You've invested the money and poured your blood, sweat and tears into a fine pizza business.

Now it's time to cash out.

Congratulations. You've earned it.

But be prepared. Selling your pride and joy may be less profitable than you think.

"We've found that virtually all business owners who are ready to sell think the business is worth more than it actually is. It's a funny little law of how things go in the sale market," said Bill Miller, president of BizBuySell.com, a Charleston, S.C., Internet listing and information service for people who are buying or selling businesses.

But just because a business might not be worth what an owner thinks it is, that doesn't mean he can't get a fair price. If all the pieces of the company puzzle are assembled in the proper order, the owner should profit nicely from a sale. And experts say getting the business positioned for sale is

Tips for Selling a Business

Source: Sunbelt Business Brokers

1. Don't be greedy.

2. Prove to the buyer your profits are real because the final sale price is influenced by reported earnings.

3. Be prepared to train the buyer for at least two to six weeks. The buyer's success depends on your help to make a successful transition.

4. Provide the buyer with a non-compete agreement. It builds trust that you won't open a restaurant right across the street from him.

5. Be ready to finance up to 50 percent of the purchase. Ninety-five percent of all business are purchased with some seller financing, also called an owner carry-back.

6. Provide a complete list of business assets.

7. Equipment must be in excellent working condition, and the business must look good.

8. Immediately upon acceptance of an offer from a buyer, tell your landlord. They can be deal killers, and the buyers will want to know if the lease requires renegotiation due to the sale.

9. Be honest and disclose any negative information. Surprises kill buyer-seller trust.

10. Don't announce the sale of your business publicly. It could hurt employee morale and send customers elsewhere.

more easily done with the help of a broker or intermediary.

Bob Slingerland runs the business valuation and brokerage arm of Prudential Interwest Business Consultants in Salt Lake City. Slingerland said the valuation-and-sale drill is largely numbers driven. "The numbers never lie, and I can pretty much tell you what a business is worth when I know some key numbers."

If he's approached to sell a business, he'll conduct a limited appraisal (commonly called a "sheet appraisal") rather than a comprehensive appraisal. "Only if you need your numbers to stand up to an IRS audit would you ever need a comprehensive appraisal," Slingerland said. At Interwest, a limited appraisal costs about $995, while a comprehensive appraisal is almost four times as much: $3,500. "In a limited appraisal, I'm looking for several factors about the business, a snapshot in time, if you will, to help me determine what it's worth today."

Slingerland starts with a request for two numbers: gross sales and seller's discretionary cash flow (cash used to pay for the seller's health insurance, retirement savings, a company car, etc.) He next valuates tangibles such as furniture, fixtures and equipment (called FF and E), and then considers intangibles like the age of the business, whether it's a franchise or an independent pizzeria, plus any outstanding maintenance needs.

Years of brokering, Slingerland said, have taught him several rules of thumb for business valuation. Each differs, however, based on whether the business is a franchise unit or an independent unit. Among his rules of thumb (ROT):

* National franchise ROT #1: "(Some franchisors) take 45 percent of the first $400,000 in annual sales ($180,000), then 50 percent of the next $100,000 ($50,000), and then 55 percent of the next $200,000 ($110,000) for a $700K business." That yields a gross valuation of $320,000. "When the number's over that, say $1 million dollars, that pizza business is a hell of a lot more valuable because all the costs go down."

* National franchise ROT #2: "Take four times monthly sales and add in your inventory." If the operation does $50,000 in monthly sales, that's a $200,000 gross valuation, plus ending inventory.

* Average independent ROT #1: Because many independents "tend to live out of their businesses," meaning, as Slingerland said, make non-business purchases through the business, seller's discretionary cash flow (SDCF) comes into play. "This guy, on average, has sales in the $350,000 to $400,000 range." By Slingerland's estimate, the SDCF for this business could be about $50,000 to $75,000. He then multiplies that cash range by 1.5 or 2 to get a gross valuation range of $75,000 to $150,000.

* Average independent ROT #2: "You also can take 35 to 40 percent of annual sales for smaller operations. Get over $500,000 in sales and those businesses are a lot more in demand. Get to $750K in sales, and people really want those businesses."

Some operations are so successful they break all Slingerland's rules of thumb. One of those was Wasatch Pizza, owned pizza operator-turned marketing consultant Kamron Karington.

