Did you know that only half of small businesses survive their first five years? Sadly, a large percentage of these businesses tend to be new restaurants.
If you own a failing restaurant, you’re likely weighing the pros and cons of selling or liquidating. So which one is right for you? To learn this, you first need to figure out what your failing restaurant is worth.
You also need to be familiar with what’s involved in winding down a business. Luckily, in this article, we’ll go into both of these areas. That way, you can decide what course of action is best for your specific restaurant. Let’s get started!
Why are Many Restaurants Failing?
You shouldn’t take the fact that your restaurant is failing as a personal failure on your part. The reality is that the restaurant industry is already incredibly competitive.
So, when you throw in a global pandemic that forces customers to stay home, it can quickly turn catastrophic. Even if your restaurant was able to survive the pandemic, new challenges await you.
An employee shortage and new competition with home cooking are making traditional businesses harder than ever. So, it’s important to keep emotion out of a restaurant failure.
Instead, look at the facts and figure out your restaurant worth to get out of it as cleanly as you possibly can.
Factors to Consider When Valuing Your Restaurant
Many people think that the only factor involved in valuing a restaurant is the physical assets. Expensive kitchen and dining equipment indeed make up the only guaranteed value that you’ll get from a restaurant.
But, it’s far from the only factor that’s used to estimate restaurant value. Another factor to consider is the state of the economy. If the economy is down, then even a high-end, successful restaurant isn’t going to be worth much.
This is unfortunate because this factor is entirely out of the control of the restaurant owner. The next factor is the age of your business. If your business is just starting, and it’s failing, then this won’t matter much.
But, if you’ve been established for decades, this can up your value. Potential investors might see the value of purchasing a legacy restaurant and making some changes.
That brings us to the last factor: customer loyalty. Established businesses can have repeat customers that come in every day. Sometimes, the appeal of this loyalty can raise the value for people trying to purchase from you.
That being said, it’s a big if. Many investors might be worried that the customers are loyal to you, not the restaurant brand. So, when they take over, they could lose them.
What are the Different Ways to Value a Restaurant?
There are three main ways of answering the question, What’s my restaurant worth? The first way is the income valuation method. This method looks at the amount of income that a business is making to determine value.
The more money a business makes, the more valuable it will be. The best way for small business to determine their income value is the Multiple of Discretionary Earnings method.
The benefit of this method is it’s a quick way to get a snapshot of what the restaurant is worth in the present. The drawback is that many buyers may be skeptical that this simplified snapshot translates to future value.
The second way is the market valuation method. Instead of looking at current earnings, this method looks at future potential. It does this by measuring the value of the restaurant against other ones that have sold in the area recently.
Ultimately, this method depends on who you’re dealing with. If both parties go into negotiations with the same knowledge, the deal can be fair.
But, if you’re dealing with a large investment firm, they can usually manipulate numbers and come out with a better deal. The third method is the most straightforward is asset valuation.
This method bases the restaurant’s worth on the value of its assets subtracted from its liabilities. The good news is that this is the easiest method. The bad news is that it usually results in the lowest possible worth for a business.
Best Valuation Method for a Failing Restaurant
So, what’s the best method of valuation for a failing restaurant? Income valuation, market valuation, or asset valuation? The answer is the asset valuation.
Sadly, you can only use income valuation or market valuation if you’re coming from a position of power. That means your leverage the success of your restaurant to get a higher evaluation.
But, if your business has no loyal customers, bad publicity, and lots of debt, the restaurant itself is worth nothing. Any investor will need to put a lot of money into rebuilding a rebranding the space.
The only thing of value is the assets you have inside, like the equipment, dining supplies, and furniture. So, if you’re ready to throw in the towel on your failed business, go with the asset valuation method.
You’ll be taking a loss, but it’s also the easiest method with the least amount of headaches.
How to Start Winding Down a Restaurant
Hopefully, you’ve got a rough estimate of what your failed restaurant is worth based on the assets. So, now what? There are four areas you need to focus on when you begin winding down a restaurant.
That includes the lease, your employees, the liquidation of the assets, and any settlements you may have with lenders. In this section, we’ll briefly go over how to start tackling all of these areas.
Lease
The first thing you will need to sort out is the physical building your restaurant is in. Most closing restaurants are not prepared to vacate the second that they close their doors.
It takes some time to prepare the assets for auction and liquidation. Sadly, many landlords include “going dark” provisions in the lease. These provisions mean that if your business isn’t operational for a brief period, you default on the lease.
You can try to avoid this by asking the landlord for additional time to remove all of the assets. If the landlord is understanding, they will provide it for you. You can also engage in our facility closure services to streamline the process and save time.
Sadly, certain lease obligations will require you, or your guarantor, to be held personally liable.
Employees
Next, you need to decide what you’re doing with your employees. If your business is failing, odds are you will be terminating all of them. However, you cannot spring this decision on them at the last minute.
There are both state and federal laws that require you to give a certain amount of advanced notice. Typically, this amount is determined by the Worker Adjustment and Retraining Notification Act (or WARN Act).
You should work with an attorney to see what specific amount of time is needed. If your employees have health insurance or severance policies, you will need to fulfill your contractual obligations to them.
You will also need to wind down any profit sharing or benefit plans they might have.
Liquidation
Next, it’s time to liquidate all of your assets. The easiest way to do this is to hire liquidation services to hold an auction for the equipment. Before this, you should contact your creditors and tell them you’re engaging in voluntary liquidation.
Remember that liquidations can take some time. Some of your equipment might take a while to sell.
So, the better the liquidation service, the faster things will sell. Make sure to learn more about restaurant liquidation by checking out this article.
Settlements
Different failing restaurants will have different levels of debt liabilities. In a perfect world, you’ll be able to pay back creditors 100% with the assets you liquidate. However, most of the time, this isn’t the case.
If you fall in this category, you should consider contacting an attorney. They can attempt to work with your creditors to settle your debt for a percentage of what is owed.
However, this won’t always work. If your liabilities are too high, your only course of action might be bankruptcy. You can learn more about declaring Chapter 7 bankruptcy for your business in this guide.
Need Help With Closure or Liquidation? Contact TAGeX Brands
We hope this article helped you learn what your failing restaurant is worth. It can be hard not to take a failure personally. But, the most important thing is to treat it like a learning experience and come out with as little debt as possible.
Luckily, TAGeX Brands can provide you with failing restaurant help. We know that facility closures, employee redeployment, and asset liquidation can be a headache.
That’s why we provide end-to-end management for businesses that are winding down. You certainly don’t need any more stress on your plate when your restaurant is failing. So, contact us today to make your life a lot easier.