Buying or Selling a Cafe or Restaurant - Simplifying the Process

With Ken Burgin, SilverChef (host), Paul Leach, GSE Business Consultants, Julian Mero, Food Beverage Logic, Sven Wicks, SilverChef, and Richard Edwards from Pragma Legal.

The market for cafes and restaurants is active, and there are plenty of buyers and sellers. If you're considering selling your cafe or restaurant, or looking to purchase, this webinar recording is packed with the information you need. The guest experts have many years in hospitality and know the market from all angles.

Topics covered include:

• State of the market in 2021 - trends and opportunities
• What type of businesses do people want to buy?
• The buying and selling process:
• Legal issues - leases, contracts, licenses and other obligations
• Landlords, rent and occupation costs
• Importance of exit planning, and how to make your business more saleable
• Handling negotiations with brokers, landlords and lawyers
• How to value your business and justify the price
• Payout or take over leases and SilverChef agreements - what are the options?
• Traps for unwary buyers and sellers - what to look out for!

 

Summary of the Webinar's Main Points:

The market for cafes and restaurants in Australia is thriving, with a lot of opportunities for both buyers and sellers. If you are considering selling your cafe or restaurant or looking to purchase everything you need to know about the market is right here:

State of the market in 2021 - trends and opportunities

• During the pandemic, there was a decrease in new listings coming through which drove the demand from customers. 
• The suburban cafes were booming but the CBD businesses were struggling 
• Post pandemic has seen an equal number of buyers and sellers coming through

What type of businesses do people want to buy?

• Businesses that are in the right location 
• Businesses whose assets are in the working order 
• Businesses that have been inspected 
• Businesses that are generating profit 

The buying and selling process

Do your homework and understand the market whether you are buying or selling a cafe or restaurant:

• Buyers should prepare a business plan and be ready to show it to the landlord 
• Understand the business's numbers.
• Make preparations to systematise and automate your business processes.
• Take control of your digital assets – login details and subscriptions
• Examine the two most important value drivers, the lease and profit.
• Analyse what needs to be changed, or renegotiated in the lease 
• Test the market on your new concept before you go into a permanent lease.
• Recognise the true value of the business and market it at the right price
• Gather information and then make an offer.

Legal issues: leases, contracts, licenses, and other obligations

Look over the lease before making an offer and see what it contains. Obtain the following information before submitting the offer:

• Understand the lease you are purchasing and know what you are signing 
• Understand the plant and equipment, your inventory, and what's happening with the staff
• Hire a third-party technician to inspect the property and equipment, to ensure that you're getting what you paid for
• Set a fair price and list it for what it's worth
•  Communicate with the landlord because you are transferring a long-term relationship
• Supply an assignment to the buyer - the assignment of the lease is an important aspect of selling or buying a business especially in a shopping center

Landlords, rent, and occupation costs 

If you are buying a business, the landlord will want to see:

•  A business plan 
•  A profit and loss statement or some asset and liability statements 
• Proof that you are familiar with the industry and you know what you're doing, 
• Proof that you can afford to pay the lease

It is worth noting that rentals have come down in some city locations and CBD locations, but have remained the same in suburban locations and some shopping centres. 

Previously, landlords were getting excellent rent per square metre, with rent-free periods of six months or longer but due to the nature of supply and demand rental bidding has become much more competitive.

To make your business more saleable, take control of your digital assets:

• Google My Business page
• ASIC Connect
• Facebook and Instagram Accounts
• Software subscriptions like Xero

Handling negotiations with brokers, landlords, and lawyers

• If you put a business on the market and you don't get a favourable response after eight weeks, it suggests the buyers don't think the pricing is fair.
• Negotiating rates and contracts has become more difficult as a result of the influx of new people into the market.
• For example, if you only have two or three years left on the lease of the business you are selling, it's in your best interests to talk to your lawyer about renegotiating and possibly securing an extended term that will add value to your business. 
• Or if you are going to relocate to another shop your lease should include a relocation clause that allows the landlord to move the tenant to a similar site or location, which your lawyer should review.

The basic business valuation formula is:

Calculate the business's actual annual net profit and multiply it by anywhere from one to three times before looking at the profit and loss account for any other costs or expenses.

 If your net profit as a percentage of revenue is higher than average, this can also help you move up the scale.

If you are on the buying side, you must know what you're looking for and how to work through the figures and ensure that you are not being duped by:

• Taking a look at the Point of Sale receipts.
• Take a look at the bank records that show the Point of Sale receipts.
• Ask for suppliers, invoices, and receipts and make sure that everything's been paid.
• Obtain a record of all payments by checking bank statements and tax returns.

Payout or taking over SilverChef agreements - what are the options?

SilverChef makes selling the business easily by:

• We can pay out existing contracts on the equipment, essentially fulfilling or terminating them, and that becomes part of the purchase.
• We can assign the existing rental agreements to the incoming owner or new owner if you choose.

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Transcript of Webinar on Buying or Selling a Cafe or Restaurant

Ken Burgin:

I'm going to ask Paul Leach to talk about state of the market. What's happening? 

