Restaurants fail for several reasons, possibly mismanagement, owner is sick, or maybe too much competition of a food type in the area, etc. When working with a seller whose business is failing it is important to recognize the additional stress that the seller is under. If the gross sales are unable to cover the costs of running the business and produce a profit, then it may be necessary to do an asset sale.
An asset sale is when the business shows no income, losing money or the seller cannot prove the profits of the business that is cash driven. Just “closing the doors” can be very costly to the owner, because the landlord can sue for time remaining on the lease, also the owner would still be responsible to pay taxes, employee wages, outstanding contracts, and any other expenses that they may have been floating while running the store. I always remind the seller that they do have value and something to sell. An asset sale still includes machinery, furniture, fixtures, and equipment, inventory, government licenses and permits, logos, telephone number and leasehold improvements. I often have buyers come to me and ask for an asset sale because they plan to put their own food type in anyway and see this as way to alleviate costs that occur from starting a business from scratch.
When an owner decides to sell their distressed restaurant, their initial inclination might be that they want the broker to take an open listing, which allows many brokers to sell at the same time. I can understand the seller's frustration, but I try to advise them that this option may feel safer, but it is not. When a broker takes an open listing, and knows many people also have the same listing - how much time, money and resources are they going to spend? An exclusive listing is much more beneficial to the restaurant seller. I explain to the seller that it is extremely important that the buyer is fully aware of the financial situation of the business, so if they buy it, they can't later turn around and sue the seller because it does not show a profit on their own endeavor.
Setting a price for the business has many factors and even though some use a common multiplier, it can often be what the market bears, but buyers of an asset sale are aware of how expensive it would be to do tenement improvements of a retail space from a vanilla shell, so finding an existing location has appeal.
I sell a restaurant showing little or no income the same way I sell something that is profitable, but I use a few more precautions. The first thing I do when meeting with the restaurant buyer is explain the financial situation of the restaurant. I also have the buyer do some form of due diligence so that they have some idea about what they are getting into and can't later say they didn’t know what they were buying. If everything between buyer and seller seems satisfactory I will often go to the landlord and see not only will the buyer be approved, but also will their "food type" be accepted. I do this to not incur costs of opening and cancelling an escrow.
Going to escrow is very important when selling a restaurant because it protects all three parties, buyer, seller, and broker from future litigation. Right before going into escrow I have the restaurant buyer sign an "Asset Sale Disclaimer", so they are aware of the decision they are making. The "Asset Sale Disclaimer" defines what an asset sale is and explains "You are buying the business in its PRESENT physical condition (as is) with no warranties implied or given". I instruct the escrow officer to put in the language of the escrow statements that the buyer has reviewed and acknowledged the business disclosure and has signed an "Asset Sale Disclaimer". Escrow is important that all past debts of the business are paid, contracts and lease transferred, and all state government licenses and permits are in the name of the new buyer upon closing. Once escrow is closed then the restaurant buyer is the new owner and the previous restaurant owner is free to pursue more profitable endeavors.
Sometimes the previous restaurant owner just suffered from "burn out" and a restaurant can be much improved through the enthusiasm of the new owner, which translates into better customer service. Changing the style of food due to over saturation in the area to something new can also work wonders. Many of my clients will put in a new Point of Sale system so that they can more accurately track peak periods and food purchase types. I've seen locations that have once suffered previously, flourish under the right restaurant ownership.