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ARE YOU QUALIFIED TO BUY A RESTAURANT?

May 21, 2008
Article #7
Author: Mel Jones

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QUALIFYING THE BUYER

Being a qualified buyer is key to successfully closing a business purchase.  There are several variables at play when trying to qualify and the qualification process is nothing like trying to qualify a person to purchase a home.  There are factors realting to you and factors relating to the business that needs to be analyzed. 

First and obvious is whether the buyer has the money to purchase the business or real estate. If the business qualifies for an SBA loan, the buyer should have at least 20% down in the bank as cash or securities.  If the business for sale is an asset sale, than the buyer should have at least 125% of the purchase price in cash or securities on-hand. As for real estate deals, if the current business has solid tax returns showing nice profit, the buyer should plan on putting 20-30% down, while if the business doesn't have good tax returns, then it becomes very difficult to secure financing and a buyer will need at least 50% down and probably more depending on the current credit conditions.

Second, another major hurdle is getting the business buyer acceptable to the landlord.  This is often the show stopper!  Here the business buyer most like needs experience in this particular business, good credit and a strong balance sheet, meaning the business buyer's net worth is reasonable, i.e. if the business for sale is $200,000 the buyer's net worth better be several times this amount in order for the landlord to accept the buyer as a tenant.

Third, if an alchol beverage license is involved, the buyer can not have a felony in his back ground. In addition, the buyer must be able to prove the source of the funds to the state agency.

Fourth, if a franchise is involved, the franchisor wants a franchisee with good credit and good character to operate the business.  So just like the liquor license agency and the landlord, the franchisor will kill a deal if the buyer is weak.

At SellingRestaurants and SellingStores we categorize buyers into classes to better understand our chances of closing a deal.  Here is our ABC's of classifying the buyers and one of the reasons why we have nearly a 3 times industry average for closing deals:

An “A” buyer has a high net worth of at least a couple million, plenty of cash and lots of business/restaurant management experience and solid FICO of 700+. 

A “B” buyer has a net worth several times the asking price of the business – Asking $200,000 net worth should be at least $600,000 –, plenty of cash to do the deal (remember SBA only needs 10 to 20% down) good business/restaurant experience and a good FICO of 670+. 

A “C” buyer is boarder line net worth of one or 2 times the asking price, enough cash to make the deal happen, but the buyer isn’t left with much when the deal is done, and a credit score of 630+.

A "D" buyer is one with little networth, not enough cash to do the deal and is looking for the seller to finance the deal and has little exeprience with low credit score.  SellingRestaurants and SellingStores always advises our seller's not to do transactions with these buyers as they are high risk.

Remember, the seller is often still liable to make rent payments in the event the buyer defaults on the lease. So protecting the seller is what any good broker must do. And at SellingRestaurants  SellingStores an, our brokers are trained to use certain techiques and tools to increase the protection to our seller. Call a SellingRestaurants and SellingStores agent today to help you.

                                                                                                                                                                                                                                                       

We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions. 

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University.  Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions. 

 

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