Paul Leach:

Thanks, Ken. Good afternoon, everyone. I guess, at the moment, the roller coaster continues with the COVID spell, 2020 March, we saw pretty much every deal that we had fall over. For a period there, Sydney, especially, was affected quite strongly in the areas that we operate in. And then at the end of May 2020, things started to come back. And it actually it got very busy. But it got very busy with people wanting to come into the market. And it got very difficult for the first time in the time that we've been operating, it became very difficult to actually get businesses to come to market, because the suburban cafes, as most people will know, were absolutely booming, doing really well. And quite naturally, people were riding the crest of the wave, they would have been crazy to sell at that point. They wanted to get what they could from it, whilst it was running like that.

            And on the other side, the CBD businesses were just in a world of pain, and most of them were limited to trade if they were able to trade at all. So we saw a real drop off of new listings coming through which kind of then I guess that drove the demand with the people coming through. And there was a lot of new buyers coming through. So people that were previously in employment, and maybe throughout COVID had been made redundant. We saw actually, with some of the bigger listings, a lot of pilots coming through.

            So pilots that were used to earning a good salary, and they've been laid off, or certainly no plans of working anytime soon. On some of the bigger listings, the bigger ticket listings, we had a lot of interest from buyers like that. So it brought a whole wave of new buyers into the market. And also people that, like a lot of us throughout COVID, I think everyone's coming out of it different, nothing's going back to how it was. Everyone's realised that actually we can communicate in different ways. We don't need to do as much travelling as we did before. And businesses are changing.

            Lots of people that we're talking to now and since May have actually been people that have decided, that's it, I'm not going back to how it was, I just want to do something, this is my time, I've always thought about doing this. So there's been a big surge of new buyers come through from about May onwards, that took it down to a limited stock. And we kind of had a feeling that when job keeper finished, that there would be a surge the other way. And we just thought that the balance would shift.

            But what's actually happened is all the stars have aligned. And at the moment, there seems to be an equal amount of buyers and sellers coming through. So that surge of buyers that we had is still there. But we're also now getting a lot more businesses come to the market, certainly than there was even two or three months ago. So overall, the market is very busy, as there's plenty going on.

Richard Edwards:

I've seen a comment recently that some businesses are getting letters from the ATO saying that we're doing a bit of an audit to make sure that you've been properly qualifying for job keeper. Have you heard that as a motivator for anyone trying to sell?

Paul Leach:

No, Richard, not as a motivation for sell. But I do know, there's been a bit of chatter about that in the group recently. And there has been, in fact, I got approached myself as well. I'm being audited. Believe it or not, not for job keeper, but for this small business grant. So I actually got a phone call and then I got an email. So it's definitely a thing that's happening, but nobody's come through as a motivation for selling. So nothing of that nature.

Paul Leach:

The way that I look at this is, I'm a chef by trade back in the day, and I look at really the sale process, very similar to how you operate as a chef. And that is that it's all about planning and preparation. So the more effort and the more planning you can put in at the front end, the easier the process is going to be for you as you go through. So a bit like, as I said, the way that you run your kitchen, if you get set up for service properly, you've got enough stock, you've done enough prep, you're good to go, you can have a busy service, and everything will go smoothly. As opposed to those days where things don't go right, you're short staffed, you haven't got enough stock or something goes wrong, it just leads to chaos.

            So the approach that we take is all geared around that front end. So a big part of that, and I won't go into the details of it all, but a big part of that is looking through the two main drivers of value, the lease and the profit. So the lease, there's a lot of different aspects of the lease beyond just how long it is, what the rent is, what the increases are, and so on. There's a lot of different aspects there that you need to look at and consider. And that's really the first starting point that we look at, because if there are things that need changing, or you need to negotiate, that can take time. So it's a really good starting point to make sure you've got that kind of kicked off and that process going well.

Ken Burgin:

There are a few questions popping up here. And one, probably a few of them are going to be about rent and landlord negotiation. So 12 months ago, I mean, there was some tough negotiation backed up by new legal processes. But what's the story with rents up or down? Or more flexible or? Julian.

Julian Mero:

I think in some circumstances, rents had to be reset, but it really depends on location, the term of the lease left on the business. So I wouldn't think that there's a blanket overlying fact that rentals have come down. And I think the retail activity has been really surprising to everybody. There continues to be new cafes and restaurants opening in the marketplace. And so I wouldn't say it's a blanket come down, I think in certain circumstances, rents have had to be realised, more city locations, obviously, CBD locations, but suburban locations and in some shopping centres, they're just as per normal.

Ken Burgin:

So not as much movement down as maybe we might have predicted 12 months ago. We were expecting the end of the world and it's not like that.

Paul Leach:

I think there was definitely an element of that. But what's happened now is, we said with the market, the retail market and the business sales market, there's a flood of all these new people coming through this, it's just natural supply and demand. So if we look back sort of three or four months, the deals that we were helping people with, we were getting really good rent per square metre, we were getting really good rent free terms, five, six, even more in rent free, that is getting much harder to negotiate now. And we've actually had situations now where a client recently, we had to deal pretty much agreed, and then two other people came through and gotten into a bidding war and ended up losing it. Whereas a few months ago, you would have been asking the landlord for whatever you wanted. It's definitely shifting at the moment.

