Avoid the Biggest Mistakes of a Hospitality Business Buyer by doing Due Diligence
Over many years in the Hospitality Industry, as an Owner and Consultant, I have been involved in the purchase, growth and sale of many Businesses. Both as a Business Buyer and a Business Seller.
Here are some of the lessons I learnt and mistakes that I made and have seen people make when buying a business. Sometimes it is too late to fix this after the event.
Whenever you buy a business – you are typically buying its future sustainable income and you should do some due diligence to avoid any likely risks or nasty surprises.
You really don’t want to be paying for ‘potential’, you are better to pay for proven past performance as past profits CAN be a useful guide to future performance.
That’s why buyers tend to look at the last few years of the profit & loss Statement to see the trends and profit performance of the business.
It’s generally a much better idea to buy the ASSETS of the business rather than buy the COMPANY operating the business. Buying the company may expose you to liabilities and risks attached to it from past activities.
Before you buy any hospitality business here’s a list of things and potential risks or ‘Skeletons in the Closet’ to check for:
1. Are the stated BUSINESS FINANCIALS correct?
This is a big one for Business Buyers. Have a thorough look at their numbers.
- Does the income and expenses look correct? Watch for overstatement of income and understatement of expenses.
- What is the % of Rent to sales and is that consistent with similar businesses
- Is the sales revenue stated in the P&L and their BAS statement the same?
- Look at addbacks in the P&L (these are Non-operational costs by the owner)
- How much of the business is owner’s personal expenses?
- Get your Accountant to check the financials thoroughly – watch out for any cash transactions, cheaply paid or family staff working in the business.
- Many hospitality businesses claim that they have been taking undeclared Ca$h out of the business as a benefit. This can’t be tracked and must be ignored – just base your purchase price on declared profits.
2. Is the INCOME SUSTAINABLE in the future?
- Is the Industry Sector, region or local area in decline?
- Any Downward Business trends for this type of business?
- Any Major new competition being planned (New competitor or developments)?
- Any Changes to Franchise Terms that will increase expenses for the Business?
- Any Recent Bad Publicity, Bad Reports from Council or Government Bodies?
- Any Increasing difficulty or expense in getting raw materials or services (e.g. drought affecting food costs)
3. Are the current CUSTOMERS Happy and Stable?
- Do they have a Good reputation? – Check out their online reviews – comments and star ratings will help.
- Any potential non-renewal or loss of a big client? – Meet and interview some bigger customers if possible
- Trial the business for 1 or 2 weeks and observe the REAL customer flow and sales
- Were they previously paying Kickbacks or illegal commissions to clients to get biz
4. Is it a good stable LEASE with few hassles?
- Is the lease reasonable? – a long lease with many options and fair rent increases.
- Watch for any Leases that are non-assignable or non-renewable – the landlord mightb not give permission to sell
- Is the landlord friendly and supportive to your changes and ideas?
- Any significant increases in rent expected ? (e.g. initial low-start rent period expiring)
- Any impending or actual zoning changes that will curtail business or expansion?
- Any Unapproved existing variances in violation of zoning regulations (Illegal uses or building been done)
5. What EQUIPMENT is included in the Sale?
- Any Poor management of the capital assets (bad maintenance & neglect of equipment)?
- Any Obsolete Machinery or machinery that doesn’t operate properly ?
- Selling things they don’t own – coffee machine, grinders or ice machines, postmix equipment, dishwashing detergent dispensers, Phone systems, Gas Bottles, Ice Freezers. (Check the Chattels list otherwise you’ll have to pay it back)
- Check for any leased equipment liabilities.
6. What actual STOCK will you be buying?
- Most sales are plus Stock at Valuation (SAV)– be careful about buying old Overvalued inventory – what valuation method will be used to value stock? Especially Wine cellars.
- Product Obsolence – You want FRESH stock – avoid old useless stock (no vol au vents?) – You can say you wont pay for stock older than 1,3,6,or 12 mths old.
7. Check out any TEAM ISSUES
- Is the team culture good?
- Will your purchasing of the business change the CULTURE and lose any customers or staff ? – Are you like the current operator?
- Do you like the business and culture that is within the business, what else will you bring to the table?
- Are critical team members staying or going?
- Who has liability for any long service leave and other accrued leave?
- Have any staff been underpaid in the past? – Will there be a liability for this?
- Any Potential Labour Union or other employee problems – IRC, Office of Workplace Relations?
- Inability to replace a Key person? – A “Superseller”, “Brand name” Chef or Barista
- Poor safety focus – Workcover Claims Track record – may be passed to new buyer
8. Check the OPERATING LICENCES – Food & Alcohol, Safety, Technology etc
- Any Recent suspension or trouble with Liquor Licensing Commission for regulation violation
- Any Residential Amenity problems with the LLC due to patrons leaving or band noise
- Food Safety Plan not prepared or not implemented properly
- Check the Computer Software Licences are original and up to date
- Any Non-compliance with environmental or safety requirements? (e.g. fire safety)
9 As a Business Buyer you should look for any OTHER BUSINESS RISKS
- Ask the neighbours WHY they are selling
- Legal claims, encumbrances and liens against the business
- Pending litigation against the business
- Change in attitude of insurers – fire risk, public liability or arson risk (inc premiums)
- Past Credit problems with Banks & Suppliers
- State or Federal law violations that will are expensive to correct
- Who’s liable if GST is payable on sale of Business (ask your accountant)
- Will the business owner open up nearby and compete against you? – is there a non-compete clause and how enforceable is it?
10. Any Issues with the SELLER like Financial Instability or partnership breakdowns?
- Non Payment/lodgment of BAS Statements, GST, PAYG, Workcover
- Unpaid taxes and Insurance (GST, PAYG, Workcover)
- Personal Affairs of the Seller that may affect ability to sell (e.g. Divorce)
- A Partner or shareholder that doesn’t want to sell (but can’t afford to buy it)
11. Are you really Getting Good VALUE as a Business Buyer?
Ensure you get VALUE for what you are paying for
- Any Expiring or Expired Licences, Permits, Business Names or Domain Names?
- Will the grease traps, range hoods or septic systems be cleaned out near settlement day?
- What adjustments (for advertising and prepayments) will be made on settlement day?
Remember – Caveat Emptor – Always Let The Buyer Beware!
BIG Disclaimer – This is NOT an exhaustive list of everything that could go wrong in a business purchase but just some of the many problems that can be found out during hospitality business due diligence prior to the sale.
Doing good due diligence during the buying process will help smooth your transition to hospitality business owner.
BUSINESS BUYER RESOURCES FOR CAFE or RESTAURANT BUYERS
- Gina Ezard has written a great book about buying a cafe or restaurant called OPEN FOR BUSINESS
- Eldred Hospitality has a great 2 day workshop for people opening a new cafe or restaurant run by Gina Ezard.
ABOUT THE BLOG AUTHOR – David Staughton CSP
Big Hat Professional Services can help you grow your hospitality business and improve your Function Event & Wedding Sales. David & Kevin can help you!
David Staughton CSP is an award-winning International keynote speaker, and experienced Small Business consultant. With over 15 years ‘hands on’ experience in the Hospitality industry, he speaks and consults on a wide range of hospitality business improvement in the areas of sales, staffing, service and strategy.
Kevin Kosky is a skilled business communications trainer. He is a specialist on inbound phone skills, presentation skills and delivering sales presentations. Kevin is an expert teacher of face to face communication skills like sales, supervision, and presentation skills.
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