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EXIT STRATEGIES FOR RESTAURANT INVESTORS

Sep 13, 2012
Article #151
Author: Mel Jones

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As a restaurant broker who has been selling restaurants since 2003, I meet and talk to hundreds of restaurant owners each year, read hundreds of leases, review hundreds of tax returns and financial statements and I can't tell you how rare it is to see a well thought through exit strategy putting the restaurant owner in the front seat when selling or getting out of their restaurant obligations.

There are one of two reasons owners aren't well prepared to exit their business:  first, the owner believes they'll never sell it and don't care about an exit strategy or second, the owner has either received bad advise or no advise from a lawyer, accountant or real estate broker.  There is no other logical explanation. 

There are two areas that need clear thought and planning in order to exit your business, the lease and your financials. 

LEASE

A lease gives the tenant total and undisputed control and ownership of a space for a certain period of time at a certain rate under certain conditions. It is an asset to the business owner. But it can quickly turn into a liability if the lease isn't designed with an exit strategy in mind, a stragety to get you out of the long-term obligation and/or out of the business.

There are two exit strategies here: One for selling the business, and one for when the business gets in trouble.

Most leases attempt to hold the tenant on the lease for the duration of the lease and some landlords will even try to attach the tenant liability to the options. So what do you do to reduce this liability?

Here is where I need to tell you to get a good lawyer.  Okay I said it...Lawyers! 

Now, and sorry to some lawyers, most of you folks have little education in exit strategies for tenants. Often the landlord will try to get the tenant to personally guarantee a lease if the tenant is a corporation or LLC. The shear fact the tenant's name is on the lease generally means he/she is personally liable for the lease. The winds of a weak economy has shifted the power of negotiations in favor of the tenant in most cases.  Landlords are more willing to give-up their demand for personal guarantees than they were 4 years ago. And in many case the landlord is willing to reduce the time one is on the guarantee. 

But if you find yourself being forced into a personal guarantee, then offer the landlord an alternative. Remember, the landlord's interest is in collecting rent and making sure when a property becomes empty it gets rented quickly. Nothing is worse than having a restaurant space stripped-out.  It takes many, many more months to to rent than a finished space.  And let's face it, the vale of the equipment is less than a dime on the dollar.  

So here is what you do.  You offer the landlord a turn-key restaurant space in the event you can't pay the rent.  You hand over the key and walk away from all obligations toward the restaurant. That solves the rent liability issue. But obviously it doesn't solve you tax problems if you have any. 

I have done this strategy in a number of deals.  Buyer's love it. Seller's love it. Landlord's adore it!  Every one wins. 

Furthermore, when you sign a lease make sure the assignment language isn't restrictive in a transfer. The common language used should say "will not unreasonably withhold consent." You should avoid language adding restrictions to a transfer such as "assignee (that's the buyer) must have an equal net worth as the buyer at the time assignor (that's the Seller) signed the lease.  Read the assignment paragraphs over and over again to help you understand what you're signing.

Next, other the landlords will play another trick to avoid you transferring the business. They'll make the options personal to you.  This means the options don't transfer with the business, hurting the value of the business and putting the sale in the landlord's hands. 

Finally, there is a tricky clause some landlords like to stick into lease. This clause basically says something to the nature that a high percentage of the purchase price is to go to the landlord.  These paragraph are written in such a way that only a good attorney or broker can really interpret what it means. They are true poorly written on purpose. 

So watch for potholes that landlords stick in the middle of your road! 

FINANCIALS

When money was flowing everywhere back in the good old days, financials were less important than they are today. More and more buyers are demanding good financials. So if you want to get top dollar and a fast sale, keep good books. 

The restaurant business tends to have a lot of cash, resulting in restaurant owners skimming the cash and not reporting it. DON'T DO THAT!  Not only is it not ethical, it is plain stupid! There are tax strategies a good Tax attorney or good CPA can help you with to avoid paying high income taxes or at least defer the taxes.  Use them! They are worth their weight in gold!

There is a saying in this business for people who steal from other tax payers (gov't) when thinking about pricing your business "you already got paid for the good will of your business by stealing from the government, so don't ask for a goodwill price."

There are a number of benefits for keeping good books.  First it allows you to manage your business.  How's your food costs percentage? Are employees stealing from you?  How's your labor costs doing?  Is the G.M. over staffing your restaurant?  You can only answer these questions by preparing and analyzing the numbers. There is no other way. 

Having good financials also opens up thenumber of potential buyers available to buy your business by at least a factor of 10. Yes, 10 times more buyers will be able to buy your business causing your price to be higher as a result of the desirability of it. Why?  Because your business will qualify for an SBA loan!  A buyer can come in with as little as 10% down.  So if you're selling your business for $300,000 all a buyer needs if $30,000 to buy your business!  There are a lot of buyer with $30,000!  But there are few buyers with $300,000!

CONCLUSION

So to conclude, get your lease reviewed by us and an attorney and keep good books and you'll be happy you did this when we walk in to sell your restaurant for top-dollar that you've worked hard at building!

 

                                                                                                                                                                                                                                                       

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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