Ken Burgin:

Sounds pretty important to have an advocate on your side to help with that negotiation.

Julian Mero:

Definitely.

Ken Burgin:

There's a question here from Raj, Paul, what's the formula for valuation of a business? How much? What's it worth?

Paul Leach:

A million dollar question, good question Raj. I'll try and keep this as straightforward as I can. There is a bit that goes into it. But the basic formula is a multiple of the net profit the business can demonstrate. And there's several ways that you look at that. In relation to the actual net profit that you're demonstrating, depending on the size of the business, that may or may not include the owner. So if it's a smaller business, typically, the owner's wage is going to be added back in. You'd be going through the P&L and you'd be looking at other things, other costs or expenses that are put through the P&L, that if I was to buy the business from you, wouldn't go through.

            And then from there, you're going to work out what the actual annual net profit of the business is and then multiply that by anywhere between one times and three times typically, that's a broad range, one to three times is the average. At the moment, and this is what most people want to know, at the moment, the transactions that are going through, and I'm talking anything from 100,000 up to 1.6, 1.8 million with recent transactions, they're all around the 1.6 to two times net profit.

            Now, where you sit on that scale is going to be determined by a number of things. And that's where you see people talk about the amount of trading days that you open, the amount of hours that you open, the input from the owner, all those kinds of things. So the factors that, going back to what I mentioned before, that determine the value most obviously, the net profit, and the net profit as a figure gives you a bigger number to multiply. But also, if your net profit as a percentage is higher than average, that can help push you up that scale as well.

            So that's a really good key metric to look at, measure and monitor as you're working through where the value of your business might be. You could have two businesses and this has happened quite a lot. Two businesses taking the same money, one's running at a seven or 8% margin, the other one 15 to 20%. And even though the turnover is the same, the value and a return to the purchaser is significantly different. [crosstalk 00:16:19].

Ken Burgin:

So do I believe, do I trust the figure, the 15 to 20% figure? Or is that just a very well run business?

Paul Leach:

Well, it depends on who you're working with, who's giving you the numbers and how thoroughly you do your due diligence. I think now in this day and age, it's much easier to do thorough due diligence than it's ever been. Back in the day when, like my first shop, I think it would have been 98% cash, there was, it's almost a grown from the staff when somebody pulled out a credit card, because he had to do the manual transaction. But now, if you want to verify turnover, then let's talk about looking at the FPOS receipts, let's look at extracts from the bank showing those FPOS receipts, point of sale is much more accurate than it ever used to be. So it's a different world as far as that's concerned.

            But the margin, if you're buying, so if you're on the buying side, the due diligence is crucial that you understand what you're looking for, and how to work through those numbers to make sure that you're not having a wool pulled over your eyes.

Ken Burgin:

Question from Mario. He's been in retail for 22 years, thinking about buying a deli or cafe in Northern Beaches, I presume that's in Sydney, where does he start? He knows retail, does that put him on a good start, or what's the best way? Is it a gum tree, or is it a broker?

Paul Leach:

We know like hospitality is about being hospitable. And if you've got a good retail background, the chances are you've got a good understanding of customer service and how that works. And then taking that to the deli side, obviously, you want to have a good understanding of food and everything else. But if you find a good well established business, and negotiate a good training period and a good handover, and if the business has been set for sale properly, there's going to be proper IP, everything's going to be set up and systemized and process driven, which is going to give you the confidence, even if you're not coming into something that you've done before, providing you've got some sort of experience in how to deal with people, then go for it. I think, again, it comes back to due diligence, making sure that you're not buying something that as soon as the owner leaves, is going to have no value.

Ken Burgin:

Good question from Alex, if you're buying a cafe, you want to secure a better lease. When you do this negotiation during the buying process? Richard, you want to talk about that?

Richard Edwards:

My view is you should be doing this at the time you're placing the offer. It needs to be that early, which means that before you put the offer in, yes, you're going to have a look at the lease and work out what it has in there. The reason being that, as a matter of course, the business will be solved with the lease, it will be an assignment or a new lease of the premises. Unless it is part of the terms of your contracts to say we want an assignment or a new lease with these extra great terms. Then if you don't get those terms, then if it's a properly written contract, you can't walk away from the sale on the basis you didn't get the deal you wanted from the landlord. So it is without exception, as soon as possible once the offer has gone in.

Ken Burgin:

What's your experience Paul with this on the ground? Are landlords generally ready to turn the four years left on a lease into a 10 year lease?

Paul Leach:

I guess it depends which side we're talking to. So if you're the seller, then I would be as we mentioned before, reading through that lease, re familiarise yourself with it again, because in many cases, you read it or you get your solicitor read it through when you take the business over or you start the business, but you need to really revisit that, and make sure that you understand that.

            And then if there's anything in there, like if it's a short term, for example, if you've only got a reasonable two or three years left, it's well within your interest to actually talk to your solicitor about renegotiating and getting even a variation of an extended term on there, because that will add significant value to the business, it's going to make it easier.

