The Sweet Spot – Timing the Sale of Your Business
This post marks the first in a new series discussing the ways in which you can add value to your cafe and maximise the return when you sell. This article discusses what an important part of the valuation process the lease is and, how it can affect how saleable your cafe is when you go to market.
All retail food businesses have a built-in clock. For some this clock sets the time frame for business growth and for others it is a ticking time-bomb. The realities of the retail food game are harsh. A profitable business on a poor lease, is a still a poor business. In this article, we explore the relationship between the length of the lease and the sale of your business.
There are two closely related moving parts. The first, is the impact your lease has on the value of your business and secondly, the sweet spot – when your business stands the best chance of achieving maximum sale price relative to the time left on the clock.
So we start with a simple reality.
A profitable business with a long lease can be sold for more than a profitable business with a short lease.
No two businesses are alike, so what value drivers are common to most successful business sales?
Answer: Profit and lease years remaining.
We will explore profitability later on in this series, here the focus is on lease years remaining, and more particularly the valuation multiples that apply to food businesses.
If you have come along to one of my workshops, or heard me talk at trade shows or industry events, you would know that establishing the correct profit (earnings) multiple for your business is crucial in planning the sale.
There are a host of value drivers and detractors that depend on the subjective circumstances of your business. The days, hours and intensity of operation, the relative skill (or not) required to produce menu items, the location and demographic are all examples of the factors you must carefully consider and balance.
Say, for example, having found that balance with your business advisors and accountants you arrive at a profit multiple of 2.6. That means you could expect a buyer to pay 2.6 years’ worth of profit for your business.
How many lease years need to be left on the clock to justify the buyer paying you 2.6 years of profit upfront ?
If you were buying would you pay 2.6 years of profit with 2, 4 or 6 years remaining ?
What if the landlord refuses to extend the lease ?
This brings home the plain truth – you must plan to sell your business before you sign the lease. Opt for a lease with a baked-in exit strategy that coincides with sales growth, projected profitability and the multiple you need to make the risk worth it. Yes, you need to value your business before you build it.
Knowing the multiple means you can make strong decisions early, rejecting sites, offers and landlords that drive the multiple down. Remember apart from a bunch of second hand equipment, all you really have to sell is the opportunity to make profit from a site for a fixed number of years. The more years left on the clock, the higher the price.
© Peter Panagiotopoulos 2017 @cafelawyer
Exit Planning For Cafe Owners – Lease Considerations
Peter Panagiotopoulos of CRAFT Legal is a leading lease and business sale negotiator who has protected the rights of food and beverage retailers for over two decades.
Known within the industry as the cafelawyer®, Peter has personally choreographed the sale of hundreds of small businesses and has dedicated his legal career to giving businesses the tools and confidence to make the right business-building decisions.
Mobile 0414 257 298
Twitter @cafelawyer https://twitter.com/cafelawyer