F&B businesses are frequently being transferred, most of the time due to the business’ inability to profit. A large sum of capital was also spent on the interior, equipment and rent deposit, which is why F&B businesses will want to sell the entire place as it is, most of the time with a take-over fee.
Shrewd businessmen are always on the lookout for a good takeover deal, and sometimes taking over an restaurant or cafe business can be profitable. Or sometimes you just want to save time and effort setting up one form scratch. In these kind of deals, the profit is made the minute you buy, not when you sell. If you have no experience in F&B takeover businesses, please pay attention to these 5 important points to lookout for when paying a takeover fee.
1. Check the Accounts. Thoroughly.
Always check the book accounts of the existing business. Are there proper book-keeping procedures and recorded transactions to refer to? I have come across businesses who do not have any form of monthly statement other than a few pieces of hand-written scrap paper. Yet they claim that they are profitable- I call bullshit.
Never take the owner’s word for it; always check their accounting books and the corresponding monthly sales statement (X/Z report), as well as expense receipts. Not every business owner is honest, and they have the added incentive to make their business look profitable, so that they can attract more buyers.
They might also have some hidden debt that you will need to make sure you don’t takeover along with the business. If the business doesn’t have clear, recorded accounts for each expense and revenue, don’t risk it. You don’t want to run into trouble with IRAS (Singapore Tax Authorities) if an audit is requested.
2. True Takeover Value
The takeover fee for kitchen equipment, interior furnishing, rent deposit etc should most of the time be at most 50% of what the owner paid for first hand. E.g, if the first-hand value of everything in the store costs $200,000 to purchase, you want to be paying less than than $100,000 for takeover fee. In fact, I typically negotiate for only 30%-40% of the firsthand value. Otherwise it is simply not worth it.
F&B equipment and interior all depreciates amazingly fast. The more specific/niche the equipment, the faster the value drops. E.g, an Ice-cream machine is worth $16,000 first hand, but I can tell you the resale market puts it at a range of $4000 worth only (25% value). If no one buys the equipment, it becomes useless because demand for it is very low. Same goes for the interior furnishing.
I have seen owners even trying to make a profit on the takeover fee, which makes zero negotiation sense other than the fact they are trying to scam potential buyers by making a quick buck. Never ever pay above value, because you could easily hire someone and create the exact same layout. Also, there are definitely better deals around so don’t feel pressured.
3. Reasons for selling
Ask the current business owner, what are his reasons for selling the business? If the business is as profitable as he claims, then why is he selling it? There are valid reasons that exist, like medical conditions, retirement, migration etc, but I am always very skeptical about businesses that are cash-generating, yet being sold off by the owner.
Probe more about the situation and assess whether it is valid, or is he just trying to get out of the current situation. I’ve seen restaurant owners with extremely good foresight, who sell their business at its peak because they have predicted that the trend will go down soon.
Make sure you are buying a sustainable business and not just being sold something that is going to go downhill soon. You have to be aware of the business’ future outlook, and not only base on previous records. Be skeptical and ask questions, because if a deal is too good to be true, it usually is.
4. Existing Tenancy agreement
Take note of the remaining lease term on the tenancy agreement, and the existing terms within. You don’t want to buy a business that only has 1 year of tenancy lease remaining, thereupon the landlord might raise the rent or decide to kick you out; you don’t have a choice.
Always check the tenancy agreement. Also, do make sure that you meet the landlord first and discuss the future terms as well as the takeover procedures. You want to find out if there are any existing problems or debts that the previous owner might try to pass to you with the takeover. Due to the space, some businesses are sublet from another tenant, so make sure to deal with the real tenant or landlord, not the sublet tenant.
5. Operation layout fit
Lastly, be sure to evaluate whether the existing kitchen, seating layout is suitable for your concept needs. If changes have to be made, are they big changes that include hacking the wall, shifting the toilet or major constructions work? If so, you are better off just working with a brand new space. Your interior designer will agree that it is a lot more work to revamp an area rather than build and design from scratch.
If your new concept can fit the existing layout, by all means go ahead to purchase. Check that the kitchen equipment suits the food you want to cook as well, and it is best to get a professional chef to look at it.
Avoid taking over a F&B business for a tens of thousands, then spending another tens of thousands to revamp the entire area after you realize it is not suitable.
Related Guide: How to Start a Restaurant or F&B business in Singapore
Taking Over an F&B Business Psychology
As a resale buyer, you have the bargaining power. The more time passes, the less valuable the reseller’s assets become, the more expensive it is for the seller to store all his unsold equipment in a restaurant or cafe with rent to pay. When the lease period ends, he will also have to hire a crew to tear down all his interiors, which makes the value zero. Takeover business is a very specific market that is time-sensitive, and bargaining power is with the buyer. Always negotiate knowing that you have other better options, and the reseller is racing against time.
Remember, the profit is made the minute you buy, so make sure you sure the business you want to takeover is undervalued first.
I would highly advice you to engage a F&B consultant like myself to evaluate the business that you are looking to buy, or even assist you in negotiation. It just makes monetary sense to invest a small sum on feasibility research before spending hundreds of thousands to takeover a business, that might be losing you money instead.