It seems that everyday someone contacts me from around the world wanting me to value a restaurant they're buying and practically every time they are paying way too much.
Most brokers don't understand the restaurant business and the smart ones tend to stay away from brokering them while others venture into an area they know little about and stick prices on restaurants that make no sense and pray for an unsuspecting and inexperienced customer to foolishly buy the business. And sometimes they find those people.
First, that in may world that's borderline unethical. I feel a broker has a duty to properly value a business. Sure value is in the eyes of the buyer. But when the buyer relies on the experience of a broker to fairly value the business, then one enters the realm of duties. So many brokers will disagree with me, but this is the precept I run my business and agents on.
Sure, buyers can place different values on a business, that's commonplace. I'm not talking about those differences. I'm talking material price difference. For example, Peter, a buyer of a restaurant, sent me the following e-mail:
"[I'm] In the process of buying an existing business, would like your help in evaluating the sale price and also if the business could stay afloat if operated as is."
He later followed up with:
In the process of getting the returns and the broken down monthly reports. We're assuming it's doing somewhere between 600k and 700k for the year and we believe that's being generous with those numbers. It's approx 5k square ft building but the rent and triple net combined come out to around 8500 monthly....the price is $350,000."
Clearly this business is grossly over valued and this buyer doesn't know the restaurant business well enough to make a judgment call on the value. This is where the broker does have a duty, in my opinion, of fair and honest dealings. If the monthly sales are $50,000 and the rent is $8,500 then the rent factor is 17% ($8,500/$50,000). A well-run restaurant may net 15-18% when the rent factor is 6%. Knock 11% of the perfectly run restaurant business, leaving perhaps 4% profit. Of course this is a rule of thumb. So at best this restaurant may be netting $25,000 a year. This hardly justifies a price of $350,000 unless it is in a rare location where everyone wants to be.
So be careful out there when buying a restaurant and be vigilant about getting verifiable tax returns. There is an IRS form 4506-T that you need to get the seller to sign. This form is sent to the IRS to verify the numbers on the return. If the seller refuses to sign it, move on. Her or she is lying to you.
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.