You’ve always enjoyed food (and no, I don’t mean just eating it). Now you want to make a business out of it by opening your own restaurant or café. You’ve done the sums, and have even started scouting out possible locations.
However, before you start signing leases and handing over money there’s one more piece of information you need to know: are you doing it for love or money?
Now that may seem like a stupid question. Of course you’re doing it for the money. You want to make enough money to live on, as well as a decent profit to justify the risk you’re taking. But is it going to be your ‘cash cow’? Or do you hope to eventually sell it for a capital gain?
In case you’ve never heard it before, the ‘cash cow’ metaphor describes business that keeps making money after its setup costs have been paid off. Imagine you’ve bought a dairy cow. It’s more expensive than a regular cow, but you can sell the milk it produces. And once you’ve paid it off, you can keep selling the milk for a profit. However, once your cow stops producing milk it’s just a regular cow. And if you decide to sell it you won’t get anywhere near what you paid for it.
Restaurants and cafés can certainly operate as ‘cash cows’. In fact, it’s one of the most common revenue styles of restaurant and cafés. And there’s nothing wrong with it. Many successful restaurant owners slowly build their businesses to the point where they can earn a good living and accumulate some wealth to invest in their future.
The other option is to build the business so it can be sold in the future for a capital gain. And while it’s more challenging, it can be just as rewarding. After all, having put their blood, sweat and tears into what may well be a lifelong dream, it would be nice to be rewarded at the end.
But very few do, and I can’t think of a single restaurant that was worth what the owners were asking.
Cash cow or capital gain?
Let’s say there’s a fine dining restaurant in your area. It’s won a few awards, even a hat or two. People come from all over town to eat there. And it’s all thanks to the head chef, who’s worked under some of the greatest chefs in the country. But he’s not just the main drawcard. He’s also the owner, and is making quite a decent profit.
Now, just down the road is a family-run fish and chip shop that’s been around for years. Nothing over the top, just good fish and chips. Over the years they’ve developed a ‘system’ of preparing and cooking their food consistently well, no matter which member of the family is working on the day. The drawcard for their business is the consistent quality of their food.
Now, let’s say they both go up for sale. They both made the same profit, and would take the same amount of effort to run. Which would you buy?
Most people would choose the fine dining restaurant. After all, it’s won a hat for goodness sake.
Unfortunately, their choice would be a poor one. They should have chosen the fish and chip shop instead.
Why? Because the fish and chip shop doesn’t rely on an individual for its success. Instead its success lies in the systems the family has developed, which can be easily be taken over by someone else.
Sure, the fine dining restaurant might be more prestigious, and have a reputation that goes for miles. But when that chef sells the business and leaves, its prestige and reputation will be leaving with him. The business was build around a person’s skill that isn’t transferable and can’t be replicated.
I can’t tell you how many times I’ve seen this happen.
That being said, it is possible for a fine dining restaurant to be a ‘cash cow’ while you’re running it and a capital gain when you sell it. But for that to happen its brand, reputation, ethos, style, systems and processes all need to be transferable. It can’t be built around its owner.
A good example of such a restaurant is McDonald’s. It has an incredibly strong brand presence, and yet the systems and processes are easily transferable. It even has training systems in place for its staff. And because these systems don’t rely on the owner, it’s a business that can be sold easily.
Is it worth the asking price?
Working out the true value of a restaurant or café is a bit of a science. But as a general guide, here’s what I look at when figuring out if it’s worth the asking price.
- Brand identity
- Growth in turnover
- Real profit over and above an owner’s market wage
- Return on investment
- Quality record keeping
- Documented systems and processes
- Is the business on the up or is it tired?
- Quality of staff and their training
- Surrounding town demographics
It’s certainly not an exhaustive list. But it does show what you need to consider if you want to sell your business for an amount you’d be happy with. Which means that to maximise your restaurant or cafe’s potential sale price, you have to plan for it.
A final warning about the industry’s cash economy.
I want to finish up with a comment about the cash economy that seems to go hand in hand with this industry.
Don’t do it.
Instead, make sure you:
- put everything through the books
- bank all your cash takings.
Apart from it being illegal, there are good reasons to keep all your money on the table rather than under it. By taking cash illegally and not declaring it in your tax returns, you’ll significantly understate your profit on the books. (That’s why some owners do it—to reduce their tax). But you can’t have your cake and eat it too, and if there’s little or no profit showing when you’re selling your business the final sale price will be reduced. Forget what the owner tells you about its true value. If it’s not on the books prepared by an accountant, the valuer will ignore it.
If you’re looking at opening a new restaurant or café, come and talk to us. We can discuss your plans, and see how you can profit from it both as a cash cow and a capital gain sale.