Food and Drink - Spring 2014 - 11

successful sale

Food and beverage costs are obviously major expenses for restaurants
and buyers will want to see that these
costs align with vendors' reports.
Restaurants don't keep significant inventory on hand. Therefore, food and
beverage purchases will be close to the
cost of sales.
Labor costs are another significant
expense, so it's important that these are
consistent with third-party payroll reports. Similarly, facility costs should be
reconciled to lease agreements.
These are relatively simple, yet extremely important steps for sellers to
take before the sales process because
buyers undoubtedly will have done their
homework. Sellers should be prepared
to explain any significant discrepancies.
Buyers will be on the lookout for red
flags, such as expenses or payments unrelated to running the operation.
3. Know what's driving the numbers
Sellers need to understand what revenue and cost numbers really represent. Are a handful of stores driving the
high or low margins? Are certain locations dragging down the numbers?
Buyers will want to see the figures
for each store, so be prepared to provide same-store sales analysis year
over year. They will expect there to be
some winners and losers, but they will
want to know that going into the deal.
Moreover, as a seller, you need to understand why some stores consistently
out-perform others. Is it a simple location issue, or does some other factor
play a role?
Regardless of what you learn during
this process, it's critical to have answers and explanations to share with a
would-be buyer rather than being put
on the spot without one.

This information will make the sale
process go much smoother.

customer expectations or franchisor requirements after the acquisition?

4. Store changes
Store openings, closings and remodels
play a significant role in negotiations
and future cash flows of a business, so
it's important to understand how to normalize for these factors.
For new stores, when did the store get
to the optimal profit level? For example,
if a new store earned only $100,000 during the past fiscal year due to its recent
opening, but is on its way to earning
$200,000 annually, you may be able to
request credit for that higher run-rate.
The same is true for stores that have
been remodeled. A store may have a
history of strong sales, but earned no
profit for several months due to construction. Sellers will want to add that
profit back and normalize for it.
Buyers will look at all the stores that
have closed, since they will not want to
give the seller credit for closed stores'
earnings. For example, a location that
burned down and was never rebuilt.
Historical profits from stores that no
longer exist should be excluded from
normalized earnings.
Remodels are a big part of maintaining and growing store foot traffic and
sales, especially in the quick-service
restaurant and fast-casual sectors.
Some companies have very clear plans
delineating the cost of a certain level of
remodel and the sales impact it will
generate over a specific period of time.
However, updating restaurants requires major capital expenditures and
buyers will be very conscious of the remodel schedule.
Has the seller updated stores as expected or are they overdue? How much
will need to be spent to keep up with

5. Prep your paperwork
It's important to have current and accurate financial and legal records. A surprising number of small business transactions fail because the financial statements do not confirm the owner's income, operating expenses and future
earnings potential.
Organizing the following information
will start the sale process off on the
right foot:
> Monthly P&Ls and balance sheets;
> Detailed trial balances;
> Bank statements to support revenue;
> Reconciled vendor reports to confirm food, beverage and labor
costs; and
> Leases to account for any control
provision changes that may be triggered and to support rent costs.
Also, don't overlook franchise agreements, if applicable. A buyer will compare franchise, royalty and advertising
expenses to the franchise agreements.
Large multi-unit franchisee systems require consent from the franchisor for
any sale, so make sure to take that into
consideration as you think about
prospective buyers.
Sellers would be well-served to consider these five steps in undertaking a
due diligence process before hanging
out the "for sale" sign. The better they
understand, document and explain
their own business, the more likely they
are to close a successful deal.
Wade Kruse is a partner and southeast
transaction advisory services leader for
Grant Thornton LLP He can be reached
.
at wade.kruse@us.gt.com.
food & drink * spring 2014 * www.fooddrink-magazine.com

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Food and Drink - Spring 2014 - Cover1
Food and Drink - Spring 2014 - Cover2
Food and Drink - Spring 2014 - 1
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