Selling a Restaurant Business for Top Price. (The answer is not what you think. )

Having personally sold hundreds of restaurants over the last twenty years I have had plenty of experience in going to market with an asking price for a restaurant business. Do you set an asking price really high based on what your accountant tells you the business is worth and then hope for the best? Do you base your price on the debt and taxes you owe to come clean? Do you ask a very realistic price, take it or leave it, and not permit any negotiating room? What about asking a fair price and allow for 5% to 10% negotiating room like they do with residential houses? I have concluded none of these strategies works the best.

In my experience the best strategy is to start negotiations with no asking price – provided you are prepared for a realistic selling price. Here’s how it works.

Let’s say you have a restaurant with a replacement cost of $300K doing about one million in annual sales. The annual discretionary cash flow to an owner/operator is about $150K. At 40% of annual sales the business is worth $400K and at 2.5 times discretionary cash flow the business worth $375K. With a $300K replacement cost you determine the business should sell for anywhere between $350K all cash to $425K with fifty percent of the business owner financed. In my determination that’s about right but here’s how I would suggest approaching the market.

When a prospective buyer asks the selling price say “We don’t have an official selling price. My accountant tells me the business is worth one times annual sales but I think that’s high.” ( Use the highest number you can justify even if it’s a reach. If the original adjusted book value of the restaurant was $675,463.63 use that. “We have $675,463.63 invested in assets you can touch such as furniture, fixtures, and equipment on a balance sheet but I think that’s high.” You get the idea. )

Now here’s the kicker. Say “But we are DETERMINED TO sell the restaurant in the next thirty days to a qualified buyer for the best reasonable offer we can get. Please just give us what you think is a reasonable offer with all the contingencies you would like.”

Here’s why this might work. The buyer will be confused but may give you an offer based on what THEIR accountant tells them it is worth. Using the above example, I’ve seen offers come in using the above technique for $750K with $500K down – far above the realistic selling price you were prepared for of $350K all cash to $425K with fifty percent of the business owner financed..

Should a prospective buyer insist on an asking price, you always have the opportunity to give them an asking price of say $450K leaving yourself some reasonable negotiating room. But why give them an asking price based on what you can reasonably expect in selling price if you don’t have to? The above technique gets the buyer to “go first” without your giving up the fall back position of giving them a realistic asking price if they can’t come up with their own price or insist on an asking price.

It’s important to also tell them you are “DETERMINED TO sell the restaurant in the next thirty days to a qualified buyer for the best reasonable offer we can get.” This tells the buyer you are serious and only want a “reasonable offer”. If you were to say “we don’t need to sell the restaurant but give us an offer” as example the buyer would conclude you are just looking for a wind fall. If the offer comes in much higher than you expected you must still counter it and “agonize” over it being a fair price. Don’t jump up and down with delight in front of the prospective buyer as example.

As a side note, do not try this strategy or even go to market unless you are prepared for a reasonable selling price. Why risk confidentiality? I’ve had buyers who have a zero annual discretionary cash flow use a very high adjusted book value of say $845,000 and say “We don’t have an official selling price. Our adjusted book value is $845,673.32 based on what we have in the business – but I think that’s real high. But we are DETERMINED TO sell the restaurant in the next thirty days to a qualified buyer for the best reasonable offer we can get. Please just give us what you think is a reasonable offer with all the contingencies you would like.”

The expected selling price (based on a zero annual discretionary cash flow) would typically be an asset sale of no more than $100K – but the offers came in at $200K and above because the buyer’s didn’t know where to start.

Your comments to this article are greatly appreciated.

Sincerely,

Sincerely,

Jack Kimball
Director of Business Development
www.RestaurantBizOps.com
Toll free: 877 219-9747