ARE YOU RUNNING YOUR RESTAURANT FOR INCOME - OR BUILDING AN ASSET YOU CAN EVENTUALLY SELL?
By Laughton Appollis I L.Appollis Attorneys Inc.
Most restaurant owners understandably focus on running the business in front of them.
There are wages to pay, suppliers to manage, customers to attract, menus to refine, food costs to control and rent to meet. If the restaurant produces a good income for its owner, it is natural to regard it as a successful business.
But there is another question worth asking:
Are you building a business that works for you, or an asset that could one day work for somebody else?
The distinction may only become apparent when an owner decides to sell.
A restaurant can provide its owner with an excellent living for many years and yet prove surprisingly difficult to sell at the price the owner expects.
The reason is simple. A purchaser looks at the business differently.
The owner knows what the restaurant has done for him. The purchaser wants to know what it will do after the owner has left.
The purchaser sees a different business.
Imagine a successful restaurant whose owner has spent 15 years building its reputation.
He knows the important customers. He negotiates with suppliers. He approves purchases. He deals with staff problems. He watches the cash flow. Perhaps he is also the chef or the personality associated with the restaurant.
The business may work extremely well.
But how much of that success belongs to the restaurant, and how much belongs to the owner?
A purchaser acquiring that business has to consider what happens on the Monday morning after the seller leaves.
If an experienced general manager, head chef and established team remain behind, that is one proposition.
If much of the restaurant walks out of the door with the seller, it is quite another.
This is the essence of transferability.
Can you prove what the business earns?
The same principle applies to financial information.
Owners of privately held businesses often legitimately arrange their affairs with tax efficiency in mind. An accountant's focus may quite properly be on ensuring that the business complies with the law while not paying more tax than is legally required.
A purchaser has a different objective.
The purchaser wants to establish the sustainable economic earnings of the business.
Suppose the financial statements show annual earnings of R700,000, but the owner maintains that the restaurant "really makes" R1.2 million because certain expenses would disappear under new ownership.
That does not necessarily mean the owner is wrong.
There may be legitimate adjustments. An above-market owner's salary, personal expenditure properly recorded through the business, once-off professional costs or expenditure unlikely to recur could potentially be normalised when analysing maintainable earnings.
But a purchaser will want to examine those adjustments.
The seller cannot simply say that the business earns R1.2 million.
The seller has to be able to demonstrate it.
And the difference can become substantial when earnings are capitalised into a purchase price.
A relatively small annual adjustment can translate into a much larger difference in value when a purchaser applies a multiple to sustainable annual earnings.
Good financial records therefore do more than satisfy SARS or the accountant. They can ultimately help establish the value of the asset an owner has created.
Your lease forms part of the investment proposition.
Restaurants have another unusual characteristic: their economics are often intimately connected to premises they do not own. An outstanding location, attractive fit-out and loyal customer base can create significant value.
But what if only 18 months remain on the lease? What if rental escalations are onerous? What if the purchaser cannot take over the existing lease without the landlord's consent?
The restaurant may be profitable today, but the purchaser is buying tomorrow's earnings. For that reason, owners thinking about eventual value should regard their lease as part of the architecture of the business rather than merely another monthly expense. Make yourself progressively less important.
There is a paradox in building a valuable business. The founder may have created the restaurant through extraordinary personal effort, yet one of the things that can make it more attractive to a purchaser is the extent to which it no longer needs that extraordinary effort. That means developing management. It means documenting systems. It means ensuring important commercial relationships belong to the business rather than only to the owner. It means maintaining proper employment, supplier, licensing and financial records. It means understanding who owns the brand, website, social-media accounts, recipes and other intellectual property.
It means asking periodically: Could somebody else take over this business and understand how it works? Build to sell — even if you never sell None of this means that every restaurant owner should be preparing to sell. Quite the opposite.
A restaurant that has reliable financial information, good management, documented systems, secure tenure and less dependence on its founder is probably a better business for the existing owner to own. “Building to sell” is therefore not really about putting a restaurant on the market. It is a way of thinking about the quality of the business being created. An owner who begins this process five years before selling has options that an owner who begins five weeks before selling simply does not have.
Management can be developed. Financial reporting can be improved. Owner dependence can be reduced. Contracts can be regularised. Lease issues can be addressed. Systems can be documented. And the restaurant can gradually move from being principally a source of income for its proprietor to being an asset capable of generating sustainable earnings for another owner.
That ultimately leads to three deceptively simple questions: What does the restaurant earn? Can those earnings be demonstrated? Will those earnings continue when the present owner leaves?
The answers may tell an owner more about the eventual value of the business than the amount originally spent creating it.
