Selling a restaurant

Selling a restaurant is a complex transaction not to be taken lightly. There are three phases to selling a restaurant. The first phase is deciding why and what you're selling. The second phase is marketing the restaurant and finding a buyer. And the final phase is closing the deal.
This article is intended to be a general guideline for restaurant owners to help them sell their restaurant. Each state or country varies in the details and regulation, but the basic concepts are the same. Like any analysis these questions need to be answered: why, how, what, where, when questions must be answered.
WHY: The restaurant owner must first determine why they want to sell. Most restaurant owners fall into three categories: (1) Retirement, (2) burn-out by the demands a restaurant places on the owner, and finally (3) the restaurant is losing money. Of course there are other reasons, but these are certainly the top 3. Most buyers want to know the reason for selling. The seller musts be prepared to discuss the reason keeping the story consistent throughout conversations with a buyer. Obviously the first two reasons are fully explainable. But the third will add a challenge to the sale, which can be over-come if the owner has analyzed their business well to identify the cause of the financial losses. Then at least the owner can sell the buyer on the challenges of the upside. Everyone likes challenges and if the restaurant is priced right, it could sell regardless of the losses.
WHAT: Once the seller determines why he/she wants to sell, then they need to determine what exactly they want to sell and what price they want to sell it for. A restaurant has a series of assets that include the restaurant's furniture, fixtures and equipment (FF&E), the lease and leasehold improvements (if they don't own the real estate), goodwill, liquor license if the state or country allows them to be sold, covenant not to compete, recipes and trade name. If the business is a franchise then the owner doesn't own the trade name or recipes and can't sell them. Some franchisors won't allow the owner to sell goodwill either. So the owner needs to check with their franchisor before going to market.
So exactly what are these assets? And how much are they worth?
FF&E
FF&E is all the major equipment, furniture and trade fixtures and would include for example the stove, oven, meat cutter, blender, grill, fryer, hood system, sinks, coolers, walk-in cooler and freezer, etc. Equipment has different values. Often buyers make the mistake of thinking they can go down to the restaurant equipment store and buy equipment at 10 cents on the dollars so that's the value. But this isn't so. Having the equipment installed and operating has additional value over the stripped-out price. So don't let a buyer give the old negotiating line "I can buy it for 10 cents on the dollar on Craigslist" to get a better price.
LEASE:
A lease is an interest in a piece of real estate one has for a specific period of time. The longer the lease, the higher the value in general. But this old axiom held true a few years ago before collapse of world economies. As a result of the collapse, commercial lease rates have fallen and fallen dramatically in some areas. So if one signed a new 10 lease in 2007 with 2007 rents, the price of the business is negatively affected by the above-market rate lease. This also makes it more difficult to sell as buyers will tend to be very sensitive to the rents and use it to negotiated the price of the restaurant.
LEASEHOLD
Leasehold improvements are the additions the owner has made to the empty space such as adding bath rooms, electrical, plumbing, sewer hookups, walls, floors, etc. This has value and the higher the quality of work the great the value and the easier it is to sell the restaurant. And the older the improvements, the lower the value. Of course, the condition of the facility also has a bearing on price.
GOODWILL
Technically, goodwill is the difference between the sales price and the value of the hard assets such as FF&E, leasehold improvements, covenant not to compete, lease, recipes and trade name or brand. For example, if the price is $100,000 and one determines the assets are worth $50,000 than goodwill is calculated as $100,000 less $50,000 for a goodwill amount of $50,000.
RECIPES
The owner can try to perform this task themselves or hire a professional restaurant broker to do it for him. But it must be done. Often owners get a number stuck in their mind and despite having no value analysis prepared, they try to sell it for the amount in their head. Often owners want to get what they put into the restaurant. This is the greater fool theory. Sometimes it works, but not too often.

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