WE'RE GETTING SBA LOANS FOR OUR CLIENTS!
Written By: Mel Jones
The other day I met a buyer. He's been looking at asset sales - typically businesses that are running but have or show no profit. These are turn-a-round opportunities and attractive for experienced restaurant operators to save big money on building restaurants from scratch.
This buyer, in many ways, is the typical restaurant buyer. He's got many years of big restaurant management experience but he has no ownership experience. He's got good credit and plenty of cash.
He went to his local bank to see if he could get a loan not realizing that most banks don't lend on restaurants and that only a handful of banks do lend on restaurants. Banks that most buyers would never think about going to get a loan.
So when I heard his story I looked him in the eye and asked, If I could find you a restaurant making $150,000 on tax returns and you put $50,000 down and net after paying the loan $120,000 why would you pay $50,000 for an asset sale with no income?
And I added that there has never been a time where restaurant prices have been so low, driven by two factors. First, the cash flow multiples the investors are willing to pay have never been lower - essentially driving down the price of the restaurants. Second, restaurant profits have been hurt by the economy in two ways - lost of volume/sale and higher costs. I added that in time the prices will adjust to the costs and the profits will return as the economies get stronger.
So a restaurant that was making $150,000 in 2007 would have sold for as many times as 3 times cash flow or $450,000. Today because of the weak economy and higher costs this same restaurant may be making only $120,000. The investor being more negative about the future may only be willing to pay 2 times cash flow, giving the business a value of $240,000.
In time we'll get back to a normal economy and normal cash flow multiples. And this restaurant if managed well, could be worth $450,000 again. And if this buyer is smart, he'll sell when things are going well instead of waiting for the restaurant to get old.
So leverage your money and be smart.
SellingRestaurants is the nations top restaurant broker providing services in Washington, California and Arizona. If you're thinking about getting into the restaurant brokerage business, give us a call!
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