Friday, November 6, 2015

Know the Signs

Know the signs or lose it all

One of the most difficult tasks of brokering restaurants is informing an owner that their investment has become an "Asset" sale. An asset sale is the term used to describe a business that is negative cash flow usually ranging from $99,000 down to as low as $20,000. There are always going to be "Monday Morning Quarterbacks" but at that point opinions won't change facts. I often hear "I put $350,000 into this", there is no good news to answer that with, a buyer is looking for a positive cash flow, a good location or the potential which the seller can't sell. 
This blog is not intended to be about how to avoid getting into this situation, its intended for "You are in it already" and how to cut your losses before there is nothing left to lose.
1) Sales are slipping but not that badly: If you see a 10-15% drop in your revenue stream you need to be on high alert. First, talk to your sales reps.. Don't ask them about a specific location, you would not want that information going to your competitors right? Ask them if orders are slowing generally speaking and across the board. They will be aware if a down trend is happening in your area. If there is a downtrend then tighten up your operation and weather the storm if possible, find the leaks and plug them. Get your staff together and make them aware that it is widespread, morale is a key element in any business. 
On the other hand and this is important, if others around you are doing well and your operation starts to slip you would be wise to consider a move, a 10% slide going to 18% the next month often turns into 50% or greater quickly. People like to be where people are, they like the "Buzz". 20% less people in your place means 20% more people elsewhere and the momentum is moving away from your favor. Hoping they will return more often than not leads to catastrophic failure. 
The trouble starts:
#1)You take the "It'll work itself out" approach.
#2)You move to drastic specials where you do not make money hoping that you will become popular at which point you can remove the special and start making a profit.
#3)You collect Sales Tax but commingle those funds with operational money and cannot recover in time to Pay the Taxes.
#4)You fall behind in your lease obligations. Depending on your Landlord, he may start the eviction process after no cure in 30 days, I've seen it allowed to continue for months and payment plans arranged for when "Things Turnaround".
There are other signs but these are generally the Red Flags that time is now working against you and the longer you hold out the more options you lose.
Take #4 for example: If you are under the eviction process you cannot list, a buyer will know this information and why buy what you can take for free. I've seen operators misread this agreement to take payments from the LL as a pass to keep trying and although no one can dispute that sometimes it works out in the case of a general downtrend, if its the other more often than not the lease payments are still missed as well as the arranged "Catch up" payments. The Landlord will most likely become very aggressive at that point. Think it through carefully, if you've bought some time it may serve you best to use that time to list and sell.
I had a client that had made an accepted offer with earnest money, when we met with the Landlord to secure a new lease as part of the APA, the LL informed us that the current tenant was out in two months and had no lease to transfer. Needless to say we pulled the deal, got the earnest money back and my clients signed a new lease with the LL while the tenant received nothing.
As much as it pains me to see anyone lose their dream, it pains me more when they lose it all. If anything in this blog strikes home in your situation please reach out to a restaurant broker and sit down to discuss what your options are BEFORE you have none left.
I hope you'll include me in that conversation.
George Hilliard
"I Speak Restaurant"
The Restaurant Farm