How valuable a meal ticket is it?

2008-05-12 00:00

This past month, I devoted a large part of my columns to the subject of buying a business. Your response, both through e-mails and general chats, suggest that the subject represents a high interest factor. I would place at the top of the list in this regard those people thinking about buying, selling or opening a restaurant about which a number of questions were raised.

Firstly, let me say, the restaurant industry is a significant employer and therefore an important part of our economy. However, it would be equally fair to say that contrary to many people’s opinions, a restaurant is a difficult business to run effectively, requiring great skill, attention to detail and experience — get it right and you make a lot of money, get it wrong and you could lose your shirt.

The most frequently asked question is: "I am thinking of buying a restaurant, but it has no formal accounts. How can I fix a price?" Another way in which the same question was asked: "The restaurant I want to buy has no accounts. How can I check the asking price in respect of its true value?"

The best way to fix or verify an asking price is to actually spend a month in the business — you can then establish the turnover during the month and set a "value" by multiplying this monthly turnover by four. Carrying out this exercise will not only help you check or determine a selling price (asking price four times monthly turnover), it will also give you a good handle on the type of customer and frequency of visits they make to the restaurant.

Carrying out a costing exercise in relation to the restaurant could put a value on it of say R300 000, but the nature of the restaurant’s clientele may be such that, once the current owner takes off, all the regular customers also leave. Obviously, the data taken from such an exercise will vary depending on the time of year. However, spending a month in the business will give you a good feel for the type of customer and the day-to-day level of turnover that can be expected, which can be confirmed by checking this against the business’s banking records.

Buying an existing restaurant or establishing one from scratch, as I have said, can be a precarious undertaking, one that requires tremendous planning and consideration.

There is an old expression used in Yorkshire, "There is nowt as strange as folk", that describes the fickle, idiosyncratic behaviour of people. The point is, you could position your restaurant in a tremendous location with a fantastic menu, yet it doesn’t take off — why? On the other hand, you could open a restaurant in the middle of a field, miles from anywhere, in the depths of the Midlands Meander, and you need to book to get a table — why? The answers to these questions are far lengthier than this column can allow. So think well and hard before you jump in.

You may have wondered how the large restaurant franchises can ask such big sums for joining their stables. Quite simply, they have established a total package and got it right — décor, ambience, menu and price are all on the button in respect of their customer and market. Added to which, you are buying into an established reputation that makes profits. It is this latter point that is possibly the most important consideration for someone wanting to buy or set up his/her own restaurant.

In other words, ask how strong and successful the business’s reputation is. Answering this question should tell you how much the business is truly worth.

frankgreenfield@iafrica.com

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