________________________________________ Laughton Appollis is a Cape Town commercial attorney and director of L. Appollis Attorneys Inc. The firm specializes in the confidential sale and acquisition of established restaurant businesses. Owners considering an eventual sale—or simply wanting to understand how a purchaser might view their business—are welcome to contact Laughton for a confidential discussion. L. Appollis Attorneys Inc. 083 274 7769 lappollis@lappollisattorneys.com
But there is another question worth asking:
Are you building a business that works for you, or an asset that could one day work for somebody else?
The distinction may only become apparent when an owner decides to sell.
A restaurant can provide its owner with an excellent living for many years and yet prove surprisingly difficult to sell at the price the owner expects.
The reason is simple. A purchaser looks at the business differently.
The owner knows what the restaurant has done for him. The purchaser wants to know what it will do after the owner has left.
The purchaser sees a different business.
Imagine a successful restaurant whose owner has spent 15 years building its reputation.
He knows the important customers. He negotiates with suppliers. He approves purchases. He deals with staff problems. He watches the cash flow. Perhaps he is also the chef or the personality associated with the restaurant.
The business may work extremely well.
But how much of that success belongs to the restaurant, and how much belongs to the owner?
A purchaser acquiring that business has to consider what happens on the Monday morning after the seller leaves.
If an experienced general manager, head chef and established team remain behind, that is one proposition.
If much of the restaurant walks out of the door with the seller, it is quite another.
This is the essence of transferability.
Can you prove what the business earns?
The same principle applies to financial information.
Owners of privately held businesses often legitimately arrange their affairs with tax efficiency in mind. An accountant's focus may quite properly be on ensuring that the business complies with the law while not paying more tax than is legally required.
A purchaser has a different objective.
The purchaser wants to establish the sustainable economic earnings of the business.
Suppose the financial statements show annual earnings of R700,000, but the owner maintains that the restaurant "really makes" R1.2 million because certain expenses would disappear under new ownership.
That does not necessarily mean the owner is wrong.
There may be legitimate adjustments. An above-market owner's salary, personal expenditure properly recorded through the business, once-off professional costs or expenditure unlikely to recur could potentially be normalised when analysing maintainable earnings.
But a purchaser will want to examine those adjustments.
The seller cannot simply say that the business earns R1.2 million.
The seller has to be able to demonstrate it.
And the difference can become substantial when earnings are capitalised into a purchase price.
A relatively small annual adjustment can translate into a much larger difference in value when a purchaser applies a multiple to sustainable annual earnings.
Good financial records therefore do more than satisfy SARS or the accountant. They can ultimately help establish the value of the asset an owner has created.
Your lease forms part of the investment proposition.
Restaurants have another unusual characteristic: their economics are often intimately connected to premises they do not own. An outstanding location, attractive fit-out and loyal customer base can create significant value.
But what if only 18 months remain on the lease? What if rental escalations are onerous? What if the purchaser cannot take over the existing lease without the landlord's consent?
The restaurant may be profitable today, but the purchaser is buying tomorrow's earnings. For that reason, owners thinking about eventual value should regard their lease as part of the architecture of the business rather than merely another monthly expense. Make yourself progressively less important.
There is a paradox in building a valuable business. The founder may have created the restaurant through extraordinary personal effort, yet one of the things that can make it more attractive to a purchaser is the extent to which it no longer needs that extraordinary effort. That means developing management. It means documenting systems. It means ensuring important commercial relationships belong to the business rather than only to the owner. It means maintaining proper employment, supplier, licensing and financial records. It means understanding who owns the brand, website, social-media accounts, recipes and other intellectual property.
It means asking periodically: Could somebody else take over this business and understand how it works? Build to sell — even if you never sell None of this means that every restaurant owner should be preparing to sell. Quite the opposite.
A restaurant that has reliable financial information, good management, documented systems, secure tenure and less dependence on its founder is probably a better business for the existing owner to own. “Building to sell” is therefore not really about putting a restaurant on the market. It is a way of thinking about the quality of the business being created. An owner who begins this process five years before selling has options that an owner who begins five weeks before selling simply does not have.
Management can be developed. Financial reporting can be improved. Owner dependence can be reduced. Contracts can be regularised. Lease issues can be addressed. Systems can be documented. And the restaurant can gradually move from being principally a source of income for its proprietor to being an asset capable of generating sustainable earnings for another owner.
That ultimately leads to three deceptively simple questions: What does the restaurant earn? Can those earnings be demonstrated? Will those earnings continue when the present owner leaves?
The answers may tell an owner more about the eventual value of the business than the amount originally spent creating it.
________________________________________ Laughton Appollis is a Cape Town commercial attorney and director of L. Appollis Attorneys Inc. The firm specializes in the confidential sale and acquisition of established restaurant businesses. Owners considering an eventual sale—or simply wanting to understand how a purchaser might view their business—are welcome to contact Laughton for a confidential discussion. L. Appollis Attorneys Inc. 083 274 7769 lappollis@lappollisattorneys.com
Subscribe to our Newsletter
Subscribe to receive our newsletter and free high value information pages