            And from obviously, in most of what I'm doing, I'm advising people who are selling. And I will always try and keep the buyer away from a negotiation with the landlord at that point, because it's just one more thing, is one more thing that can potentially go wrong. Quite often you find that buyers start negotiating with the landlord, after everything's been agreed, the vendor has gone into the mindset of that's it, the business is sold. And then those negotiations with the landlord break down, the buyer starts asking for things that aren't reasonable, the landlord is put offside. There's a lot of drama that can happen there. If you're selling team, be prepared.

Richard Edwards:

I'm going to use a situation where exactly that happened. Paperwork was all signed up saying a planned assignment of lease that then the tenants, the prospective buyers came through and demanded to meet with the landlord. And unfortunately, for literally everyone involved, the one particular representative, the buyer was psychotic, to the point of restraining order type level stuff that we're talking about, and offended the landlord so much. So I think the landlord was terrified to allow them to get in there.

            And for some reason, we managed to get the landlord to consent, and then they came back for even more changes to it. And then the whole thing fell over, took months. Cost everyone money, it was a wasted time.

Ken Burgin:

So the old saying about when you're done the deal, shut up.

Julian Mero:

It's just a real balance between when you do that and who does that. And usually, you're right, Richard and Paul, that when an incoming buyer starts to go to a landlord and requesting an extension of lease and starts asking for all these different things, the landlord does get that back up a little bit. You're better off having the seller, if they're wanting a bit of an amendment to the lease in an extension to give him some more to sell, you're better of far better of a seller doing that before you go to market because the buyer will usually be a little bit more aggressive and can ruin a relationship very quickly.

Ken Burgin:

So now the question here about regional New South Wales, but is regional everywhere, I think, I mean, the only place we can go on our holidays is the country. Paul, what's the story outside the big cities?

Paul Leach:

There's certain pockets that are absolutely booming at the moment. So Port Macquarie NSW is a standout for us at the moment, it's just been going absolutely crazy out there. We're a huge amount of demand. As soon as we listed something there under offer very quickly. Tari, recently, we just sold one full asking price in seven weeks. So it just depends.

            And there's other areas where you're just not getting any traction at all. It's very hard to pick it. So there's Queensland, regional Queensland has been very popular because of the visa criteria there. So for residency, there's been a lot of traction there. So it's, generally speaking, yes, a lot more interested in regional areas than it usually is. But I think that's partly the rise in the whole market.

            And then certain pockets, like you mentioned Ken, because we can't go overseas, and more people are discovering towns that they didn't even know existed two hours away from where they live, that obviously is pushing that demand. But places like Sanford, not that that's reasonable, but Sanford, house prices, they're gone up 30% huge demand there. Coffs Harbour, all those places, they do seem to be booming at the moment.

Ken Burgin:

And I guess one of the management issues around that is, running this business and actually attracting staff with a brutal employment market. But even any country business, my observation as a customer is it seems like the owners are much more heavily involved in making coffees and clearing tables and all those sorts of things. You got to be ready to do that.

Paul Leach:

I think some of it comes down to the size of the business as well Ken. I see that here, even the places that I go to, the smaller venues. As we know, unless you're in there in a smaller operation, it's not the way you need it to be or want it to be. So it does depend a little bit on the size of that. I've got clients in regional areas, consulting clients, very successful businesses that aren't as involved. It just depends on what kind of management you can afford to attract, I guess.

Ken Burgin:

Is it possible to lock out a tenant since COVID laws finished in March?

Paul Leach:

Yes. Yes, you can. Have it happen to a client, $50,000 in arrears, and the ability to access protections on the various bits of COVID response legislation was limited to situations where there was a genuine dispute under the COVID response situation, legislation. If you are behind in rent, you're just behind in rent. You're not a protected species anymore.

Julian Mero:

There's also other avenues of obviously failure to trade. So there's other avenues within a lease that can be utilised, obviously, to lock out a tenant.

Ken Burgin:

So a question here, from Karen to panellists, probably one for you, Julian about a food court. The shop has been sold to new investors taking over, we're going to be relocated to another shop, refurbishment of the whole centre etc. What's your take? What's the best approach here for Karen?

Julian Mero:

So within that lease, there should be a relocation clause. And that relocation clause does allow a landlord to relocate that tenant to a similar site or location, that obviously won't be a lesser site, by trade level. So they're also protected by the retail tenancy act. So they need to make sure they look at that. But it really comes down to a negotiation of how much the landlord is going to pay, what that rent free period would look like to move them because there'll be downtime more than likely. So that does become a bit of a negotiation on that relocation. But certainly, the landlord would need to pay for that.

Paul Leach:

And absolutely get your lawyer to have a look through the way that clause actually works. In some states and territories, the relocation clauses are regulated, which means you might have some additional rights that are not provided for under the lease. And I've had a lot of people are having troubles when it does come to relocation. So be alert, be aware, try not to be alarmed.

Ken Burgin:

How do I make sure that the figures are legitimate, that we've got real numbers? And obviously, the rise of tap and go payments and the disappearance of cash helps us all with that. Any other tips you've got for?

Paul Leach:

With due diligence, there's plenty of things you can do, you can get, obviously, you can get the bank statements, you can get, as we said bank statements with the extract showing the FPOS. You can ask for suppliers, invoices and receipts and make sure that everything's been paid. Obviously, you're going to get record of all the pay through the bank statements and tax returns. So it's just a process of working through the numbers almost forensically.

