When a restaurant business is failing, it is common to evaluate the assets when estimating the selling price. The most common way this is achieved is by engaging an auction company that is experienced in liquidating restaurant furniture and equipment or possibly an experienced equipment dealer. Although this method is common, I believe it is only accurate when a restaurant business has lost its lease. Generally, this achieves the lowest possible selling price.
During the early 1990s I noticed a trend in the Denver restaurant resale market that caught my attention. There was a dramatic increase in the number of restaurants that sold and converted to other concepts rather than closing. Considering our company has always been able to sell under-performing restaurants, this caught my attention. I knew if I could identify the reason and quantify it, this would translate into an increased number of successful transactions.
The following is what I believe influenced the market at that time:
- The average tenant improvement (on a dollar per square foot basis) for a full service restaurant was over $100 PSF. This did not include the furniture, fixtures and equipment.
- The local commercial real estate market was hot and restaurant locations became scarce; competition was fierce. In general, it became a tight retail market and rental rates were increasing.
- Landlord contribution tightened up and independent restaurants could not afford to lease restaurants from a “vanilla or grey shell”.
Identifying what influenced the market was the easy part, quantifying it would be much harder. Unfortunately, I spent many hours “over thinking” the process and finally realized it was obvious. I analyzed our most recent transactions and during this period, it was not unusual for a purchaser to pay up to $40 per square foot for an equipped, operating, yet failing restaurant. In some situations, the dollar per square foot paid was significantly higher if a long-term under-market lease was in place. Additionally, extraordinary assets such as a high growth location, niche market and other factors influenced the selling price. The most significant fact was that every restaurant sold if there was a long-term (market or below) lease in place.
When I finally realized I was making it much more difficult than it needed to be, I developed a simple Conversion Value Method. Using our transactional database I assigned the highest possible selling price per square foot for each restaurant classification. I developed a scoring system to evaluate the physical plant, assets (including FF&E, lease, licenses etc.), location and ease of conversion. The result is applied to the highest possible selling price per square foot resulting in an accurate Conversion Value.
Although it seems very simple, few brokers have the experience or data to use this method successfully and it can be a very dangerous. I have used this method effectively for over ten years and the highest price per square foot has changed with the economy and also with the desirability of the classification (full service, fast casual, specialty etc.). In Denver, we currently have a shortage of second-generation restaurant space, which is having a direct impact on conversion sales. We are not back to the highest values yet but could be in a short period of time – especially in urban niche trade areas.
How to use this information -If you own a restaurant or bar that is losing money or under-performing now might be the best time to sell. Sanborn and Company is a Colorado leader in assisting and representing people buying restaurants, bars, liquor stores and hotels. Our Full Service Success System™ goes beyond completing a successful transaction by helping clients master operational best practices. We are experienced restauranteurs who have learned the business from the bottom up. Let us know how we can help, call us today at 303-220-7919 or request an appointment online.
Shawn Sanborn, President of Sanborn and Company is a recognized industry expert, speaker, expert witness, restaurant owner and considered one of the top restaurant brokers in the country.