NO SUCH THING AS A PROFITABLE BUSINESS FOR SALE...NOT!
Written By: Mel Jones
I’ve been brokering businesses for 6 years now. Prior to doing this I was a buyer of businesses as some of you may know. After a two year search, I gave up and decided to open SellingRestaurants.
I often get buyers who are skeptical about buying existing businesses and who are skeptical about a business’ profit. I recently had on buyer tell me that a broker actually told him that no one sells a profitable business, why would they he said. The amusing point of this story is the broker then proceeded to try to sell the buyer his services in starting up a business. Fortunately the buyer saw through this broker’s scheme and had doubts about what the broker was telling him.
This buyer calls me and of course he has doubts about buying businesses and doubts about businesses showing profits. His first question is why would the seller sell a profitable business? That’s a great question every buyer must ask. And there are a host of reasons why a profitable business is being sold.
But before I get into the reasons why one would want to sell a profitable restaurant, let me say the best time to sell a business is when things are going great; when the operation is humming; when the Seller has a passion for the business they’ve built, and; when the profits are pouring out everywhere!
I can’t tell you how often a restaurant owner comes to me a few years after they’ve lost the passion and the profits have gotten thin and then they want to sell. It drives me crazy. But I’ve learned that being in the restaurant business has an element of the gamblers mentality. What I mean is the restaurant owner’s emotions are directly ties to the performance of the restaurant. One week the owner is feeling low and wants to sell because sales are down and the next week they’re feeling great because sales are up and they down ever want to sell the business. A gambler is similar. When they’re losing, they want to quit, but they stay in the game because they hope the next hand will be the start of a winning streak, i.e. next week will bring great sales to the business and all will be fine again.
Moving back to the reason why one sells a profitable business. The best examples I can give are real life examples. The economy changes these examples so I’m going to give you recent examples that better relate to our times.
During the expansion that took place from 2001 until 2007 in the restaurant business, there are true restaurateurs who built and operate restaurants and that’s all they do. Well these folks have found themselves in need of capital these days for various reasons. As a result, they look at their portfolio of restaurants and bars looking for products that don’t fit in their product line. For example, a restaurant operator may have ventured into the bar/club business and learned that this is not a business they’re great at running, but nonetheless, they have run a profitable bar business. So they make a business decision to sell the asset from their portfolio.
Another bar owner had inherited a bar from his uncle. He ran it absentee for four years, but then decided it wasn’t his bag of tricks. It was a great neighborhood bar and I sold it without going to market because it was priced right and perfect for a single person to operate and it made great money as well.
Yet in another case, the owner of a neighborhood bar was getting up in age. He had experienced several of his friends pass away. This was an eye opener for him and he wanted to travel before the good Lord took his life. He owned the bar for 8 years. It had great books. It had great profit. It had great history. It is/was well managed. The location was tough, but we sold it at a good price. But the bar three years earlier would have sold for twice as much had the Seller thought about selling it. But the economy weakened the earnings – $130,000 net still isn’t bad but not as good as $180,000 when times were better – and the buyers beat down the price to earns multiples from upper 2’s to lower 2’s in the past few years. The simple math is the buyer has the potential of making some great money if (1) the business comes back and (2) the buyer bid-up the multiples. This will happen, no doubt.
On yet another business, there were two partners. They separated. One partner goes off and works for the sheriff’s department. As such, she can’t hold a liquor license in the same county where she’s a sheriff, forcing the sale of a profitable business.
So when people say no one sells a profitable business, frankly it isn’t true. As a buyer it is your job to smell-out whether the reason is factual or made up and whether the numbers are good. If the buyer does their homework, they can find a diamond!
<< back to articles