            And bearing in mind that usually, this is one of the biggest expenses that you're likely to outlay. So it really is important that you be very careful about where your money goes and that you're buying the right thing.

Ken Burgin:

And there's another person in the form that can be very useful. And that's a bookkeeper or accountant. Great to have Christine Green on the webinar, she knows the restaurant and cafe industry inside out.

Paul Leach:

It does make a huge difference. And I know there's been a couple of instances where we've kind of gone through the P&L for a client, looking at it, and you see the bookkeeping phase. There was one instance recently where the guy was paying a significant amount in bookkeeping. But when we got to due diligence, and when we got further down the deal, he went from me thinking, you could probably get that for a couple of 100 bucks a week less to me thinking this guy is worth his weight in gold. He was instrumental in helping get that deal, keeping the momentum in the deal, which is crucial and ultimately helping to get the deal across the line. So you very much get what you pay for with that sort of thing.

Ken Burgin:

Paul, there's a question earlier on from Danielle about we found it difficult to sell in June 2019, pre COVID and was offered to the Chinese market, but that certainly was like new arrivals, people coming on business spaces. How do you know who to utilise to assist in a sale like this? Sounds like a pretty substantial kind of business. Why use a broker? Because obviously, there's commission, but there's a lot of legwork that brokers will do, could you put your best phrase forward.

Paul Leach:

In answer to Danielle's question, there's a number of factors that it could be there, I mean, usually, even in a normal market, if you're putting a business on the market, and you're not getting good traction within the first four, six, eight weeks, which is a crucial time, then that's the market talking to you. And it's really up to you whether or not you listen to it. And silence from the market is basically telling you one of several things, and usually that comes down to the price. So if buyers don't feel that the price is right, you're not going to get any traction or any movement.

            So regardless of what you think the value is, it's only going to get really decent inquiries from qualified buyers if it's positioned correctly. And there's a fine line, there's a very fine line there. And that balance between what you need, what you expect, what you want, and what the market will pay is something that you've got to spend a bit of time on. So a proper appraisal, and understanding the true value and then marketing it at the right price is a big factor. I mean, it will deter a lot of buyers.

            The market now compared to how it was a few years ago, the market is so savvy, it's so easy to get information. And you know that, you go online, you go into the Facebook groups, any of the hospitality groups out there, and you want to ask a question about, I'm looking at this cafe, it's doing this much, and this is the profit and you can get feedback and information much easier than you ever have been able to.

            So you can't follow the market, you have to really put the budget forward. And with the marketing as well, you see this sometimes, if Danielle's not getting enough inquiries, is it going in front of the right people? And is it being positioned in the right way? So if you put too much information in the advert, people have got no reason to contact you. If you don't put enough in, they're just going to keep scrolling or looking through.

Ken Burgin:

That's interesting. Simplifying the business without taking away the character. But I remember selling my first cafe, it was a complicated business. It was very seven days and nights and I paid all my payroll directly into people's bank account, which was back in the 90s, and that was unknown. And that scared away a really good buyer, because she was just used to pay everyone cash. I overcomplicated it,

Julian Mero:

No, I've seen it work. Certainly, there's been, you've got great locations of cafes that aren't trading seven days a week breakfast, lunch, and dinner. And there's an opportunity to come in and do maybe a Thursday, Friday, Saturday night trade over a slow roast or a different concept. And I think that that's happening a little bit more. And I think there are definitely opportunities to do that. And to test the market on your concept before you go into a permanent lease. So I think there's a lot of opportunities. There's a few websites now that will also have dark kitchens and shared cafe opportunities as well. So I'm going to drop one of them in the chat as well. I've seen it work.

Richard Edwards:

It's a really exciting concept for a lot of places, because it's new news, you've got something to talk about beyond it's a new menu, you've actually got a whole new opportunity in there. You'll need to, if you're looking to use somebody else's existing restaurant and infrastructure, you'll need to cut a deal with them, unsurprisingly, to work out who's paying for everything, who's responsible for things, particularly stock and staff? Because that's going to change your obligations in there and things like insurance and bits and pieces like that.

            I'm also very apprehensive of what's going to happen from a liquor licensing perspective. You'll need to have a detailed think about how that's going to fit in amongst these, because if you're the one, there's not an existing licence there. I don't know how you're going to get it, because you don't occupy the premises, there isn't existing licence there. You can't be seen to be the one who is serving liquor, because you're not licenced to do so. All manageable, it just takes a conversation to work out precisely how you're going to do it.

Ken Burgin:

So Richard, I put a few more points up, you've been answering lots of great questions, really appreciate how busy you've been on the chat as well. But there's a few issues you wanted to particularly raise that I've got on the screen there. Do you want to talk to those?

Richard Edwards:

Lawyers are really useful, we can be bastards. But we're actually kind of handy to have around. We've been there, we've done it. And our job is to get you over the line as much as we can, we're there to look after you. Our job is, particularly as a commercial lawyer is to make it so if something's going to go wrong, we've already put the structures in place to stop it going wrong, or at least to control it as much as we can.

