Ever since the economic downturn in 2008, many small business owners have been anxiously awaiting a recovery that would enable them to sell at an attractive price. As conditions have improved over the past few years, the number of closed transactions reported has slowly increased, according to BizBuySell.com data. However, significant economic uncertainties remain that are still depressing small business valuations. These uncertainties, combined with a challenging lending environment, have left a restaurant market full of buyers and sellers waiting for the perfect moment to find a deal.
So will 2013 be the year market strength returns and patient restaurant owners can finally sell their business at the price they desire?
The short answer is maybe.
With the uncertainty of the 2012 election behind us, the economy should see steady, more predictable growth. As can be seen in the recovering real estate market, credit markets are slowly easing. Additionally, fewer small business transactions over the past few years have created a basic supply-demand equation that bodes well for 2013 and beyond.
However, clearly challenges still remain. Anemic economic growth and reduced consumer spending due to uncertainty and systemic unemployment mean that many small businesses are still in worse shape than they were prior to the 2008 downturn.
What does this mean for you? While small business sales prospects look a little brighter in 2013 than in recent years past, you will need careful advanced preparation to differentiate yourself from the competition and sell for the price you want. To help you prepare, here are some of the key issues you need to consider to sell your restaurant successfully in 2013:
1. Your exit plans should start now.
Business buyers and their brokers do meticulous research on your business before signing on that dotted line. That means as the seller you need to justify your selling price carefully.
The best way to do that is to provide detailed financial records. You should be able to provide at least three years of financial documents, including tax returns, expense reports, income statements and even restaurant-focused information like food and beverage vendor lists. These will not only support your asking price, but will also help bolster the buyer’s confidence that you have operated a well-managed business into which he or she will be able to transition smoothly.
Make sure to resolve any red flags that may hurt its value before you list your business for sale. Issues like short-term leases, a high-degree of dependence on one or a few key customers and pending legal issues will come up during negotiations and can hurt your final sale price if unresolved in advance.
Finally, remember to keep up the physical aspects of your business as well. When a potential buyer visits, the appearance of your building or equipment will make their first impression. If it appears that the business assets need updating, the buyer will likely use that as a reason to lower any offer. With that in mind, clean up, upgrade facilities inside and out and invest in any building or kitchen improvements you’ve been considering before going to the market. The less work a new buyer has to put in, the more you can expect for a final selling price.
2. Set a reasonable asking price.
Knowing how your business measures up with other restaurants in the area will be the key to setting an effective asking price.
So how do you find the right price? The best way is simply to compare your business to similar businesses for sale, both within the restaurant industry and in your local area.
As a starting point, do some research on business-for-sale sites like BizBuySell.com and BizQuest.com. Business-for-sale marketplaces like these allow you to search businesses by industry, size and location. Knowing what comparable businesses are listed for provides a valuable reference point to help you set the price of your business. For a more detailed comparable analysis that also includes the actual selling prices of sold businesses and to save time, consider purchasing a Valuation Report from BizBuySell.com. These inexpensive reports are easy to use and provide you with key metrics (e.g., selling prices, revenue and cash flow multiples) of recently sold businesses in your industry and location.
Researching similar businesses and using comparable tools are an inexpensive way to get started, but before actually listing your business for sale, you should obtain a more precise valuation by enlisting the services of a business broker or appraiser. When utilizing these services be sure that you understand what constitutes the recommended price and that you agree with his or her suggestions. The last thing you want is to undervalue your business and leave money on the table. Of course, valuing the business too high can be just as detrimental as that can lead to a long, drawn out sales cycle.
In general, just be honest with yourself. Go over your financials and determine the issues buyers will see as positives and negatives. Your overall pricing goal should be to attract multiple buyers, creating maximum demand and an auction-like atmosphere. Overpricing your business will kill any chances of that happening.
