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You are all invited to tour the newly finished We Sell Restaurants offices at 101 Centennial Olympic Park Drive this Saturday, July 10 from 2 – 4pm. Share light refreshments and take a tour of the completed facility. You can also join the fun as Atlanta’s only radio show dedicated to all things “foodie” Dishing with Donna broadcasts live from the offices. Meet Donna Rodriquez, the entertaining host of Atlanta’s only radio show dedicated exclusively to food and dining. She broadcasts on AM920 each Saturday from 2pm to 3pm and is frequently joined by Eric and Robin Gagnon of We Sell Restaurants.
Archive for the ‘Franchises’ Category
You Are All Invited To Tour The Newly Finished We Sell Restaurants Offices
Thursday, July 8th, 2010Posted in Business Broker News, Business Brokers, Business Brokers Association News, Business Brokers Associations, Business Brokers News, Business Brokers Wanted, Business owner, Buying a Business, Franchises, Restaurant | No Comments »
What is Goodwill?
Friday, July 2nd, 2010An important element of value, when it exists, is goodwill. The IRS defines goodwill in its Revenue Rule 59-60, stating, “In the final analysis, goodwill is based upon earning capacity. The presence of goodwill and its value, therefore, rests upon the excess of net earnings over and above a fair return on the net tangible assets. While the element of goodwill may be based primarily on earnings, such factors as the prestige and renown of the business, the ownership of a trade or brand name, and a record of successful operation over a prolonged period in a particular locality, also may furnish support for the inclusion of intangible value. In some instances it may not be possible to make a separate appraisal of the tangible and intangible assets of the business. The enterprise has a value as an entity. Whatever intangible value there is, which is supportable by the facts, may be measured by the amount by which the appraised value for the tangible assets exceeds the net book value of such assets.”
Posted in Business Brokers, Business owner, Buying a Business, Franchises, Selling a Business | No Comments »
Considering Entering The World Of Franchising?
Friday, July 2nd, 2010If you are considering entering the world of franchising, an important consideration is assessing the value of the business. All of the following factors either affect or help determine valuations of typical franchise operations:
1. Franchise Agreements:
Typically, franchise agreements can cover a period of twenty years; sometimes with added options. In most situations where a franchise unit has fewer than ten years remaining on the agreement (and options, if any), the value would diminish proportionately.
2. Territory Exclusivity:
Many franchisors do not, as a matter of course, provide an “exclusive” to franchisees within a given territory. More commonly, however, the franchisor will offer a franchisee limited protection for five years, during which time only he or she will be allowed to expand operation to additional units. Even limited protection can be assigned some value; any current territorial rights may have additional — and significant — value.
3. Business Hours
Potential franchisees should consider operating hours when assessing the value of a business. Business in general, and franchise operations in particular, are staying open for increasingly longer periods — some operate 24 hours a day, seven days a week. Locations in certain areas — city centers, bus stations, train depots — may open for shorter hours and fewer days. Since most business owners/managers would prefer the less demanding hours of operation, a premium value will be placed on these units.
4. Location:
This is the most obvious variable. A franchise operation in a suburban or small-town setting has a higher value than one in an inner-city or high-crime-rate area, regardless of other similarities (rent, sales volume, etc.).
5. Cash Flow:
Surprisingly, profitability may not necessarily be the key factor in valuing a franchise operation. A demonstrated, well-documented cash flow can definitely add value to the unit; however, the smart buyer will also look at other variables, such as unusually low food costs or labor costs, sales history, and potential for growth or improvement under new management in determining the overall value. Extreme situations provide the obvious exceptions to importance of cash flow: where the cash flow is extraordinarily high, capitalization of earnings becomes a truer method of valuation; where the franchise is actually losing money due to inefficient management, there would be some reduction in value.
6. Leases:
Taking into consideration market variation, the typical rent will be set at approximately ten percent of retail sales. Modifications in value could result if the lease does not cover a period of at least ten years.
7. Remodeling:
Many franchise agreements will require units to be refurbished within a certain number of years (ten is typical), with the franchisee bearing the cost. Since these costs typically fall within a range from $75,000 to $150,000, potential franchisees should pay particular attention to where the operation stands on this timeline. For example, a unit due for remodeling in a year or less could be reduced in value by a fair percentage of the cost of the improvements. The total cost would not be deducted from the value, since these improvements would also be expected to improve business anywhere from five to twenty-five percent.
Posted in Business owner, Buying a Business, Franchises | 1 Comment »
Buying a Restaurant in a Major Market: Making the Dream a Reality
Friday, July 2nd, 2010An expert restaurant broker fields hundreds of inquiries. Here’s how you can make sure you get access to the best listings first.
If you are a first time restaurant buyer you may be searching online for the latest restaurant listings. Seasoned professionals will tell you that this process is referred to as the Restaurant Buyer Internet Dating Approach. As a new buyer you are most likely confused after searching dozens of sites and expressing interest in restaurants for sale. Before you realize it you are connected with 7 different brokers on different websites with different listings.
Although it may appear that you are doing research anonymously the chances are you will be hindering your chances of getting the best listings by searching endlessly for everything from Irish pubs to fine dining Italian restaurants.
When you search online for restaurant listings you may not realize it but the same broker or firm may represent multiple restaurant listings. In most cases, when you make an inquiry it is getting sent to one source who will immediately recognize that you do not know what you are looking for and you have not pre-qualified your interests. To the broker the Restaurant Internet Dating Approach will look something like this:
- Joe the Buyer Inquiry 1: I am interested in this nightclub which is generating an income of $300,000.
- Joe the Buyer Inquiry 2: Please forward information on this sandwich shop which is on the market for $30,000.
