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The Secret Sauce to Selling a Hospitality Business.

The Secret Sauce to Selling a Hospitality Business.

Selling a business should be a positive process. We receive a lot of emails from brokers, buyers and sellers frustrated about their experience dealing with each other. Buyers get annoyed with Sellers and Brokers who unknowingly make it hard to buy a business, often leaving buyers hanging, waiting on information that never transpires, or it arrives in confusing, disorganised dribs and drabs.

On the other side, brokers get annoyed with sellers hassling them daily about enquiries then sellers get upset when brokers have nothing to report, then we have both Sellers and Brokers complaining about buyers who always want so much information and never make a decision.

The internet has made it very quick and easy for anyone to list a business for sale or find a business, there are thousands of online listings gathering web dust, it’s also made the process of selling a business much more difficult.

The Problem

There is a constant stream of new buyers and sellers entering the market who might believe business sales is like selling or buying a house. There are similarities in the process but they are vastly different. A buyer knows exactly what they are getting when buying a house, and lots of official area and sales data is available to asses the value. Unlike a businesses, there is no official data on value and buyers have to make judgement based on understanding the business and it’s financials. It's mainly based on the appearance of the business, lease, and the accuracy of the information a seller provides.

Sellers list a business without fully knowing how to deal with prospective buyers, brokers, or understanding the process of selling a business, the legalities, complexities, paperwork and documents involved, they put an ad up online without doing any prep or planning, then expect to get lots of enquiries and sell. Selling a business, handling buyers, negotiation, deal structuring, is not something you can learn quickly while running a business nor afford to do poorly.

Buyers scan through infinite pages of business for sale listings, calling, texting, sending brokers and sellers infinite enquiries, chasing information, jumping from one website to another, never making any progress chasing elusive information and the perfect business, never really knowing exactly what they are looking for and never making a decision. Buying a business is full of complexity and pitfalls, the wrong move could turn into a major financial disaster.

Business Brokers list businesses without the information and deal with problems later when and if they get a buyer, only to let deals slip through their fingers at the last minute due to dealbreakers surfacing and sloppy preparation. It staggers me the number of sellers who sign up with a broker on lengthy agreements and never sell, they move on to another broker, the same thing happens, the business becomes old stock and the end result is predictable. The business sells for much lower than expected, or never sells at all, even worse they give up on selling, close and walk away from the business altogether.

The wrong parties coming together is like mixing oil and vinegar together;

  • Unprepared Seller + No Info + New Buyer = High Friction (No Trust, High Risk, Deal Breaker)
  • Experienced Seller + No Info + New Buyer = High Friction (No Trust, High Risk, Deal Breaker)
  • Sloppy Broker + No Paperwork + All Buyers = High Friction (No Trust, High Risk, Deal Breaker)

The lack of understanding and preparation by sellers is what puts buyers off, kills deals and any real opportunity to sell. Deals might get close, but inevitably deals will fall apart if sellers are not organised and the business is not in a healthy state to sell, It’s why many businesses don’t sell.

So what is the secret sauce to selling a hospitality business?

The secret is making it easy for buyers to deal with you and remove the friction and roadblocks from the process.

Just like planning an event, dish or date, there are specific tasks that need to be planned and organised well in advance to make sure everything goes smoothly. You wouldn't just organise catering for an event on the day, you would plan the dates, menu, costs, guests and work out all the details before the event, not the day it was happening. You have to take the same planning and step-by-step approach to selling your business and do as much in advance to ensure everything goes smoothly, not leave things to chance when things start happening.

Ok, here’s the recipe.

1. Groom the Business for Sale.

The way the business looks makes a huge difference in the buyers mind and can negatively or positively influence the value of the business. For food and hospitality business, presentation is critical, be prepared for buyer inspections. Buyers will want to inspect the business and check everything, wear and tear on equipment and fixtures is acceptable to a point. but sloppy housekeeping instantly devalues the business in the buyers eyes and will bring you undone. When buyers come to inspect and the appearance does not match what you're trying to sell them, you risk losing a buyer, deal is over before it even started

Presentation of your business and staff is a key aspect of making the business desirable to prospective buyers. First impressions count. Here are a few areas as a starting point;

  • If need be, book in a health inspection, officially check what needs to be addressed.
  • Regularly clean inside and outside shop windows and entrance.
  • Fix external signage and lights.
  • Wipe down table items such as salt & pepper shakers and sugar dispensers.
  • Remove grit and crumbs in the cracks of the chairs.
  • Remove gum and crusty bits from under the table tops.
  • Wipe down sticky menus or reprint and replace cruddy ones.
  • Make sure staff are always in clean aprons.
  • Service the coffee machine.

All food businesses should be compliant with food safety regulations and keep up to date food safety logs. Back of House areas such as the kitchen, equipment, benches, cold and dry storage areas should be kept clean and organized always.

  • Clean and tidy food storage areas.
  • Remove grime from all fridge seals,
  • Fix broken tiles.
  • Seal exposed timber in wet areas.
  • Silicone exposed gaps around sink areas.
  • Clean kitchen canopy filters.
  • Clean and degrease heavy use kitchen equipment like fryers, grills, ovens and cooktops.

Just like a house that gets prettied up for open for inspections, you need to take the same approach when selling your business and make it feel welcoming and look as fresh as the day you opened. The way the business looks makes a huge difference in the buyers mind and influences the value of the business. 

