You’ve invested the money, blood, sweat and tears into a fine pizza business. Now it’s time to cash out.
But be prepared. Selling your pride and joy may be less profitable than you think.
“We’ve found that virtually all business owners who are ready to sell think the business is worth more than it actually is. It’s a funny little law of how things go in the sale market,” said Bill Miller, president of BizBuySell.com.
But just because a business might not be worth what an owner thinks it is, that doesn’t mean he can’t get a fair price. If all the pieces of the company puzzle are assembled in the proper order, the owner should profit nicely from a sale. And experts say getting the business positioned for sale is more easily done with the help of a broker or intermediary.
Bob Slingerland runs the business valuation and brokerage arm of Prudential Interwest Business Consultants in Salt Lake City, Utah. Slingerland said the valuation-and-sale drill is largely numbers-driven. “The numbers never lie, and I can pretty much tell you what a business is worth when I know some key numbers.”
If he’s approached to sell a business, he’ll conduct a limited appraisal. “In a limited appraisal, I’m looking for several factors about the business, a snapshot in time, if you will, to help me determine what it’s worth today,” he said.
Slingerland starts with a request for gross sales and seller’s discretionary cash flow (cash used for the seller’s health insurance, retirement savings, a company car, etc.) He next valuates tangibles such as furniture, fixtures and equipment, and then considers intangibles like the age of the business, whether it’s a franchise or an independent pizzeria, plus any outstanding maintenance needs.
Years of brokering, Slingerland said, have taught him several rules of thumb for business valuation. Among them:
* National franchise rule #1: “(Some franchisors) take 45 percent of the first $400,000 in annual sales, then 50 percent of the next $100,000, and then xx percent of the next $200,000 for a $700K business.” That yields a gross valuation of $320,000. “When the number’s over that, say $1 million dollars, that pizza business is a lot more valuable because all the costs go down.”
* National franchise rule #2: “Take four times monthly sales and add in your inventory.” If the operation does $50,000 in monthly sales, that’s a $200,000 gross valuation, plus ending inventory.
* Average independent rule #1: Because many independents tend to live out of their businesses, making non-business purchases through the business, seller’s discretionary cash flow comes into play. “This guy, on average, has sales in the $350,000 to $400,000 range.” By Slingerland’s estimate, the SDCF for this business could be about $50,000 to $75,000. He then multiplies that cash range by 1.5 or 2 to get a gross valuation range of $75,000 to $150,000.
* Average independent rule #2: “You also can take xxxxxxxxx percent of annual sales for smaller operations. Get over $500,000 in sales and those businesses are a lot more in demand. Get to $750K in sales, and people really want those businesses.” Have changed a little since article
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Some operations are so successful they break all Slingerland’s rules of thumb. One of those was four-unit Wasatch Pizza in Salt Lake City. “It was run professionally, sales were reported, the equipment was first rate, he had top locations, sold a gourmet line,” and he marketed it well.
Ready, set, sell
Once an operator has committed to selling the business, he needs to ensure his entire operation is in order, said Bill Eves, a broker with Sunbelt Business Brokers in Columbus, Ohio. The business should be clean, the equipment in top running order, and a basic summary of its performance must be available.
Speaking at the 2003 Mid-America Pizza, Soft-Serve and Restaurant Show in Columbus, Eves said brokers and intermediaries will lead potential buyers to look at businesses they’re representing — often without the seller’s knowledge. Such secret shopper visits help maintain the confidentiality of buyers and sellers until an offer is made. It also weeds out window shoppers.
“The intermediary allows the seller the freedom to run the business and be insulated from the tire kickers out there,” said Bob St. Germaine, another Sunbelt broker who spoke at the show. “The intermediary makes sure you see only highly qualified candidates.”
Eves said the broker/intermediary looks not only for potential buyers who could afford the business, but those who could develop some chemistry with the seller. Having the two get along with each other is crucial for many reasons, including seller financing and improving the possibility of retaining pre-sale staff and customer base.
If the deal passes muster and both parties agree to proceed with a sale, completion centers on developing a seller-led training program.
“Ongoing training is a really nice benefit of buying a franchise,” said Slingerland. “With an independent, the owner needs to stick around some to make sure the next guy knows what he’s doing. It’s in his best interest to do so.”