1. Retirement – This is a common reason why sellers sell. They, simply grow too old to properly run and manage the affairs of their business. If a seller does not have heirs interested in coming into the business, it is best that they take a proactive approach in planning the sale of their business so they have plenty of time to sell their business before they become physically and mentally unable to do so.
2. Boredom/burnout – At times, sellers get so immersed in the day-to- day events of running their business that they tend to get burned out, and are no longer effective in managing their business. When they get burned out, their thinking may get blurred, they lose perspective in making the right decisions, and it becomes difficult for them to run a profitable and competitive business.
3. Undercapitalization – This is a common reason why businesses must sell, and is especially true in the restaurant, bar, and nightclub business. These businesses are very cash intense in that the payables need to made on a timely basis—such as payroll, and food and beverage bills, plus bills for utility, rent, taxes, etc. Employees generally have to be paid every two weeks, most vendors need to be paid weekly or monthly, and the rent needs to be paid monthly. If these bills mentioned are not paid on time, you will not have the supplies necessary to serve your guests, you will not have the employees you need to make the products and serve the guests, and you will not have a premises to operate in because you’ll be evicted. Frequently, operators get into business without having the proper level of cash reserves set aside to deal with unexpected events. For example, the operator may have projected that he would do $40,000 a month in sales, which is his breakeven point, and in fact he does only $30,000 a month in sales. Where is the shortfall of $10,000 going to come from if the operator did not establish the proper cash reserve account when he purchased the business? What typically happens if he can’t raise the cash is he’ll defer making his sales tax payment and/or payroll tax payment, which will mean steep interest and penalty charges. For example, in California if you do not make your sales tax payment timely, there is a 10% penalty on the amount owed, plus a steep monthly interest charge. If you don’t make your payroll tax payment timely, there is a 50% penalty on the amount owed, plus a steep monthly interest rate. If you don’t keep your vendor bills current, you will quickly find yourself in a C.O.D. position, which means that vendors will not leave the merchandise ordered unless you pay them cash on the spot.
4. Health/death of the owner – The restaurant, bar, and nightclub business, in most cases, requires the owner to be hands-on in operating the business. These businesses are usually physically demanding, and frequently the owner is working the front of the house as a host, waiter or bartender, or in the back of the house cooking. If the owner gets sick, the business will suffer. Most owners of independently run restaurant, bar, and nightclub businesses are immersed in the operations, and they generally control them, set the pace for their employees, and control the cash flow. When the owner/operator is out of the picture due to health reasons, the consistency of the food quality and service could suffer. Also since these businesses are largely cash-oriented, there is a strong chance of cash shortages as the owner is not around to oversee the management of the cash.
Also if the owner dies suddenly, and no other family members are available to step into the business, it is almost certain to fail due to the items indicated above. This is why it is so important that if no family members will take over the operation of the business—in case of a prolonged sickness or death of the owner operator—that a plan is in place to quickly sell the business and/or liquidate the assets to minimize any loss of value of the business to the owner’s heirs. If an owner operator dies without warning, and you are a family member trying to keep the business operating, I would suggest calling a reputable restaurant, bar, and/or nightclub consultant to help you find an interim manager to keep the business running until it is sold. Also, have a trustworthy bookkeeper that you know will monitor the business’s daily cash flow. And also consider a long-term key employee or employees (one for the front of the house and one for the back of the house) that you could interact with who could keep the business running under your supervision. A business that is operating usually has much more value than one is closed, so I would encourage you to keep the business running until it is sold.
5. Partnership disputes – This is another common reason why many businesses fail, and I am asked to come in and sell the business. Too many times there are situations with partners where each partner has made a 50% investment in the partnership, and one partner contributes 70% or more of his time to the success of the business, while the other partner contributes 30% of his time or less. As a result, the partner contributing more to the success of the business gets upset with the other partner who is not carrying his share of the load. Consequently, ill feelings develop between the partners, making the work situation intolerable, which can damage or ultimately destroy a business. Owners frequently ask me to find them a partner to help them run the business, in which case, I respond that this situation will most likely not work out. This is because people having different values and standards, and frequently it is difficult to match people’s operating standards with one another. I have always maintained that the only partner you want in your life is your spouse. This is based on my own experience over the years of having several partners involved in several operating restaurant businesses that did not work out. I even had a pre-existing relationship with several of these people, many of whom worked for years in our business in management and non-management positions before they became partners with us. In most cases, these partnerships were not effective. Although these people were good managers, they lacked the entrepreneurial qualities necessary to be good managing partners, and they became too independent in their thinking. Most of these managing partners put up little cash. Most of their equity was developed through sweat equity, which they received as a result of their physical contributions and the profits of the business. They felt now that they were part owners, they could make radical changes to the operation without discussing their recommendations with us. Specifically, they had a difficult time changing their past role from employee to owner, and it became difficult for them to relate to employees from an owner’s point of view, after working with them as peers for so many years.
6. Insufficient profits – A business’s primary goal is to make money, and without an adequate profit, it will ultimately go out of the business. As mentioned elsewhere in this book, only approximately 20% of independent, non-franchised restaurants succeed. If the owner cannot make a reasonable living from the business, he will ultimately sell, or go out of business. Unfortunately, many sellers in financial trouble wait too long before they put the business up for sale, and consequently, they have to close the doors. In a lot of cases, the landlord takes back physical possession of the premises before the seller has a chance to recover any of his losses. In the case where the seller has to close down and return the premises to the landlord, the seller may still have continued lease liability until his lease expires. The landlord has to make a reasonable effort to release the space. But until the space is released, the seller is still liable for monthly lease payments unless he works out a deal with the landlord to give the landlord possession of the premises, in exchange for a relief of any future lease liability.
7. Divorce – Unfortunately, many businesses are forced to be sold, even if they are doing well, in order to satisfy a divorce settlement issued by the court. Although the business may be doing well, and both the husband and wife want to keep the business, they simply cannot work the business together. In this situation, they may be forced to sell to a third party at a lower price than they would have ordinarily received if they could sell it at time that was more advantageous to getting a higher price. This means that they have to sell the business that they formerly both worked together, because to settle the divorce everything has to be split 50/50.
8. Greed – Some sellers have an excessive desire to acquire or possess more money and power than they need, and they will sell strictly to make more money