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  Thailand Articles

15 Feb 2008 20:31:10 GMT
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Buying A Bar or Restaurant

If you've spent any time at all looking at bar/restaurant for-sale listings in and around Pattaya, you’ve probably noticed that there are more of these listed than any other single type of business. Is this a good or bad thing?

There are two ways to approach the question: the optimist will say that there's a great market when the time comes to sell; the pessimist will want to know why all of these people are selling their business. Actually, they're both right.

Good bars and restaurants, just like any other solid business, will sell quickly. As one Los Angeles broker told me 20 years ago, “There are many bars and restaurants that don’t make money, and those can be bought cheaply. There are a few that make lots of money, and those are very expensive”. The failure rate among restaurants is higher than for bars, but both are difficult enough to operate profitably that some people who thought it would be fun to own one decide to get rid of the business when they realize that it takes hard work to make any business successful. There are several critical issues you need to consider to make sure that the bar or restaurant you buy will be, or at the very least can be, successful with you as the owner.

The Lease

Unless a bar/restaurant has a long-established, storied history, most often the location will play a significant role in its success. Its traffic can be driven by its proximity to office workers, to a movie theatre, a popular mall, or an attraction like Walking Street or Soi 7. Location is crucial to most businesses; for purposes of this discussion, location is directly related to the lease.

More and more landlords in Pattaya are being extremely cautious or downright difficult when it comes to assigning a lease to a new bar or restaurant business buyer. Some flatly refuse an assignment of the existing lease unless the buyer has prior experience in this field. Or, they may insist that the former owner must remain on the lease (very difficult to convince them to do so), or insist that the buyer puts up a year of rent into escrow. Many in Pattaya simply won’t give a lease of more than a year or two. It’s not that they plan to kick you out once you’ve made a business profitable; it’s more the case that their experience with operators who don’t pay the rent on time or who cause problems with neighbors or the police, has convinced them to retain control over who rents their premises. And, of course, some landlords are just greedy and see a way to make a buck…err, baht.

With these potential challenges, it is recommended that you address the lease portion of the deal as soon as possible with the seller. On this note, it is imperative that any purchase contract contains language (known as a condition/contingency) whereby the deal is contingent upon the buyer getting the lease assigned, or a new lease in place that is satisfactory to the buyer. Once you have a deal in place, you'll want to arrange to meet with the landlord. The seller may require you to complete your financial review first, which is understandable; however, your best strategy is to convey to the seller that if the landlord will not assign or enter a new lease, or if their price to do so is extravagant, the sooner everyone knows, the better it will be. The seller will surely want to understand the landlord's position for any future prospective buyers.

Insofar as terms and conditions, obviously you'll want a long-term lease including options. Anything less than three years is not usually recommended; a “3-years with options for renewal” is ideal. In some areas of Pattaya (notably Soi 7 and Soi 8, but doubtless others as well, landlords simply won’t give a lease longer than 1 year. Buying a business with only a 1-year lease is obviously a BIG gamble, but for the most part the landlords we’ve dealt with are only trying to safeguard their position and do, in fact, renew the lease routinely…for “good” tenants. (“Good” meaning, for the most part, only that the rent is paid on time.)

Valuing a Bar or Restaurant Business For Sale

There are two main methods for valuing a bar or restaurant business: asset-based or cash-flow-multiple based. The asset-based method is appropriate for an unprofitable or closed location where you are simply purchasing the equipment in place either from the owner, or maybe even the landlord. Get a reasonable valuation done on the equipment, make sure the rent is manageable, and make an offer.

For an ongoing and especially a profitable business, a multiple of the owner's benefit is the way to go. This figure is achieved by totaling the owner salary, perks, net income, depreciation and interest expense and then assigning a “multiple” to this figure.

In Pattaya for bars and restaurants, the “rule of thumb” is that the price should be 2.5-3 x the annual owner’s benefit. If that cannot be reliably calculated, a multiple of 1-1.5 x annual sales may be substituted.

You must also consider the hours of operation when valuing a bar or restaurant. As an example, an owner-operated restaurant that is open five days a week for breakfast and lunch only, and that makes 100,000 baht a month, might well be worth more than one that is open 7 days, serving three meals, and makes 120,000 baht a month.

Dealing with Cash Sales & Unreported Income

While the industry has gotten better, there still is a tremendous amount of unreported income in these “cash businesses”. The problem of course is that, when it comes time to sell, sellers expect to get paid for their total profit, yet often times they cannot document it. And really, if the seller can’t prove it, the buyer can’t pay for it.

Now, it may be possible to reconstruct the financial picture of unreported income based upon supplier invoices, hourly wages, the seller's personal records, etc. Nevertheless, the onus is on the seller, not the buyer, to do so. The main question the seller has to answer is: Can you prove the numbers?

Costs

Stock and labor costs are also key considerations in a bar or restaurant business. Costs will vary based upon the type of business, i.e., whether a restaurant is full service or fast food, or whether a bar is inside or out, or if it has live or recorded music. Again, do your homework. As a very general rule, the combined total of stock, labor, and rent for a restaurant should be in the range of 75% of the total revenue.

It is widely accepted that a "typical" breakdown should be:

  • Stock:   32-33%

  • Labor:   32-35%

  • Rent:      6-10%

The ideal range when combining these three components should be between 70% - 80%. Stock costs in a bar are much lower; rents tend to be higher.

Due Diligence

Conducting a due diligence review of a bar or restaurant is a comprehensive undertaking. There's a lot to review, and a short time to do it. Allow yourself enough time to perform this critical stage when buying any business. You might consider paying a business advisor to investigate and evaluate a potential acquisition for you, to assure thoroughness and impartiality.

Other Issues

Unless you're an expert, take the time to have the equipment included in the sale evaluated by a professional, especially if that’s a substantial portion of the “value” of a business you’re considering. It doesn’t matter what the seller paid for it, only what you’d have to pay for comparable equipment today – new or used, The good news about bar and restaurant equipment is that if you do need to repair or even replace it, there's a huge market for used equipment at substantial savings.

So there you have it. Buying a bar or restaurant can be very exciting. Managing one can be fulfilling. However, there is a lot to consider. Try to educate yourself thoroughly, especially if the bar/ restaurant business is new for you. After all, running a business is very different than being a customer, and you’ll want to buy and build a successful business that will both make you money and make you happy.

 

 

 


 
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