Five steps to help sell your restaurant now

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2012 was an eventful year for restaurant mergers and acquisitions, with financial and strategic investors snapping up fast food chains, family dining, fine dining and quick service restaurant (QSR) concepts, franchises and more at near-record pace.

Some business owners hastened sales in 2012, anticipating a 5 percent capital gains tax increase and a 3.8 percent tax on investment income in 2013. However, with the fiscal cliff avoided, and capital available to deploy, we expect another robust year in 2013 for this sector.

Strategic buyers are looking to grow, often through acquisitions. They have record amounts of capital surplus and the low cost of debt makes financing attractive. Private equity continues to invest billions in restaurant holdings.

It adds up to a strong M&A market for sellers.

Whether you want to monetize your restaurant investment or grow your organization by integrating with a larger one, to maximize value in your restaurant sale, you’ll need to get your house (and books) in order.  

Here are tips to arm yourself with knowledge of where a buyer may try to poke holes, uncover opportunities you may have missed, and generally improve the speed and certainty of a closing.

1. Talk frankly about revenue.

How’s business? Has revenue moved due to pricing or foot traffic? Have any units been recently opened, closed or remodeled? Buyers will question the reliability of revenue and profit projections and need to understand what the revenue looks like on a normalized basis. Start with proof of revenue by linking revenue to cash deposits.

2. Understand vendor relationships and business costs.

According to the National Restaurant Association, one-third of sales in a restaurant go to food and beverage purchases. Wholesale prices rose drastically last year, and drought conditions reduced supply. Use third-party vendors’ reports to document these business expenses so buyers see that the costs align, and also make note of suppliers who are paid in cash. Because restaurants turn their inventory so quickly, food and beverage purchases will often be close to the cost of sales. Another third of a restaurant’s sales goes toward labor costs, an expense that will increase under the Affordable Care Act. Third-party payroll reports should correspond with labor costs. Similarly, facility costs should be reconciled to lease agreements.

Sellers should be prepared to explain any significant discrepancies. Buyers will look for red flags, such as expenses or payments unrelated to running the operation. You need to have a full understanding of how your business operates to anticipate and answer these questions.