            Some of the only things you can do, I've got the point about heads of agreements being binding or pointless. I've often seen non-binding heads of agreement, which means that people sign a piece of paper, which is not worth anything, and then go to the bank who goes well, we don't actually know what you're going to pay for it because it's not binding and getting into bed with the landlord and the landlord gets jack of them. And then the whole thing falls apart and the sale is left with nothing.

            You need to have an offer, which has all the touch points in the agreement, which are going to go into the contract altogether. What's happening with the lease? New lease variation, supply an assignment, what's happening there? What's happening with employees? Who's footing the bill for making the buggers redundant? Or paying out their long service leave, annual leave entitlements? I would bet your bottom dollar that's Sven is going to pop up and talk about the equipment finance side of things. Certainly the old school way is the seller has to check and the PPSR releases happen at the end.

            What's happening with your licences? What about the carpark? The little pop up store that you've got with the chairs and tables in the carpark? What's happening with that? Condition of equipment is one where I've had so many arguments with the other side when it hasn't been documented properly. Nothing like having to argue about who has to replace the seals on the fridge. Do it now. Do it when you know what you're going to get. And if you don't have enough information, get the information then put the offer in, it's absolutely critical in there.  Because your offer supposed to be your offer not the thing leading to the offer.

Have the discussion now, sign up when you've actually got a deal capable of being heard, very important there.

Ken Burgin:

Richard about the last two points, business names and social media. What's the story there?

Richard Edwards:

Cafes and restaurants are sold as a going concern. That means it's a turnkey operation where the owner walks out and the buyer walks in. It's also a different legal entity. And also more fundamentally, where's the website? Where's the password? How do you transfer all of these things? People forget their passwords, people forget how to log on to the damn things. So if you want to be prepared as a seller, look around now and go track down the Facebook passwords and log ins, actually not Facebook, is you have to-

Ken Burgin:

The young guy who set up the Facebook page who left ages ago.

Richard Edwards:

And here's the problem with Facebook is you can't hand over username or password, you need to make them an administrator then get them to remove you as an administrator. I've had to do that nine o'clock at night for a very, very tense transfer. You need to look at the list of usernames and passwords because they are the things that get handed over at settlement. The same thing happens with the business name. The ATR pretty much says you need to transfer the business name at settlement. You transfer the business name by having someone log on to this thing called Asset Connect.

            I've had to log on to my own ASIC Connect before a year and a half after signing it out and back it if I could remember my password, it can take four weeks to get in your username and password, you got to access your business name to get the secure transfer number to transfer it out. Get your accountant or whoever, whoever it is, get them to log in and make sure that they can see the transfer business name button. Because if they can't do that, and two days before we go, oh, you're going to be in all sorts of trouble. Do it now.

            And for that matter with social media, if you haven't claimed your Google My Business page now, go and do it. Whether you're selling or not, you need to take control of your digital assets which are floating around out there.

Richard Edwards:

Christine, your comment about getting your access to your software subscriptions like Xero. I had one client who was held ransom for a couple of days when they were changing bookkeeper and the old bookkeeper didn't like that, and demands to be paid through the nose. It took some very tense letters sent to them to get them to back down.

Ken Burgin:

Question there from Christine, actually, about the people who use this due diligence process to start grinding the price down or negotiating down. You're like, Oh, my God, I didn't realise that was so expensive, or that was so small.

Richard Edwards:

Yep. Of course they do it, and it might be genuine, it might not be. And a properly drafted contract and heads of agreement, which says it's subject to a takings period. If the takings are going down, or they're a little bit suspicious, then under the contract, you have the right to say the takings aren't what I thought they were going to be. Either I'm terminating or you can come at the table for renegotiation of the purchase price.

Ken Burgin:

Let's hear from Julian, who's a bit of a king when it comes to negotiation, as well as knowing shopping centres inside out in the restaurant business. But you got a few points here, as well. I'm really interested in that first one, you say the first offer has more influence than any others. What are your ninja tricks for negotiation, Julian?

Julian Mero:

I come from a retail background, my family had restaurants and I had restaurants personally as well. And, at a later stage of my career, I went to the dark side, on the landlord side and worked heavily in shopping centres. So I understand shopping centres back to front and lease negotiations. And I think the first point there is preparation and planning are really two of the most important components at any negotiation.

            I think negotiating without preparing or planning what you desire, what you need, the information you have, the money that you can spend, the rent that you can pay, a fee without understanding that you end up negotiating with brute force and not really understanding the process. So once you've done your preparation and your planning and you understand the marketplace, in terms of even if you are buying and selling a cafe is doing your homework and understanding the market, then when you do go to either renegotiate a lease or buy a cafe, you're going to have a basic understanding of what does that first offer represent? How do one make a first offer?

            There's a lot of conjecture in negotiations as to whether I should make the first offer or not. There's no problem with making the first offer. But it does have an influence on the overall outcome of the purchase. Or in a lease negotiation of the end lease that you pay, making a ridiculous offer, and I'm sure Richard and Paul and the guys have been through this is making a ridiculous offer just doesn't work. You basically you can lose the sale or lose the purchase.

Julian Mero:

And you look at it and say, that's not even real, I'm not going to begin to give that any time. So you just walk away from that deal completely. So I think, understanding where that often needs to be. Now, on the flip side of that, Ken is being too generous with your first offer can also obviously influence that you'll overpay for a property or from a lease perspective, you'll overpay the lease.