3. Find qualified buyers.
After you determine the right selling price at which to list your business, the next step is to find suitable buyers. For most business owners, it is best to hire an experienced business broker to market the business and manage the sales process. When selecting a broker, consider his/her experience (has he/she sold restaurants like yours in your area?), the size and quality of their potential buyer network and references. Additionally, look for professional association memberships (most notably the International Business Broker Association (IBBA) and/or the relevant state broker association) and industry certifications (such as CBI or Certified Business Intermediary). While many brokers will have success stories, it is your job to make sure that they have experience that will help them sell your business.
Of course, owners can and do also choose to sell their business themselves. This can certainly be a successful sales path, but be honest with yourself regarding your ability to effectively market, sell and manage the sales process while simultaneously operating the business. Selling a business can be complex and it’s important that performance doesn’t suffer at this critical juncture. If you choose this route, be aggressive with your personal marketing plans. Post your business on websites like BizBuySell.com or BizQuest.com to reach buyers actively searching for businesses to buy. Leverage your restaurant associations and appropriate restaurant-focused publications that feature businesses-for-sale. Finally, don’t forget to reach out to your network of family, friends and work contacts who might know interested buyers. Preserve confidentiality by describing the business for sale without including identifiable specifics (for instance, use an attractive, but nonspecific photo related to your business such as a the kitchen or dining area) and obtain a signed nondisclosure agreement from the prospective buyer prior to getting into specifics. If absolute confidentiality is important, then a business broker is likely the best option to successfully market your business while keeping the sale under wraps.
4. Consider tax changes.
In 2010, President Obama and Congress agreed to extend the Bush-era capital gains tax rate of 15 percent through the end of 2012. That allowed small business owners to net a greater portion of proceeds from the sale of their businesses. As a result, many brokers encouraged owners to sell in 2012 in order to take advantage of the cuts, and small business transactions have slowly increased over the past two years.
As it turns out, most small businesses will still be receiving the tax break in 2013. The fiscal cliff deal, officially the Taxpayer Relief Act of 2012, extends the capital gains tax cuts for individuals with incomes less than $400,000 or households earning less than $450,000. The government estimates that the Act will ensure about 98 percent of Americans and 97 percent of small businesses will not see income taxes go up, avoiding a big hit to revenue.
However it should also be noted that more successful small businesses, ones with incomes above $400,000 or $450,000 mark, will see capital gains taxes increase. As the seller, it is up to you to research these new tax laws and understand how they will affect your net proceeds. If you need additional support, don’t hesitate to ask your broker or accountant how taxes should influence your selling strategy.
5. Seller financing a key.
One of reasons that even more business sales are not occurring is the continued challenging lending and financing environment. This problem harkens back to the credit crisis that sparked the 2008 financial downturn. With banks still enforcing strict lending guidelines, it is more important than ever for sellers to offer financing to help close a deal. In fact, in a BizBuySell.com survey of national business brokers earlier this year, 90 percent of respondents called seller financing either “essential” or “important” in speeding up the business sale process. Only two percent found it unnecessary in today’s market.
While offering seller financing means you won’t receive all of the proceeds on the date of sale, it does offer several benefits. First and foremost, it helps get deals done. It attracts more buyers and can help these buyers secure bank financing. These two factors help you sell your business more quickly and for the best price. Second, instead of receiving the full sale amount initially, you will get a portion of the sale up front and the rest (likely 20-40 percent) will be paid over time. This may be an effective tax minimization strategy as it can keep single-year income at the level needed to qualify for the lower tax rate. Third, it also provides you with an opportunity to earn interest (likely at a relatively attractive rate) on your money. Finally, you will also remain connected to your business after sale, helping to ensure a smooth transition. This is usually a 3-12 month period in which you transition the operations to the new owner and help train him or her how to successfully manage the business. Most potential buyers will welcome this assistance and that can translate into more offers and, presumably, a higher selling price.
Bottom line: if you’ve considered selling your restaurant in 2013, take your time and do it right. Start planning and researching asking prices now, market your business aggressively (either through a business broker or directly) and learn how the new tax situation affects your takeaway. Knowing the sales process and the details involved is half the battle. With proper preparation, you can ensure a low-stress transition and a financially successful exit from your business.
Curtis Kroeker is general manager for BizBuySell.com, the Internet’s largest and most heavily trafficked business-for-sale marketplace.