2. Do The Books.

Having up to date, accurate financials will help sell your business. Any serious buyer that calls, emails or brokers that you hire will want to see at least 1 to 3+ years of verified tax financials and profit and loss reports to assess the business. If the financials are not available, are poor or are inaccurate it won't help to sell your business and could hurt your chances of selling. You must provide buyers with a comprehensive explanation about the income and expenses of the business or buyers will not be confident in what you say and will be doubtful the business is profitable. Buyers are looking for profit and most standard financials don’t show the real profit a business makes. The usual financials accountants provide would not separate the many personal, one time and unnecessary expenses owners may put through the business that affect the profit shown in reports.

Usually referred to as ‘addbacks’, discretionary income, adjusted net profit, which can be items like depreciation, company car, business trips, interest on the owner's debt, solicitors fees, website etc. These are all expenses that should be adjusted and be reflected as adjusted net profit in the business. A good accountant will be able to help sellers deal with unreported income and provide clear, concise reports showing the original figures and adjusted figures.

Before you list the business for sale have your financials done and invoices organised ready for buyers. A business profile (more in section 5.) will help explain poor or average financials to prospective buyers which your financial reports alone won’t.

  • Good Financials + Adjustments + Showing Profit (Low Risk, Deal Maker)
  • Poor Financials + Adjustments + Showing Profit (Moderate Risk, Deal Maker)
  • Poor Financials + No Adjustments + Showing Negative Profit (High Risk, Deal Breaker)
  • No Financials (High Risk, Deal Breaker)

Knowing your numbers and what comprises your main sale items shows buyers you know the business and will give them confidence when you explain each component.

  • Takings
  • Ratio of Sales eg; (Food vs Beverage, Pickup vs Delivery)
  • Main Sales Items (eg: kgs of coffee sales in a cafe, kgs of fish and potatoes in a takeaway)
  • Sales from third parties (eg: Menulog, Uber Eats, Fodora)
  • Cost of Goods
  • Wages
  • Number of Staff, Role & Responsibilites
  • Seats
  • Additional income like Functions/ Catering, Online sales
  • Rent
  • Lease Terms
  • Lease Increases
  • Outgoings

The key takeout here for sellers is don’t make it hard for buyers to to do business with you. When buyers enquire, they are only chasing one thing, information. Buyers will not hang around waiting for sellers to get organised with their books and records. Financials alone will not explain the business, it's the seller's opportunity to answer any and all questions the buyer has, financials is just one aspect.

3. Remove Deal Breakers.

Once the books are in order, it's time to assess the permits and lease. Prospective buyers will want to review the food permit, liquor licence, seating capacity, rent, lease terms, annual increases, rent reviews, disclosure statement and investigate if there are any clauses or local council restrictions that will create issues for them in the future. Businesses with secure lengthy leases and low rent are highly desirable as it gives buyers time to get into the business and when need be, sell it down the track too. If you are on the last term or at the end of your lease, consider approaching the landlord to secure a longer lease for the business making it more attractive to buyers.

  • Long Lease (Deal Maker)
  • Low Rent (Deal Maker)
  • Short Lease and High Rent (Deal Breaker)

4. Remove Roadblocks

Don’t wait till you are standing in the kitchen with the buyer and health inspector a week out from settlement. It would be wise to book in a health inspection before you list your business for sale and address any items that come up, so when it comes time to selling, everything is done, you have a clear path to settlement and handover.

Many food business sales are delayed or fall over at the last minute here because a health inspection from the council has surfaced food safety issues or breaches that must be resolved before settlement, which can result in thousands of dollars of additional cost to the seller to fix, especially difficult for business with tight cash flow and relying on the sale to happen.

5. Do a Business Profile.

For sellers, every enquiry from a buyer is an opportunity to sell, discussing the business with every buyer and broker is time consuming, explaining the business answering the same questions again and again, playing telephone tag and waiting for responses is frustrating and not practical if you're trying to run a business. Buyers are unlikely to remember everything business broker's and seller's explain.

Once the business is groomed, the financials done, Roadblocks and Deal Breakers removed, experienced brokers and savvy sellers pre-prepare a Business Profile that thoroughly explains the business, risk and opportunities to buyers, brokers and anyone else involved such as lenders, accountants and solicitors that may need to make a full assessment.

It's the final step in getting prepared and the anchor of marketing the business for sale. A business profile can be as simple as a one page summary to a comprehensive professionally prepared 10-20 page document, it all depends on the type, price and complexity of the business.  

Plus, buyers and lenders would prefer to receive a prepared document about the business first, then decide to see if it is worth a look, risk and investment. At the very least, a Business Profile should include enough information about the business to spark buyers interest, then they can come back to you for more detailed information if there is genuine interest.

Whether your business is worth $20,000 or $20 million, out of all the potential businesses a buyer might come into contact with, they will remember the one with the information pack.

Some things you could include in a business profile;

  • Short description of the business, hours, capacity
  • How it was started/ established.
  • Products & Services Overview
  • Type of Customers
  • Details of the Premises
  • Location, Area & Suburb Profile
  • Staff Structure
  • Trading Patterns
  • Marketing Activities
  • Suppliers
  • List of plant & equipment included with the sale.
  • Intellectual Property such as recipes, domains name, website, social media.
  • Financial Reports showing turnover, Cost of Goods, wages, expenses, addbacks and profit!
  • Explanation of financial adjustments, inconsistencies and abnormal expenses.
  • Lease details including rent, lease terms, annual increases
  • Copies of lease, licenses and permits
  • Asking price.
  • Sale Terms
  • Training & Assistance
  • Photos of the Business
  • Floor Plan of the Premises
  • and much more...

Do the Business Profile as standard practice and let the document sell the business for you. It will reduce the friction with buyers and brokers, show the value of the business, maintain your asking price, present the business in the best light, answer most of the buyer’s questions and many they didn’t think of. 

By Peter Kais | hospitalitytrader.com