Do you have an exit strategy for your restaurant or franchise business?

A wise restaurant industry mentor once gave some very sage advice: “Always, and I mean always, have an exit strategy before getting into any venture.” He suggested that this exit strategy could take one of many forms, and we are going to take a look at each of them in this article.

If you are an entrepreneur operating your own restaurants, a franchisee or even a franchisor, you have most likely been focusing most of your attention on your growth plan. And that is understandable. But even early on, it is critically important to have an exit plan in place.

What an exit plan should contain

A comprehensive exit plan is necessary no matter what your corporate structure might be, and it is especially important if you have partners in your ventures. It should cover what happens in the event that one or more partners want out of the business – and this includes you. The exit plan needs to lay out the steps to be taken in this event.

Asset value

Have a predetermined method for the valuation of company assets. How will the company be valued? Will it be valued based upon current income and assets? Future income? It is usually wise to have an independent appraisal conducted by a professional business valuation company. Your exit plan should cover this in advance.

• First right of refusal – Address the “first right of refusal.” If a partner/shareholder in the business wants out, not only do you want the methodology for determining the valuation in place, but you will want the remaining partner(s) to have the “first right of refusal” to buy the departing partner’s portion of the business using the prescribed valuation method.
• Sale of stock in the restaurants – Who can purchase the departing member’s portion of the business in the event the remaining partner(s) do not want to exercise their right to purchase? This is important to consider and address in your exit plan.
• Asset inventory – An ongoing asset inventory should be maintained that includes equipment, furnishings and inventory.
• Financials – Financial statements should be kept up to date and include profit and loss statements, balance sheets and cash flow statements.

Legal documentation

• Ownership – Make certain that all ownership documents, deeds, leases and licenses are up to date and transferable.
• Compliance – Make certain that the business is following all federal, state and local regulations and that all of these are transferable or easy to renew.
• Contracts – Organize and review all contracts with employees, suppliers and service providers.

Transfer of operations

• Operations manual – All operational procedures, training materials, marketing materials and recipes should be documented.
• Personnel – Your exit plan should outline how to communicate with staff and contain any needed information regarding key staff member retention or severance packages in place.
• External communications – Your exit plan should outline how to communicate any changes to your guests, customers and the broader market (if appropriate).

Strategy for the sale of the business

• NDA – Have a confidentiality agreement prepared in advance to make certain that any sensitive information is protected when sharing information about your company during any sales negotiations.
• Marketing the business – It is wise to prepare a marketing plan in advance in the event you are going to solicit an outside buyer. This may contain a strategy to utilize business brokers or industry networks.

Finances and taxes

• Debts – Develop a plan for resolving any outstanding debts and liabilities.
• Taxes – Seek the advice of a tax professional to make certain you are informed of the tax implications that closing or selling your restaurants may incur.

Develop a post-exit plan for yourself

• What now? Will you retire, start another restaurant concept or a different business venture? Give thought to this in advance.
• Public relations – How will you communicate your exit from the restaurants to your employees, guests and others?

Create a team of professional advisers

• Assemble a team – If your exit involves selling your restaurants, you will need professional advisors from multiple disciplines – a business attorney, an accounting firm that can guide you, a financial advisor and a restaurant consultant.

The many possible modes of exiting from your restaurant business

While selling your business, whether to partners, employees, outsiders or even competitors may come to mind first, there are many other options that you might take when exiting your restaurant business.

Family

Passing the restaurant business down to the next generation of family members. Even though the business remains within the family, it is still wise to have an exit plan as well as a succession plan.

Merger or acquisition

You may find strength in merging with another business, or another business may acquire your restaurant(s).

Closing the business

Situations may occur that would force you to close your restaurant(s). This may or may not involve bankruptcy and liquidation of assets.

Going public

While this may not entail a full exit, it will dramatically change your role as an owner. If you, as the owner, opt to exit this scenario it often means making a “gradual” exit over time.

Franchising

While this is not a straightforward exit, it also definitely changes the role of the owner. You may retain some or all of your current restaurants and grow strictly through franchising. Either way, you will need an exit plan for the “new” version of the company.

Change is challenging, but inevitable. It is a wise person who prepares in advance for those changes. Many of these exit plans should be reviewed and maintained regularly. A strong team comprised of an experienced accounting firm that understands the restaurant industry combined with a sound legal advisor and a veteran restaurant consultant can help pave the way for a smooth exit no matter which route you may take.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

David Foster is the principal of Foster and Associates, a restaurant, bar and hospitality consulting firm. He may be reached at dfoster@fosterandassociates.net.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.