Planning Your Pizza Exit Strategy
Note from Peter: I ran into “World Pizza Champion” Michael Shepherd last week in Atlantic City at the Northeast Pizza & Pasta Show, where he was offering presentations to pizzeria owners on how to run a more successful, profitable operation. He told me he’d been working on a concise summary of his best tips for creating an exit strategy, and offered to share them here on Pizza Quest. As always, I’m thrilled to present Michael’s Guest Columns, as I find them very useful and universal, not only for pizza operators but for anyone in any kind of business. You’ll find a link to his website, Perfectingpizza.com at the end of the column. Lots of free resources there, as well as access to both Michael and his business partner, Siler Chapman. Be sure, also, to read Michael’s bio in the Contributor’s Section — the man knows what he’s talking about! The floor is now yours, Michael:
Planning Your Exit Strategy
While very few restaurant owners think about selling their restaurant before they even open the doors, they should, early on, also be planning their exit. Opening a pizzeria is no easy feat but selling it or passing it on can be just as difficult, if not harder. Your exit strategy should be part of your opening strategy. It takes time to sell a business, sometimes years, if it even happens at all. Many independent pizzerias don’t transition into new ownership, instead they are liquidated for pennies on the dollar – even the profitable ones.
The sooner you are prepared for it, the more money you can get out of your business. Selling your business in a hurry usually equates to a lower selling price.
Why is selling your pizzeria such a difficult task? You built your dream. You created something that you are passionate about, something that you love, and something that you are connected with. Not everyone has the same vision as you; not everyone will love your baby the same way you do. In fact, no one will value your business anywhere near as much as you do.
When it comes time to sell your pizzeria, there are usually three different paths you can take.
- Transferring to a family member.
- Selling to a dedicated, loyal employee who has embraced your dream.
- Selling it outright to an uninvolved third party.
The dream most of us pizza operators have is to spend our lives building our pizzeria to the point where it is highly profitable, respected, and valuable. We hope that we can sell it for a considerable sum of money to some stranger and escape to a private island somewhere in the Caribbean or a cabin in the mountains. But that dream seldom happens. What usually happens? Most of the time no one wants to buy our pizzerias for our asking price, banks refuse to finance potential buyers, and we end up personally funding them to someone that is not fit to own or operate a business only to have to them default on the loan or run the pizzeria into the ground.
Let’s take a look at the three paths a little more in-depth:
Transferring to a Family Member
Perhaps you are lucky enough to have a son or daughter who wants to take over your pizzeria and run it as their own. They have worked alongside you for years, know the ins and outs of the operation, and are well suited to keep it going and keep it thriving. Consider yourself lucky if you are in this situation because it doesn’t happen often. Before you get too excited, know that you will either be giving the business to them, they will slowly buy you out, or you will finance the sale for them. Who makes their family members take out an expensive bank loan to buy the family business? Some, but not many. Remember, banks aren’t much in the business of making loans for restaurants, let alone to young people with little or no collateral. Banks don’t like risks, they like sure things.
Selling to an Employee
Chances are you have at least one or more loyal, motivated employee interested in buying your business. They will probably need your mentoring, coaching, and guidance to grow and develop their skills to the point where they would be a successful operator, so it may not be an overnight solution. It may take years to groom an employee for business ownership. It’s also risky revealing your plans to sell to a key employee, so proceed with caution.
Even though you might pay your employees the best you can, they usually aren’t the most highly paid people and often don’t have the cash reserves or collateral needed to back a large business loan; banks aren’t going to be interested no matter how successful your operation is. So, how do you make this happen when your interested employee will not have or be able to obtain the funds to outright purchase your operation? More than likely, you will need to finance the sale of the business yourself. It’s not the best way to sell your pizzeria and comes with significant risks and strings attached.
Selling to a Third Party for a Lump Sum
The Holy Grail of selling your pizzeria is to sell it for a lump sum to a third party and walk away with cash in the bank. At the risk of repeating myself – this does not happen often – and there is a reason it doesn’t happen. Ask yourself this question: “Can you walk away from your pizzeria right now for a month and have it run more or less the same without you there?” If not, you aren’t selling a business, you are selling a job. Who wants to spend six figures buying your job? Not many people. Who wants to buy and work your dream job when they could just build their own?
The fact of the matter is that you need to sell an investment. Your business needs to be attractive to investors and absentee owners – these are the buyers who have cash and collateral. If you want a third party to step up and buy your business for cash, it needs to be absentee owner ready. Your restaurant must be systematized with a full management team, checklists, procedures, operations manual, marketing plan, and the whole nine yards. All of the business knowledge you have hiding in your head needs to be downloaded and put into writing; you the owner should be obsolete and out of the equation.
Investors also want to buy a well taken care of investment. They don’t want a piece of junk that is falling apart. This applies to both the physical aspect of the building/equipment and also the mentality/morale of the staff. The building needs to be maintained and in good repair; clean and well taken care of. When the ceilings tiles sag and break, they should be replaced. Loose or cracked floor tiles need to be repaired quickly. The walk-in cooler needs to be maintained and running correctly, hinges not busted and failing, the prep tables need to be humming along smoothly with no leaks, and the ice machine needs to be free of mold and filters changed frequently. Think of it like buying a used car – you want one what was well maintained by the dealer with records and not a rusty piece of junk held together by duct tape that the owner keeps telling you is dependable!
The management team needs to be competent, dependable, and redundant. Morale needs to be high, and your pizzeria needs to be a fun and enjoyable place to work with low turnover. A brand-new absentee owner doesn’t want to be called in to run the oven on a Friday night because someone got fired.
A long time ago when I worked for one of the pizza chains during my college years, I can remember the owner suddenly started a remodel of the pizzeria. A fresh coat of paint, new floor tile, new equipment, and all those broken things we kept compiling about were suddenly fixed. We were all excited at our refreshed workplace, it appeared as if the owner loved us again. Sadly, it was because he had put the shop up for sale and wanted to make the best impression he could on prospective buyers. Ownership soon changed.
While there may be countless other scenarios that may present themselves, these three are the most likely situations you will find yourself facing. Prepare early, do your homework, and hopefully you can find yourself retiring to the Caribbean or a mountain getaway instead of re-entering the workforce when you close your pizzeria down.
For a more in-depth guide to selling your pizzeria and a comprehensive checklist to help guide you through the process, join perfectingpizza.com and enjoy these as well as many other pizzeria resources.
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