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Management buy-ins

16 March 2006

The problem
After many years of working in other people's restaurants, you decide that you would like to set up on your own. But you have concerns about starting a restaurant from scratch and wonder if buying an existing restaurant would be a better way forward.

The law
It's essential to have an acquisition strategy in place before you set out on this road. Are you looking to take over a restaurant that's already highly profitable and successful, or do you have the skills to acquire a restaurant in need of a revamp?

Expert advice
While many would-be entrepreneurs are keen to own their own business by starting from scratch, there are an increasing number who prefer the option of taking over an existing business by way of a management buy-in (MBI).

Buying a business with a track record and a basic infrastructure, customer base and workforce is usually advantageous to the incoming owner. As these businesses are usually considered less risky than a new business start-up, there are often a larger number of potential funding sources when compared to a pure
start-up.

Another advantage of buying an existing business is that, usually, the vendor will be willing to assist in the handover and may accept staged payments, which can help with the funding of the acquisition. This can mean that there's no time delay between buying the business and opening.

One of the main influences on the price a buyer should pay for a business is their confidence in the underlying profits they're acquiring. Buyers should ensure that any restaurant they're considering acquiring has positive cash-flow, room to grow and scale up, high-calibre staff and a reliable customer base.

The acquirer will also want to be happy that they can grow and develop the business from its existing level, either through improving the offering or increasing the number of covers, which can lead to enhanced profitability.

Check list

  • Remember to summarise the main objectives of the transaction in a profile. Clearly, with all acquisitions, the focus is on growing and developing a business to make it more valuable in future compared with the price paid for it today.
    A plan of action on how the value is to be built is the best starting point.

  • Appoint an experienced adviser. There are a number of issues in how a deal is funded and its structure that must always be considered. Having experienced deal-makers on your side takes the pain from the process and should speed it up.

  • Obtain preliminary independent advice on the feasibility of the project. It's vital to have any plan reviewed by a "devil's advocate".

  • Consider how much finance is required and for how long. Be realistic about the pay-back period and the cash-flow implications of the funding.

  • Make sure that your business plan can stand up to potential funders' scrutiny. Remember, it's better to marginally outperform your original plan, providing you don't undersell yourself. Make sure you have a contingency for those unexpected overruns.

  • Undertake due diligence to quantify areas of commercial and financial risk. Nearly all funders will require due diligence - it highlights the key areas of risk and its findings can reveal any skeletons in the closet. Typically, the due diligence investigations are critical for any funder when deciding whether to support a transaction.

  • In negotiation, be aware of the vendor's objectives. Be reasonable and realistic in your demands. Vendors don't always require the highest price. Sometimes, their continuing involvement in the business, or assistance with their tax planning, could be more important to them.

Beware! Be realistic in your valuation of the business, and don't be pressurised into making an expensive mistake and overpay. This could make it harder to increase the value of the business and could reduce the pace of growth of the business.

ContactsMarc Fecher
Director, Devonshire Corporate Finance (part of Kingston Smith)
020 7566 4000
mfecher@kingstonsmith.co.uk
\* Kingston Smith specialises in providing business and financial advice to the hospitality sector.

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