take before listing is getting your financial house in order and having all pertinent information available for prospective buyers. Along with uncooperative landlords, failing to compile a copy of the lease, current and recent years’ sales histories, tax returns, operating expenses and equipment list is another common reason sales fall through. “When sellers don’t get this stuff pulled together in a timely manner, interested buyers are left to wait and wonder and they often get cold feet,” Zimmerman says.

For the same reason, many brokers recommend getting a blank purchase agreement form drafted by a lawyer before you list. Doing so means you’ll be ready to fill in the blanks when you find a buyer and avoid having to wait what can be several weeks to secure this document.

For marketing purposes, “the basics” should also include a summary page with bullet points about the type and size of restaurant, general location (if keeping specific location confidential), years of operation, gross income and net profit.

Unless you’re taking the for-sale-by-owner route, you’re now ready to find a broker, most of whom will ask for all of the above and more before agreeing to handle your listing. Experts recommend using a broker with extensive knowledge of the local market and local ordinances and who specializes in restaurant sales. Check with your local restaurant association or find leads to brokers on www.restaurantbrokers.com, an online nationwide referral service.

A good broker will guide you through the entire sale process and handle virtually everything once you’ve done the pre-listing legwork. “Most brokers will only work under exclusive listing contracts, which means they alone have the right to market and sell the property for a given period of time—usually six months to a year,” Zimmerman says. Commissions average 10 percent of the final sale price or, for smaller, lower-priced businesses, a minimum fee determined by the individual broker. “In this market, that minimum is usually around $10,000,” Zimmerman says. “So if we’re selling a $50,000 taqueria, we’re still guaranteed that fee.”

Restaurant confidential

Brokers’ primary raison d’etre, of course, is finding potential buyers. But before setting them loose to do so, it’s critical to discuss how you want the listing handled—i.e., publicly or confidentially. For operations that depend on doing business as usual until a buyer is found, this can be the part of the process over which the seller may lose the most sleep. Should word get out that the restaurant is for sale, the risk of losing employees, customers and general goodwill is high and the impact could be devastating.

Marty Kotis, president and ceo of Kotis Properties in Greensboro, North Carolina, says many deals are done before employees or the public find out a restaurant is for sale. Working with a broker with strong experience in confidential sales and with multiple local restaurant listings is key if you don’t want word to get out. Ask to review the broker’s confidentiality agreement and procedures for screening buyers to make sure you’re comfortable with their approach.

Kotis also cautions against making the all-too common mistake of sending out a confidentiality agreement for interested buyers to sign that names your operation on the document, either in the agreement itself, on the letterhead or simply on the bottom of the fax. “So many give away the information right on the agreement, which of course the interested party now doesn’t have to sign because the seller has disclosed which restaurant is for sale. They can check it out on their own and aren’t legally obligated to keep it quiet.”

Confidential listings are marketed with general information and a listing number only, adds Zimmerman. Potential buyers see the listing, contact the broker and are carefully screened for experience and financial status. Only if their profile indicates they could be a serious buyer are they asked to sign a confidentiality agreement, after which they’re given the name and location of the restaurant. “We then explain the rules of confidentiality, which include guidelines on visiting the restaurant and interacting with staff members. If they’re still interested, we’ll then set up an appointment to tour the back-of-the-house with the seller and go from there,” he says. “A lot of people who contact us about listings never get to first base. They’re just tire kickers who want to know what’s on the street.”

What’s it worth?

There are too many variables specific to each property and business to present a clear pricing formula to follow, but most brokers come up with a fair market value based on whether the sale involves just the business assets (i.e., the physical space, fixtures, etc.) or a “going concern,” which the buyer will continue to operate. When the seller also owns the property, it is valued or appraised separately and added to the value of the business.

The Restaurant Brokers, a Tempe, Arizona, brokerage, lists the following factors among those most closely considered when developing a sale price:

  • Sales history
  • Business reputation and goodwill
  • Franchise rights
  • Quality and terms of the lease
  • Equipment and fixtures included in the sale, and the condition thereof
  • Vendor contracts and rental agreements
  • Location demographics and traffic counts
  • Comparable business sales
  • Replacement cost of the facility
  • Assumable loans and liabilities
  • Administrative systems
  • Quality and extent of personnel
  • Recipes, customer lists                      

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