In the past, a subsidiary of my company was a business broker, concentrating on hospitality businesses — mainly restaurants and pubs. The broking company was getting constantly inundated with requests to sell small restaurants and cafes for people. It’s pretty sad to reflect on; most of them didn’t have much to sell and we couldn’t really help them. Behind a fair percentage of the calls lies a tale of human misery.
A small business can easily become a prison
Over the years I’ve been a consultant I have come to understand that small businesses can easily become prisons for people. If you are not careful a small hospitality business can lock you into long working hours, substantial stress, little recreational time off and the inability to take holidays. You can probably tolerate this while you are young and enthusiastic, and think you’re moving towards your dreams, but what happens when you get a bit older and lose your passion to the demands of a relentless routine?
You’ve really got three choices if you want to escape:
You can try to grow your business to the point where you have a team of staff who will handle all the day-to-day routine and take a fair bit of the stress off your hands, but this requires a steely resolution and substantial use of hard won profits to install the right systems and people. It’s that hard that only a small percentage of business owners manage to achieve it.
You can to build your business and sell it for a good capital gain. Most people drive themselves along with the belief that there will be a pot of gold at the end of the rainbow. There may be, but mostly their isn’t. We value hospitality businesses by applying a multiple to their net profit. That multiple can range from between 1 x net profit – 4 x net profit, depending on the profitability, potential and ease of management of the business concerned. Multiples of 3 and 4 times net profit are rare; generally the business is worth around twice what it earns in a year. To put it another way, if you bought a business for twice net profit you would recoup the money in two years or less. It would want to be a pretty good business to have you waiting longer than this for a profit on your investment. You can’t have it both ways. If you take as much as you can out of your business and invest little back into its physical presentation or the staff who run it, don’t expect it to be worth much when you sell it. If you want an example of this, drive around the suburbs of any of our major cities looking at all the hospitality businesses you come across. I’ll bet you see plenty of run down businesses with the smell of death about them. These are the people who took their refurbishing and staff training money out of the till and put it into their pocket over many years, thinking it was profit. Now, if they want to join the 21st century, they will have to borrow a big stack of money to bring the business up to date. Most of these businesses are what we consider ‘fire sale material’ — tomorrow’s development sites.
Your third choice to get out is to take your operating profit as and when it comes then just sell your business for a nominal amount and walk away at the end. This is not an ideal choice, but unfortunately the only one that a lot of business operators have in today’s economic climate. There are a large number of businesses that have suffered declining profit over the last few years to the point where when we apply the multiplier to their net profit we get an amount equivalent to a fire sale auction of their fixtures and fittings.
Supply of businesses for sale far exceeds demand
There are many restaurants and cafes that are for sale right now. The supply over-exceeds the demand by such a spectacular amount that it is almost a total buyer’s market in some industry sectors. This is bad news if you have been slaving away in your business for the last twenty years and now want to sell up and retire.
If you want to sell a hospitality business you need to plan well ahead and make sure that you can show at least two year’s clean books to a prospective buyer. By clean books I mean accurate figures that indicate a good net profit. You may have to defer a lot of discretionary expenditure and run very lean to do this.
You can't have it both ways
If you have been pulling ‘black money’ from your business don’t expect this to be taken into account and increase your sale price. Buyers will only get finance for businesses based on figures verified and signed off by an accountant, and in this economic climate the banks are unlikely to lend any more than 50% of the purchase price of a business unless a purchaser supplies other security. This is proving a significant barrier to entry into business at present and is a major factor in the oversupply of businesses for sale.
One way or another, it is easy to get trapped in a hospitality business at the moment. The days are almost gone where you can rely on pulling a very good living out of a small hospitality business and then sell it for a fat premium when you have had enough and want to get out. Those depressing phone calls we get from tired, desperate people are strong evidence of that. I wish I could help them, but unless they have done the right things in the past, I can’t.
Caveat emptor — ‘let the buyer beware’.
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