This stage is where we get everything prepared for dealing with enquiries and work out what the sale price of the business is going to be.
The preparation stage in my opinion is the biggest chance you have to make the sale as easy as it can be for yourself, this stage can also make a big difference in the time that you spend on the market.
You are probably aware that in the current market, there are a lot of other cafes for sale, most buyers are typically looking at several businesses at the same time. If you are not ready to deal with enquiries or if you do not have the answers to the most common questions ready to go then you are risking losing your buyer to another business.
When it comes to valuing your business then it is a fine line, if you undervalue the business then you will stand the chance of walking away with $10K – $20K (or more) less than you deserve. Go too far the other way and you will find that you get little or no interest from the market.
The old way of pricing cafes and then adding some on to allow for fees and negotiation simply does not work in the way that it used to. Buyers have never had more information readily available and you need to price the business correctly right from the start.
If like most people you are concerned about keeping the sale as confidential as possible then the preparation stage can also help. It’s pretty simple really, if you are priced right you will get more enquiries. If you have all of the information that buyers are likely to ask for ready then you will be able to move them through the process quickly.
The combination of these two things being done properly is going to mean that you stand the best chance possible of reducing your time on market, this will help you to reduce the chance of staff, suppliers and customers finding out that you are selling.
In summary, when you get the preparation stage right you will be confident that you are priced right and that you have everything ready to be able to deal with buyer inquiries quickly and efficiently.
So what does the preparation stage involve?
Document preparation
I find it quite amazing how different buyers look at cafes in different ways when considering the purchase.
Some people are completely focused on the financials, some get wrapped up in the location, some on the décor, and the smart ones get obsessed with the lease.
You need to be prepared to deal with all of these areas and if you work through the previous stage as well as this one you will find that the process will also help you to have important information front of mind.
To make it easier for yourself to share information with buyers you can use a cloud storage system like Dropbox or Google Drive to store all of the information that buyers are likely to ask for.
Having everything in one place like this will mean you can easily share multiple files quickly and this will save you a lot of time.
Some of the most important information to have ready is:
✅ A soft copy of the lease.
✅ A copy of the liquor license.
✅An inventory of the fixtures and fittings
✅A schedule of employees
[TIP] We actually build a lot of the information from the fours points above into the business profile and/or adverts to answer the questions early on.
The other key benefit of gathering all of this information is that it is going to help you with the process of valuing the business.
What is your business worth?
As mentioned above this part of the process is crucial to get right so taking some time here to make sure that you have not missed anything will really pay off.
It is not really possible to go into all the detail of this process in this post, I am considering running an online workshop to go through this properly, if this is something that might interest you then please let me know in the comments. If there are enough people interested I will put something together.
The general “rule of thumb” with a (smaller) food business is that the value will be 1 -3 times the annual net profit of the business.
Whilst this sounds like a fairly basic method of valuation there are a number of factors to consider.
The actual net profit of the business will need to be adjusted for “add backs”, these are expenses that may appear in the P&L but may either be one-off expenses or may not relate to the running of the business.
Examples might be:
- Motor vehicle expenses
- One off equipment purchases or repair costs
Once you have accurately calculated your annual net profit then the amount that you multiply that figure by will be affected by the following factors (in no particular order)
- The current market.
- Your Lease terms.
- How established the business is.
- Your location.
- How many days/hours do you trade?
- How much competition do you have?
- Local infrastructure plans.
- Your involvement in the running of the business.
- The quality and condition of the fit-out.
- The inventory of fixtures and fittings
- The future growth potential of the business.
Some of the points above will have more impact on others in relation to how much they will push you up or down that scale of the multiple.
The current market is a good example of this, if you look at trying to sell for a multiple at the level it was 5-6 years ago (or even less) then you will most likely be in for a nasty surprise. The current market value can be gauged by talking to brokers or industry professionals who are dealing with similar businesses.
A word of caution, as with the real estate market the practice of “buying listings” goes on in the brokerage world too. This is when a broker will effectively tell you what you want to hear in relation to the selling price in order to get your listing. Be careful not to give away too much early on and ask for information about recent similar sales.
Your lease is also going to play a big part in how far you can push the multiple, if you have a long-term with reasonable increases and a reasonable bond you can expect to push for a higher price. By contrast a lease with a demolition clause is going to significantly reduce the asking price.
This all comes back to the principle of return vs risk, buyers want to know that they are going to have enough time to get a good return on their investment. It typically works that the higher the perceived risk than the lower the price. With this in mind it seems like a good opportunity to revisit the last post and the first suggestion – check your lease!
As I am sure you will appreciate there is more to this than we can squeeze into a social post but I hope this gives you a better idea of what you need to consider during the preparation stage.
Look out for the next post where we will cover the advertising, marketing and selling stage.
In the meantime if you have any questions about anything in this stage feel free to post them in the comments below and I will do my best to answer them for you.
