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Restaurant acquisition made simple
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Opportunity is knocking, are you ready? In the past few years, we have seen increasing numbers of store transfers in the restaurant industry. Purchase and sale of locations between franchisees due to market consolidation, retirement or succession plans in effect, and divestiture of corporate stores by franchisors is driving this activity. In this article, we will discuss some of the common questions that come up when considering restaurant acquisition.
How much should I offer?
An appropriate price depends on the strength of the brand, stability of market, and sales history. The price should be based on a multiple of annual EBITDA – earnings before interest, taxes and depreciation/amortization. A stable brand in a good market, with positive sales trends should command a price in the range of 4x to 6x EBITDA. In some cases, a purchaser may want to average out the past few years of EBITDA to determine a price.
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What if the EBITDA is low due to the seller’s operating/accounting practices?
There may be some expense add-backs to consider when evaluating the financial statements. Sellers may include personal expenses such as cars or travel, or they may not be realizing the operational efficiencies that you expect to achieve. Create a pro-forma income statement based on actual (or modestly improved) sales of the location. Remove the excess expenses and make the assumption that you will achieve half of the operational efficiencies you think can be achieved. Benchmark your other existing restaurant units if the acquisition target is under the same brand. For example, if an existing location you own has a COGS of 28 per cent, and this location reports 32 per cent, assume 30 per cent is realistic. Ensure that you do account for a personal salary and management fee going forward. This adjusted EBITDA can be used for the business valuation calculation to make an offer.
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Should I offer to make an asset purchase or a share purchase?
Typically a share purchase commands a lower purchase price due to tax savings for the seller. It can also be advantageous for a purchaser from an accounting perspective to continue any tax loss carry-forwards, however there needs to be additional due diligence in investigating all assets and liabilities of the business. Many buyers prefer to start with a clean slate and go with the asset purchase or bulk sale, and usually this is easier from a legal perspective and if financing is being sought. Discuss both options with an accountant before making an offer.
How much can I finance?
A lender that understands the restaurant industry and specializes in cash- flow based lending might go as high as 85 per cent financing of the purchase price, provided that the economics make sense. But note that your existing businesses will be reviewed as well and they should be stable and performing. The loan requested should be based on a multiple of EBITDA, and the store should be able to achieve a comfortable fixed charge coverage ratio or debt service coverage ratio of 1.20 x or higher. This means that annual earnings cover projected annual debt service with a 20 per cent buffer.
Can I use an existing store to come up with the equity?
Yes, if you are debt free or under-leveraged on an existing unit that performs well, you should be able to work with a lender to structure a refinance of the existing store’s debt with a cash-out component for the acquisition. You may be able to achieve 100 per cent financing for the deal if you have one or more strong existing units that can be pledged as collateral.
What else should I be thinking about?
You need to know the future obligations and needs of the store. Review the lease agreement to determine the rent escalations, expiry date and renewal provisions, and decide whether to re-negotiate these terms with the landlord upfront. You should also find out what the renovation needs are from the franchisor, get both a timeline and ballpark budget. Any financing you get will be sensitive to these dates. You should also be working on a management plan and think about who will run day-to-day operations at the acquired store. Ask the seller for bios or resumes of the existing employees to see who would be good resources for your team.
About the author:
GE Capital Canada. Visit: www.gecapitalsolutions.ca/en/
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