- Joe the Buyer Inquiry 3: Please send me information on this $1.6 million fine dining French restaurant.
When you look at this scenario do you see what the broker sees? The inquiries are so broad in price point and the operations are so varied, it clearly indicates that the buyer does not know what they want and the broker will not take you seriously.
Instead, you should be asking yourself exactly what kind of restaurant you are looking for, what kind of restaurant will take care of your family, and what you are willing to sacrifice in terms of money, time, and lifestyle, to buy the restaurant.
You must have these questions answered and then use your defined lifestyle, financial, and business requirements to focus on restaurant listings that meet your criteria. A lot of restaurant buyers think they are starting out looking for restaurants that meet their personal requirements and then they fall in love with a restaurant that is exquisite looking but not earning any income. As a general rule, the fancier restaurants that are shiny and new are usually restaurants that exceeded the budget capital during construction and are not delivering a return on investment. What’s more is that there is zero capital left to cover the marketing and make the business grow. You can usually sniff out these restaurants by the wording in their listings such as “Stunning construction. Owner spent more than $600,000 to build. Seller will sacrifice for $300,000.” Basically this is a sure sign that the restaurant is not making any money.
Instead you should look for a business that looks a little worn in appearance but may be generating a whopping 2 million dollars in sales. The equipment will look worn from continued use and the bar may smell of alcohol, cigars, and cigarettes however, the books will be showing a gross profit margin that exceeds 60 percent. The owner will be pulling in net earnings that exceed one quarter of a million dollars and everything will be clearly defined without any comments like “It may have a future.”
The moral to the story is that you must define your requirements so you can search for the restaurant that meets your criteria.
Eric Gagnon is President of We Sell Restaurants and wesellrestaurants.com, one of the nation’s leading restaurant brokerage firms. He is designated as an industry expert and frequently writes and speaks on the topic of restaurant brokerage.
Posted in Business owner, Buying a Business, Franchises, Managing a Business, Restaurant | No Comments »
Buying Restaurant Franchises: Wait for the Right Deal to Enter the Market
Monday, May 24th, 2010The hottest restaurant franchise delivers more hype than income to most buyers. Read this article to get the exact timing on buying a franchise restaurant.
Buyers for a restaurant franchise are often trying to avoid the risk posed by start-up restaurants. According to one study, that’s not likely to happen since 57% of all franchise restaurant start-ups fail by the end of year three. That was the finding of Dr. Parsa, an Ohio State University hospitality-management professor who authored a study on restaurant failure rates. Franchise start-ups only minimally outperformed independent start-ups. That doesn’t mean you shouldn’t operate a restaurant franchise if you want the systems and continuity of a franchise, it means you should read this article to understand how to get a money making restaurant franchise.
If you want to buy a franchise, you’re better served to focus your efforts on mature establishments with a track record. That means profit and loss statements that show earnings for consecutive years. Three year-old restaurants with established history are a safer option than starting a franchise restaurant from scratch. If you know all that and still want a franchise, then use our established We Sell Restaurants Franchise Rule of Three to get the best deal and buy a franchise restaurant at the right time. Franchise restaurants are re-sold every day and can represent a bargain to the savvy restaurant buyer. If you concentrate on these three elements you can get the most franchise for the least money.
A look into the life cycle of the typical franchise begins with the original owner. He or she builds the store from the ground up in a super location spending up to $400,000 in initial costs. Buoyed by stories of restaurant franchise millionaires, he’s convinced he has a winner on his hands. Never mind that he’s paying $8000 a month rent, 10% franchise fees and his average ticket for sandwich is $7.95, it’s the sizzle not the substance that has him hooked. A year into operations he calls an expert restaurant broker to sell and wants to know who will give him $400,000 for his business. Unfortunately, no one will. He goes on the market at $149,000 if he has a good location and up-trending franchise concept.
The cycle continues when a new restaurant buyer acquires the business. He has paid less so his cost of debt repayment is much lower. The sales line has begun to pick up so if he works diligently, he may get this operating profitably in a year or two. All the while the franchise has received a percentage of sales of every dime generated by the business while the unlikely owners have been losing money. After a year or two in the business, owner number two has had enough. He’s operating in the black but when he calculates his time, he’s making minimum wage for the time invested. He calls us to list and that’s when the pricing is right. By now sales have matured and costs have come into line. It goes on the market for less than three times earnings and the savvy restaurant buyer picks up a deal.
Since it’s now priced based on an income valuation method, the pricing is no more than three times earnings on the books. Sales are now covering fixed cost and more so it’s operating in the black. The third buyer now has a real franchise deal on his hand. He gets every benefit from the sale and there are quite a few. First, he gets a good brand. Secondly, top line sales now satisfy fixed cost. Lastly he has a fair cost of entry. Buyer number one and number two took a bath but buyer number three is dancing all the way to the bank. That’s why everyone seeking an Atlanta franchise restaurant for sale should follow our Rule of Three.
Rule Number One: You should be the third (and hopefully final) owner of the franchise restaurant.
Rule Number Two: The best deal is found near the beginning of year three. There’s still room to grow the sales but it’s priced based on current (still developing) earnings.
Rule Number Three: No matter how “hot” you think this restaurant franchise is or how much you think you’ll make, the proof is in the numbers. Don’t pay over 3X earnings. Ever. The income valuation method should still be used.
Eric Gagnon is a designated industry expert in Restaurant Sales, Restaurant Valuation and Restaurant Business Brokerage. He is a frequent writer and speaker on the topic of restaurant brokerage and restaurant valuation. He is the president of We Sell Restaurants and www.wesellrestaurants.com an online resource for buying and selling restaurants in Atlanta, Georgia and across the southeast.
Posted in Business owner, Buying a Business, Franchises, Restaurant | No Comments »