Frank Pupo - Business Broker
While spending time looking through business listings in the city to potentially buy, you’ve probably realized that more restaurants than any other type of business exist. Is this a right or wrong thing?
Optimistically, when you decide to sell, there’s a great market in front of you to do it. On the other side, why are so many people willing to sell their businesses in the first place? Both of these points of view are valid reasons why one should carefully plan becoming a part of the foods business in Vancouver, BC.
Unless a eatery or diner has a rich and significant history, its location tends to play a big role in its success especially in Vancouver. Location can bring a diner’s target market in by placing it next to an office, movie theater, mall, or club. Regardless of the reason, the lease of eatery for sale is directly related to the location of the eatery itself.
More landlords are becoming cautious or impossibly difficult when assigning contracts to new food business buyers. Some flatly refuse assignments unless the purchaser has previous experiences in business, or may require the former owner to remain on the lease, which is quite difficult for the new buyer to convince the old one to do. Other landlords agree to an assignment, but require the customer to contribute a significant advance of rent as proof of commitment.
With these challenges, make sure to address the lease deal as possible with the former owner. Any purchase contract must contain language whereby the deal is contingent on you, the buyer getting the lease assigned or setting a new satisfactory lease in place. One the deal is set in stone; the next step is arranging a meeting with the landlord. While the seller may require complete financial review, the best strategy is to obtain the owner’s consent to assign a new lease. The landlord’s consent is necessary for both the buyer and seller; the sooner everyone knows his or her decision, the better.
Valuing Restaurants for Sale
Two methods of valuing the food business for sale are the “Asset-Based” or “Owner’s Benefit” formulas. The Asset-Based formula is appropriate for closed locations where the equipment is purchased from the owner or landlord. Once the material is evaluated, make an offer.
For locations still in business, a multiple of the Owner’s Benefit, or the “Seller’s Discretionary Cash Flow” is the proper way of evaluating. This valuation is found by totaling the owner’s salary, benefits, net income on the tax return, depreciation, and interest expense. This figure is then attached to a multiple.
Some multiples to consider are:
- Full-Service Restaurants—2-3 times owner’s Benefit Figure
- Self-Service Restaurants—1 -2 times Owner Benefit Figure
Hours of operation when valuing an eatery are also necessary. For example, if a eatery operated five days a week for breakfast and lunch and made $100,000 per year, it would obviously be worth more than an eatery pulling in a revenue of $120,000 if it was open all day and serving seven days a week.
The method of valuation focusing on some hours and days a diner is open each week is a very general rule. Although it is not an ideal way for every circumstance, buyers must understand valuation as an art, not a straightforward math or science formula. Here is another method used to evaluate restaurant for sale that are based on revenue:
- Five days per week: 70% Gross Annual Revenue
- Six days per week: 60% Gross Annual Revenue
- Seven days per week: 50% Gross Annual Revenue
Although this method focuses on revenue rather than profit, it provides another perspective for prospective buyers.
Regardless of which methods used, remember to reduce the Owner’s Benefit figure as a basis of the multiple to factor any anticipated capital expenditures needed to make after the businesses have been acquired. Yes we know it's a lot of number crunching and potential headaches for you so let me help as I confidently can let you know I am one of the best restaurant brokers Vancouver has to offer.
Cash Sales and Unreported Income
While the industry has improved, a tremendous amount of unreported income still flows through the dine-in industry in Vancouver, BC. While sellers expect to be paid for their total profit, they cannot prove their income due to the unreported circumstances. People tend to take the “if they cannot prove it, you cannot pay for it” stance, meaning if the bar, cafe, or etc. has been cheating the government for years through taxes, they cannot reap the benefits of sales in the business.
It is possible, however, to reconstruct a financial picture of unreported income with supplier invoices, hourly wages, and the seller’s personal records. Forming an idea of unreported income is the seller’s responsibility. Questions the buyer can ask are:
- Can you prove the numbers?
- How do you plan to do it?
- Are you willing to do it?
Ingredients and labor costs are key considerations in a diner’s business. Prices vary based upon whether the dine-in venue is full service, fast food, and if a significant percentage of liquor sales are involved. Understanding the costs that go into a business takes a good amount of research. The combined total of costs, labor, and rent, should not exceed 65% of the total revenue. If this is exceeded, this could lead to a crash in the business.
General breakdowns should be:
- Food costs: 32-33%
- Labor: 22-25%
- Rent: 6-10%
Combined costs should be 64-66% of the total revenue.
With many items to be reviewed and the short amount of time to do so, investigating an eateries due diligence can be quite tedious. Allow enough time for this review to be performed. List all the tasks and items needed to run a dine-in venue in Vancouver, BC successfully. Keep the the 125-point due diligence checklist to stay guided through the examination.
Other Concerns To Go Through With Your Broker
- Keep equipment evaluated by a professional. Local foods supply stores can provide referrals to professionals. If equipment does need to be repaired or replaced, used equipment is often best to use due to the large market, and savings one has from investing in it.
- Health regulations and compliance will be a major key to the due diligence investigation. Check public records for prior violations and have the “representations and warranty” sections of the purchase mention no health infractions that resulted in fines, and temporary closure was committed. Also, check local media platforms to assure health issues with particular eating places did not exist. There is no faster way to run oneself out of business than to have the local paper denounce your eatery as infested and unsanitary.
Buying potential food businesses for sale can be very exciting and can have significant amounts of success. However, make sure you as a buyer are educated properly on your new investment. Don’t go into a business hoping to be successful, let Frank Pupo Business Brokerage help in not allowing yourself to become another statistic when dealing with all the restaurants for sale available.