            So doing your homework and planning will give you a bit of an understanding of where that offer needs to be, that first offer. Really, really important. In regards to landlords, I know that there's been a fair few questions coming up in regards to leases and landlords and the likes. The fact of the matter is, is if you're buying or selling a business, you genuinely need the landlord. So I think it's the sooner you understand the landlord process and who the landlord is, the better. And shopping centre in strip locations do have a different way of dealing with the landlord, if you're dealing with a Westfield versus somebody behind the building in self-managed super.

            So I think you need to understand that before you go into buying a business and, or selling your business and seeing where your lease actually is up to. It's not something that you can hide from, the sooner you address that, the better I think, dealing with a landlord and again, it goes back to preparation and planning. When you are dealing with a landlord, you can't go and ask for a lease extension with ridiculous numbers, it just doesn't work.

Ken Burgin:

So for those people who got shopping centre tenancies, or maybe coming in or wanting to exit, are there any extra things I need to consider? Because there's shopping centre management and the hall, feels like there's another layer of kind of supervision there.

Julian Mero:

Definitely. And we were having a discussion previously about permitted use and things like that, it's a little nuances within a shopping centre that you need to understand that's within the lease, because there's certain permitted use in the lease can stop you from selling a cake. Or deciding that I'm going to do fresh juice because nobody's doing juice, but it's not in your permitted use and you're not allowed to do that, you will need to ask to the landlord's approval to be able to actually do that.

            And then the assignment of the lease and Richard might have touched on this as well, the assignment of the lease is a really big part of selling your business in the shopping centre, or buying a business in the shopping centre. Having that lease assigned, which means the landlord will want to see a bit of a business plan and a P&L or some asset and liability statements to make sure that you from the industry and you know what you're doing, and that you can afford to pay the lease. I'm sure there's many business that the deal's fallen over because the assignment hasn't gone through.

Ken Burgin:

So interested to hear comments from you, Julian and others about selling. We've got a buyer, but they're new to the industry. I mean, even someone's mentioned, they've been in retail, but presumed now hospitality experience, how do we brush these people up so the landlord's satisfied?

Julian Mero:

I think a business plan would do it. People is actually completing a business plan and showing the landlord that, okay, I don't have experience in the industry, but I have a plan. And I think that one document alone, putting it in front of the landlord and saying, here's my business plan on what I want to do with the business I'm purchasing, that's a massive tick straight there. So it's really a simple process, and everyone should do it anyway. Not just for the landlord, I think everyone should be writing their business plans and a bit of a plan of what to do.

Ken Burgin:

Paul, what are your thoughts on making an innocent, inexperienced buyer looking like a fabulous prospect?

Paul Leach:

There's a number of things you can do. And as Julian said, a business plan is a very good and important part of that, it's about putting forward to the landlord that you're actually going into it with some thought, you're not just buying it on a whim. The other thing that come from the planning and preparation side, the more work you've done in the background to systemize and make your business process driven, then the easier it is for you to back out. The less reliant the business is on you, then the easier is to convince the landlord.

            So if you've got a business, for example, that's under full management, and you've got a buyer that's qualified financially, if the current owner is not working there or doing limited amount of work there, it's a much stronger argument. You can basically push back to the landlord, and we've done this several times where landlords have the right to push back, but quite often, if you challenge it, you can.

Ken Burgin:

That's a great point. Because people are wanting to buy freedom, aren't they? They're buying a business, but they actually don't want to be bringing the beans in the morning and taking them out at night. It's not really part of the dream.

Ken Burgin:

Just that last question there, Julian, you've probably seen a few people who come in and want to change everything because they think what was... Maybe what was there before was pretty crappy. But how quickly should I change things?

Julian Mero:

I think it's always a valid point. And I think we all would have seen over the journey that people come in and buy a business that maybe was very successful, and within a short period of time, it's closed. So I think when you're buying a business, you're buying that business for a reason. And there may be circumstances where there's an opportunity to tinker with some things and change some things to increase the revenue and profit. But, changing things drastically, quickly, is not preferred. I think that you need a little bit of time to understand the market, understand the clientele, get in there and be with your staff in your business before you start making substantial changes.

            Because, again, you're buying that goodwill for a reason. And that business for a reason, and completely changing your menu overnight can be fraught with danger. Just doing it slowly, really, really slowly. And I've taken over businesses before and just slowly over a three, four month period introduced some new items, do some specials, see how they work. So I think just taking it slowly when you're buying a business is really, really important, because I think we've all seen businesses close really quickly from that.

Ken Burgin:

So one of the issues is transferring the assets. And there's going to be evaluation of the equipment and all those kinds of things. And we might come back to that in a minute too, but some of that may be Silver Chef rentals or a Silver Chef agreement and are working to transfer that over, Sven, do you want to just talk to us about how we would try and make that as easy as possible?

Sven Wicks:

With Silver Chef, we do make it easy, it's definitely one of the most common questions that we do get asked is selling the business, what happens with the contracts on the existing equipment or assets if you like? So essentially, there are two options, you can pay out, essentially fulfil or terminate the existing contracts on the equipment, and that then becomes part of the purchase. Or secondly, we can assign the existing rental agreements to the incoming owner, or new owner, if you like.

