How to Prepare a Café for Sale.
Running a cafe cannot really be compared to running many other businesses. From the outside it can look like a dream lifestyle business but for many people that’s not the reality. The first cafe that I setup and run for 11 years certainly didn’t improve my lifestyle in the early stages!
There are many things to think about when selling a cafe and this article takes a quick look at how to prepare your cafe for sale.
With all the blood sweat and tears that you’ve put into running your cafe during the time that you’ve owned it it’s really important that you sell for the right price and get a fair reward for all of your hard work.
During the time I have spent building up and selling cafes I learnt a lot of valuable lessons. I soon realised that whilst you can make a good living running a cafe the real money is made by increasing their value and selling them on.
It’s no secret that a business which is well prepared for sale generally sells quicker and for more money. Organisations such as the Exit Planning Institute suggest that a business with a well planned exit can be worth as much as 50-100% more than an unprepared business.
In my experience I have found that this exit planning process works just as well with cafes and I have developed a system that is designed specifically for food businesses.
However you decide to proceed with the sale of your business, if you do nothing else then look into how you can best prepare your cafe for sale. Even if you went through the process and increased the value by 20% imagine the difference that money could make to you.
Planning
When thinking about selling your cafe the first phase is a planning phase. During this part of the process, you will consider many different things to really make sure that now is the best time for you to sell.
Some of the key things for you to consider during the planning phase are:
Tax implications – If you have a good accountant then it’s a good idea to sit down with them and let them know of your intention to sell. Make sure that you cover your personal and business tax situation. Make sure that you’re fully aware of any capital gains tax or personal tax liabilities that may arise from selling the business.
If you don’t have a good accountant this is a great time to find one! Getting the right advice at this point can save you a lot of money further down the track.
Timing – Is now the best time to be selling the business?
If you are anything like me you could well have two answers in your head right now. The emotional side of you which feels the pain of the long hours, staff issues customer dramas and so on may well be saying SELL but the business side of you maybe well saying hold on.
Only you are going to know the answer to this question but, try to make the decision more with the business side of you than the emotional side. If you feel that there is an opportunity to improve the situation that you’re currently in (and therefore the performance of the business) then you should seriously consider taking action to achieve this.
If you don’t have to think about this too much then you know the time is right and you also know that you’re not going to look back in a couple years’ time and regret the decision you’ve made now.
Legal matters – The early stages of this process a good time to sit down with your lawyer and make them aware of your plans to sell. It’s good idea to check the current lease to make sure there is a good term remaining or at least an option to renew. As these matters generally take quite a while it’s good to get this underway early on.
Valuation – Do you know what the business is worth in the current market?
It’s good idea to take advice at this stage from professional broker, agent or valuer about what the business may be worth. There are many factors that go into valuing a cafe and although there may be similar business is listed for sale at a certain price range this doesn’t mean that’s what they are actually selling for. Brokers and valuers will have access to industry information including recent like for like sales, this will give you a much more accurate idea of what the business may actually sell for.
If you go through this part of the process and find the business is not work maybe as much as you expected then don’t despair you have plenty of options to improve this. Increasing the value of cafes is a big part of what we do so feel free to contact us or use some of the free resources on our website.
Once you are confident that the timing is right for you to sell then you can move on to the preparation phase.
Preparation
The preparation phase is definitely the part of the process which requires the most work, on the plus side it’s also the part that can add the most value to the business and really help you to sell quicker.
During our six weeks to sale program we work with our clients through a step-by-step process to get everything that a buyer will need prepared. Having all of this documentation prepared makes the whole process much smoother and less stressful for you the person selling and it also helps to reduce risk in the buyer’s mind. In my experience, reducing risk has had the biggest effect on achieving higher multiples when selling food businesses.
Imagine a buyer looking at your cafe at the same time as another cafe that makes about the same profit, the same turnover and is in a similar location. If you’re able to present all the information that the buyer needs (as well as things they may not ask for) you are sending a clear message that the business is well organised, structured and systemised. This will help to build the buyer’s confidence that the business will continue to perform well even after you’ve gone and therefore reduce risk in their mind.
If you’re having two scrabble around and put information together after somebody has shown interest it’s going to tell them that the business is a bit unorganised.
Once a buyer senses risk of any sort one of two things usually happens, firstly they may begin to question things more which can cause the whole process to slow down or even fall through. Secondly the buyer will start to see an opportunity to negotiate on the price, it’s our job to make sure that neither of these things happen.
As mentioned previously the preparation phase involves a lot of different pieces of information being drawn together, I won’t go through them all in this article but some of the important ones are as follows.
Documentation – As mentioned previously, having all your documentation at hand is going to reassure any buyer that the business is well organised. Ideally you want to keep all your documents relating to the sale in one place where it’s easy to share, this could be something like Google docs Microsoft OneDrive or Dropbox.
