By Greg Kells
When it comes to selling a foodservice business or bar, there are a number of questions that can arise. From maintaining confidentiality to deciding on the right time to sell, the process of selling your business can be daunting.
Here are just some of the questions that you may have if you are considering selling your business:
- How do I maintain confidentiality? I do not want my staff, suppliers or customers to know I am selling.
- How do I maximize the value when I sell?
- What tax planning should I be doing in advance of selling?
- How long does it typically take to sell?
- Where do I get help?
- When do I approach the landlord? I will need an assignment of my lease or a new lease.
And now for the answers. . .
Maintaining confidentiality is essential to selling your restaurant or bar and it is how good business brokers operate. Contact the best business broker you can find and let them manage the process.
Confidentiality is key
Realtors want to tell the world what they have for sale and hope someone is interested. But value drops when the street knows you are selling and you risk losing staff and clients. A good business broker will screen potential buyers to assess their experience, goals and financial resources and gauge what will work for them before ever introducing them to a business. The broker will have prospective buyers sign a confidentiality agreement and ensure they know they will be sued if they breach it.
Maximizing value is another reason for you to get the best business broker you can find and the earlier in the process you have them guide you the better. Typically they will recommend that you eliminate discretionary expenditures, report all sales, spruce up the facility, document all systems and processes, etc.
They will recast prior years’ financials to show what the business really makes as opposed to what was filed on your tax return. They will produce a Most Probable Selling Price (MPSP) report to let you know what your business is worth. They will then discuss timing and actions you can take to increase its value.
The importance of starting early
When you decide to go to market they will prepare the marketing packages that show your business in its best light and they will work with you on projections so you can share your expectations of the future with the buyer prospects. They will then market your business extensively (without revealing its identity) in order to get the widest market and most prospective buyers possible. The key for you is to start early while there is time to take the actions that increase value. Most restaurant owners wait until it is too late to make improvements.
Tax planning requires the involvement of your tax accountant or perhaps a tax lawyer. If your books have been exceptionally clean for the past three years and the MPSP is well above your total cost base, your business broker may suggest a share sale; you can then take advantage of the Lifetime Capital Gains Exemption, which may result in you paying no tax on the sale or at least reducing your tax substantially. The current exemption is more than $800,000 per shareholder. There may be some planning issues that take time to put in place. Many restaurants and bars do not operate with clean enough books to be candidates for a share sale but there are still many things that can be done to minimize tax. I suggest you start to work with your business broker more than two years before you plan to exit.
It’s about time
In terms of timing, the typical restaurant or bar sells in three to nine months. Some take longer—larger ones and chains that sell for more than $2 million typically take six to 24 months. Location is a factor— the better the location the faster it sells. Small town and rural restaurants and bars take longer. Addressing the value drivers can speed up selling and seller financing makes a big difference.
We typically include seller financing in most sales and it ranges from 20 to 50 per cenrt of the purchase price depending on the seller’s confidence in the buyer, the ability to finance through third parties, and the seller’s cash needs after the sale. Contact your chosen business broker early – it will make a big difference in what you end up with.
The most important role in selling your business is that of the business broker who will manage the sale. You will also need your accountant to help early on with financials and tax planning and, perhaps, structuring. You will need a lawyer once basic diligence has been completed by the buyer.
The initial offer, which will be drafted by the business broker, will be non-binding. It will contain clauses making the sale conditional on diligence, lease assignment, etc. It should also contain a clause making it conditional on the final drafting of the agreement of purchase and sale being acceptable to you and your lawyer.
Typically the purchaser’s lawyer drafts the agreement and your lawyer drafts the security documentation and note. You do not want to engage in this expense until financial and operational and market diligence has been completed and the buyer has secured their financing.
Insurance is often used to mitigate risk so an insurance agent may be involved. There will be a license transfer so you may use a licensing consultant to do this. There may be a bank involved if using Business Development Bank of Canada (BDC) or a Canada Small Business Loan. If you are a franchisee the franchisor will be involved. If you are planning retirement you may have a wealth planner involved. Let the business broker quarterback the team.
As for approaching the landlord, most leases contain a clause allowing a lease assignment subject to the landlord’s approval. Landlords will not approve until they know who the new tenant is, along with their assets, credit history and the experience they bring to running the business. While there is usually no point in approaching the landlord until there is an accepted offer, it is important to ask them well in advance what their criteria would be hypothetically for approving a transfer. That way you do not get a shock when you are closing.
About the author:
Greg Kells is President of Sunbelt Business Brokers, Canada’s largest business brokerage. With offices across the country, Sunbelt helps restaurant and foodservice business owners to maximize their selling price, reduce taxes, reduce risk and take the hassle out of selling. They also help many budding entrepreneurs to make the right choices in acquiring a business that works for them and matches their financial resources, skill, experience, and lifestyle goals. As you have seen in the preceding article, selling is a complex process! Contact Sunbelt Business Brokers for a free book on the selling process and for help and guidance. Visit http://sellyourrestaurant.info or www.sunbeltcanada.com. 1-800-905-3557