"Kamron's business was off the books for an independent," Slingerland said of the three-unit Salt Lake pizza company, the sale of which he brokered. "It was run professionally, sales were reported, the equipment was first rate, he had top locations, sold a gourmet line and he marketed the hell out of it. You could have taken all these formulas I've got and thrown them out the window."

Ready for Sale

Once an operator has committed to selling the business, he needs to ensure his entire operation is in order, said Bill Eves, a broker with Sunbelt Business Brokers in Columbus, Ohio. The business should be clean, the equipment in top running order and a basic summary of its proforma must be available.

Speaking at the 2003 Mid-America Pizza, Soft-Serve and Restaurant Show in Columbus, Eves said brokers and intermediaries will lead potential buyers to look at businesses they're representing--often without the seller's knowledge. Such secret shopper visits help maintain the confidentiality of buyers and sellers until an offer is made. It also weeds out window shoppers.

"The intermediary allows the seller the freedom to run the business and be insulated form the 'tire kickers' out there," said Bob St. Germaine, another Sunbelt broker who spoke at the show. "The intermediary makes sure you see only highly qualified candidates."

Eves said the broker/intermediary looks not only for potential buyers who could afford the business, but those who could develop some "chemistry" with the seller. Having the two get along with each other is crucial for many reasons:

* If a sale occurs, the seller typically remains on hand for several weeks to train the new owner.

* If the new owner is likeminded, there's a greater chance the current staff will remain after the transfer of ownership.

* A likeminded new owner probably will share the same customer service values with the old owner and thus maintain the current customer base.

* About 95 percent of the time in small business sales, sellers finance some of the buyer's purchase. That means the seller wants the new owner to succeed so he'll be repaid.

Why seller financing of pizza businesses is so common, Slingerland said, is because acquiring complete financing of restaurant purchases by

Tips for Buying a Business

Source: Sunbelt Business Brokers

1. Look at gross sales first. Good businesses show gross profits of 10 percent to 20 percent of gross sales.

2. When you find a business you like, ask for an exploratory meeting with the seller and ask for his "story" about his business. Key to the story is why he or she is selling it.

3. Don't expect complete business financial records from an "entrepreneurial" owner until an offer is accepted and due diligence is initiated.

4. Make your best offer is based what you have learned during your meeting, the good personal chemistry you have with the seller and the business facts as represented.

5. Make any contact about the transaction only through your sales agent. It avoids any direct and possibly contentious discussions with the seller.

6. Expect a surprise or two before it's all over. An experienced business intermediary will guide both parties in the transaction.

banks and the Small Business Administration is nearly impossible. Since the real estate housing a pizzeria is usually leased, there are no hard assets (other than restaurant equipment, and the used market is glutted with that) for lenders to claim in the event of a loan default.

Look closely

Before making an offer, a potential buyer needs to do his homework. A very basic step is finding out what like businesses in the area of operation, as well as around the nation, have sold for. BizBuySell.com sells such information collected in targeted reports (as do many other outlets), and brokers typically have access to the same information.

Once the buyer's broker or intermediary has valued the business, if the buyer is still interested, an offer is made. If the seller agrees, then the buyer initiates due diligence--essentially a microscopic examination of the business.

Since Eves believes a business isn't worth buying unless it's been profitable and growing for at least three straight years, a seller should request at least that many years' worth of information to get a good look at the business' numbers. If the books are in good order, due diligence is much simpler, he said, but if they're sloppy, buyer beware.

"You might find the owner is living a nice lifestyle, but the P&L looks awful," he said. "You've got to go back and refigure the financials to reflect the true economic value of the enterprise."

Whether the books are tidy or trashy, Eves said to hire an accountant or some other third-party examiner to review all documents in depth. At this stage, "It's the accountant's and lawyers jobs to criticize the deal and point out potential flaws," he said.

During this time Slingerland said the buyer should look closely at how the business is operated, particularly in the areas of food costs and labor costs.

"I want to see if he's really hitting a 28 percent food cost on that pie or slamming 50 percent into it, because profit boils down to portion control," he said. "I want to see if he's really running 25 to 30 percent labor" and not having people work off the clock to sweeten the numbers. A well-run operation, he said, will be easier to step in and maintain than one requiring a lot of fine-tuning.

If the deal passes muster and both parties agree to proceed with a sale, completion centers on developing a seller-led training program.

"Ongoing training is a really nice benefit of buying a franchise," said Slingerland. "With an independent, the owner needs to stick around some make sure the next guy knows what he's doing. It's in his best interest to do so."

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