            So having said that, if the contract is still in place in some 12 months, they can then with the permission of both parties have those contracts transferred to the new owners name, and then that will be taken over the remainder of the contract at the same weekly repayment. Well, if the contract's expired, and it's past that 12 month period, they can then start on those same assets and brand new contract 12 month agreement with weekly payments based on the depreciated value of the asset. So something that may have been with the current owner at 2500, the new owner would then take that over at site, 400 written down value, and then continue to pay the weekly repayment on the-

Ken Burgin:

Sounds like, it's important to have some legal and accounting assistance to help make that nice and smooth. But I know we're certainly ready to facilitate that. Thanks, Sven. We've got Sven's details are there and he'll drop them into the chat as well. Any other comments, Paul or Richard about the valuation of equipment and the condition of equipment that's being sold? Because the contract price is a combination of equipment and goodwill, isn't it? And sometimes one goes up and one goes down. Any other thoughts on that?

Paul Leach:

Just on the what Sven was talking about there, in relation to people asking whether they should pay out or sign over. Typically, the way that we're looking at the valuation, as I mentioned, is based on the profit that that business is generating. So if you look at it from the buyers perspective, if we're asking them to then take on a contract for rental equipment, we're basically saying, on the one hand, this business is making this much money. But by the way, that often helps to generate that money, you've got to pay extra for what you've got to take on.

            And it's another thing that complicates or potentially can complicate the deal. So my preference is always to vendor pays out. And even if that means you pushing the price a bit to make sure you've got that covered, but that whole planning process, you're going to understand what the liabilities are, and Silver Chef for lease equipment would be one of those liabilities.

Richard Edwards:

There's also the tax implications of it. I always forget which way around this is, to be honest, I think Christine's going to tell me, that I think you want the goodwill to be as low.

Paul Leach:

Incoming, so the buyer wants the asset value to be higher, so they can depreciate it. But that's only, it doesn't actually have any bearing on the actual value.

Richard Edwards:

From my side, it's working out what condition you're actually taking the assets in. Is it in good working order? Or is it as inspected or quite what it's going to be? And when it comes to inspecting just before settlement, you're going in to make sure that the assets are actually in that condition, having the compressor on the fridge, crap out, two days off. So you notice that it's crapped out two days before settlement is expensive and frustrating. That's hopefully going to stop the situation which your client has faced where it looked fine at settlement and two days later, it all died.

Paul Leach:

If you're buying, it's useful to also have a list of exclusions, because quite often there's people that have things that they're taking when they finish up, the personal items or sentimental items, or sometimes just things that they want at home. So, as Richard said, check the inventory and actually check it on the handover as well, just to make sure.

Richard Edwards:

I had a client who demanded that, I think was the TM3 Thermomix was coming home with them, thanks very much, they were absolutely not selling that.

Paul Leach:

That's pretty common, that one.

Ken Burgin:

Well, you'll be pleased to know that Silver Chef doesn't finance a Thermomix. As we are finishing, I wouldn't mind a quick tip from each of our experts about something that gets overlooked or if people did earlier on in the process would save a bit of grief and get the price up. Sven, why don't you go first, you want to do that?

Sven Wicks:

Thanks Ken. Just being thorough on something that Richard touched on before is making sure regardless of the contracts, whether it's been paid out for whether they are being transferred, that you get a third party technician in to inspect and make sure what you're getting is what you're paying for. And what you're getting is what's transferred to you in terms of contract, you just don't want to be as Richard said, two days in, you get in and your refrigerator is sitting at 24 degrees. Not right.

Paul Leach:

I guess for people selling, then it comes back to just making sure that you get the price right. So don't list for what you want, list for what it's worth, and if it's not worth what you want, then do some work to increase the value and then list it, there's no point testing the market. No point going over priced. Or of course underprice where you could be coming out with 20, 30,000 less than you should be. And for people buying, then read the lease, the lease is one of the most important documents and you can have a business with fantastic financials, if it's got a terrible lease, it has no value. So get to understand what to look for in a lease or use a professional that looks at them all the time, and make sure that you really know what you're signing for, because that lease is very binding. So make sure that it's a false economy trying to save money on a good solicitor when it comes to reviewing a lease. Because if you get a bad lease, you get stuck on it, you've got real problems.

Richard Edwards:

Selling, it's the old preparation rule. Understand your plant equipment, understand your stock, understand what's happening with your employees, and most importantly, understand the lease. The lease is the single most important piece of paper behind your business without exception. The only reason you won't have one of them is because somehow you own the land. And if you do, I wish you all the best. That sounds fantastic.

            For buyers, my biggest advice is don't fall in love with the location. This is a business, there are numbers behind it have a business plan, not a beloved thing you're going to fall in love with.

Julian Mero:

The lease and the landlords are the most important aspect of it. And I think as a seller, the communication with your landlord and understanding your lease is absolutely paramount. And as a buyer coming into a lease and understanding what lease you're purchasing, and the landlord that you're going to be in a relationship with for a very long time is absolutely important. And must be completed straight up front.