Some of the key documents that we provide our clients with templates for include, inventory, stock take, operations manuals and policies manuals etc. Other documents that can be stored on the same drive are things like a copy of the lease, supplier agreements and sample invoices etc.
Staff information – Again, this information can be stored on the shared Drive and the templates that we set up include things like staff contracts, job descriptions and rosters. I’ve always also included a short bio about each staff member as well which helps the buyer get a better idea of the team and may help to reduce risk. A lot of buyers will worry about staff leaving and anything you can do to help prevent that worry will be a benefit.
Financials – If you talked to your accountant during the planning stage then hopefully they will have given you the heads up about what needs to be done to get the books in order for the sale.
If there is one area where the sale is going to slow down, stall or fall through then it is if the buyer’s accountant or advisor find something in the figures that they don’t like. The more work you can do in the front end to make sure the books are all straight and that the figures add up in relation to the valuation the better.
It’s good idea to have up-to-date profit and loss statements, balance sheet and tax returns (you may be asked for up to 3 years) and I would suggest putting all of this information on the shared drive in a folder called “financials “.
Business as usual – This part covers a lot of different areas but is basically making sure that from the outside there is no sign of weakness and the business looks to be running as it always has.
When I’ve looked at buying businesses if I noticed things like negative reviews, lack of activity on social media, outdated website etc I generally saw that as a sign that I could negotiate a lower price. To a buyer these signals suggest that you might be a bit over it or have lost interest and may therefore be willing to accept a lower price.
As hard as it is at times, try and keep the momentum up during the sale process and the preparation phase and run the business as if it’s not for sale.
This is by no means all that you need to do during the preparation phase but should give you a good starting point.
Once you feel that you are fully prepared it’s time to move on to the Decide Phase.
The Deciding Phase
The deciding phase – In the final phase you have a couple of big decisions to make.
The first of these decisions is whether or not you still wish to go ahead with the sale of the business.
This might seem like an odd thing to say at this stage but I have found that a lot of people I work with decide to keep their business after they’ve been through this process.
By spending time organising systems, processes, documentation and so on the business becomes easier to run, some of the stresses are gone and there is clearer direction. I’ve found myself in this situation, it’s almost like you press the reset button and start it all over again.
If you find that you now want to keep the business a bit longer then make sure you keep updating all the information you put into the shared drive. By doing this your business will be ready to sell at any point and will be worth more than competing businesses and be much easier to sell.
If you’re still committed to the sale process then the next decision is whether you will sell the business yourself or sell through a broker.
If you going to sell through a broker it’s a good idea to bring in at least three different ones to get a feel for how you might work together. It’s also good way to cross check the valuation of the business and to get feedback on the current market, there could be external factors that your unaware of that may influence the price.
Naturally the commission charged on the sale is an important factor, I have been amazed over the years how much this fluctuates from one broker to another.
Advertising costs are also something else which seems to vary quite a lot, on the last business I sold I had advertising quotes from brokers ranging from $900 to $3,000. The interesting thing I found with this was that all the brokers also told me what a strong database they had!
I would expect to pay cost for advertising and no more, check with the brokers where they will be advertising and ask for a breakdown of costs for each area.
If you decide to sell the business yourself then you need to consider writing your advertising copy and information memorandum and think about how best to filter enquiries.
One of most time-consuming areas of selling a business can be dealing with enquiries from people who are not serious buyers. One of the things that we do on the six weeks to sale program is prepare non-disclosure and confidentiality agreements that can be sent out in the early stages to help filter out any time wasters. These documents also cover you legally should any confidential information be disclosed.
At the same time the confidentiality agreement is sent out we generally ask buyers to complete a ten question survey that gives us much better idea about their current situation. For example, are they currently operating another business? Do they require finance? What time scale are they hoping to work too? and so on.
This is a very useful process firstly to qualified buyers and secondly if you have more than one enquiry it gives you some information on each buyer but you can use to decide who might be the better option for the business. You can easily create these email questionnaires for free in applications like Typeform.
Once you have a buyer interested in the business with the document system you have organised it will be easy for you to share the required information to allow the buyer to carry out their due diligence.
When you do receive an offer on the business you will need to draft a heads of agreement document that instructs the legal representatives for each side about the transaction.
As the deal progresses you will then need to co-ordinate with your lawyer and potentially the managing agent for the landlord as well.
When dealing with a business sale yourself as well as running the business this part can be challenging at times. With your lawyer, the buyer’s lawyer and the lawyer for the landlord involved in the transaction without some gentle encouragement the process can take a very long time. This is where brokers earn a fair bit of their commission and it can help the transaction to move quicker.
As with the previous section this really is an overview of the process and there is more involved which cannot all be covered in this document.
Our website contains a lot of useful information for people selling cafes and I am always happy to answer any questions that I can by email.
Learn more about how to sell your cafe without paying commission here https://www.gsehospitalitybrokers.com.au/sell-my-cafe
