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WHAT NOT TO DO WHEN CREATING A RESTAURANT!

Dec 8, 2014
Article #275
Author: Mel Jones

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As a restaurant broker for more than 10 years, part of my job is to assess the salability of a restaurant business.  To do this I actually go to the restaurant several times to experience the food, service and atmosphere.  And based on what I find, I give the restaurant a score that helps me value it. 

The biggest mistake made by owners in building a restaurant business is: (1) putting your name on the restaurant, (2) being the head chef of the restaurant and finally, (3) being the personality behind the restaurant. 

My scoring is simple.  I use a scale of 1 to 6.  6 meaning the restaurant is 100% reliant on the owner and 1 meaning it isn't reliant at all. When building a restaurant business, you want to be a 1 because a buyer needs to step in to the business and feel that he doesn't have to step into the owner's shoes.  

For example, I recently got two listing leads for Italian restaurants.  One is a casual dining Italian restaurant with an average ticket for two in the $50 range while the other is high-end Italian restaurant with an average ticket for two in the $150 range.  

The High-end Italian restaurant owner is nice a guy as one would ever want to meet. Lots of personality, very typical Italian - animated, loud, funny, warm, giving, touchy, huggy, etc. I wasn't sure how he would act at his restaurant, so I went there for dinner. 

Well, he get a 6.  He's in the back poking around the kitchen cooking and directing traffic.

He comes to the dining area hugging people, laughing, greeting, loud, etc. And finally, the restaurant is named after him. NOT GOOD TO SELL because he is the business.  He goes away, the business goes away. 

On the other hand, the casual Italian restaurant is owner operated too.  But here the owner takes a lower profile.  He's not out on the floor talking to people.  He's in the kitchen simply making pizzas while his chef is cooking the meals.  Sure he's directing traffic to a degree, someone has to. His name isn't on the restaurant.  So he is not the restaurant.  But a buyer will have some shoes to fill, but nothing like the upscale Italian restaurant.  So I give this restaurant a 2.  

So how does this related to value?  Simple.  As a rule of thumb the higher the number the lower the earnings multiple. So let's say I do my valuation without considering the owner's involvement in the restaurant.  And let's say I come up with the restaurant deserving a 2.5 multiple before consider the owner factor. Then I look at the owner's involvement number. If the number is a 6, I reduce the multiple by 1.  In other words, it gets a earning multiple of 1.5 instead of the 2.5.  And if the restaurant gets an owner's involvement of 1, then I leave the multiple alone.

The moral of the story is if you're going to build a restaurant and if you're going to want to sell it - and you will - then remove your personality from the restaurant, don't be the main chef and for God sake don't give it your name!  Train the employees to operate that restaurant without you involved.  Greet and meet people, but not in a fashion where you’re personality takes over.

I often see chefs do exactly that.  They place their egos ahead of their business brains. It costs them a lot of money when it comes to selling. 

                                                                                                                                                                                                                                                      

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]taurants.com if you have any questions. 

 

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