What you need to know if you’re thinking about getting out of the business
By Carl Sacks, Certified Catering Consultants
As consultants specializing in the catering industry, one of the most frequent questions we are asked is: How do I go about selling my catering business?
Many caterers, including some of the most successful catering entrepreneurs, entered the business almost by accident. In our experience, very few caterers started their companies with a detailed business plan that included an eventual exit strategy. But many catering companies are nicely profitable, and profitable businesses can be bought and sold.
In this article, you’ll learn about maximizing the value of your catering company, factors a buyer will consider and preparing your business to go on the market. (See the September/October issue of CFE for part one of the article, which covers the different categories of caterers, which types of catering companies are most likely to sell and who the buyers are.)
Factors a Buyer Will Consider
- A strong history of stable earnings: Stable revenues and earnings are of prime importance to a buyer. Are your revenues and earnings growing or shrinking? Are your net margins growing or shrinking?
- Market position: The dominant caterers in any given market are generally going to be the most attractive targets for acquisition. There are some exceptions to this rule, but in general buyers are looking for top-of-the-food-chain operators.
- Geographic location: While there are certainly exceptions, generally it is better to be located close to growing and major population centers. You can be located on a farm, but if that farm is close to a large and growing city, your business will be worth more. Exceptions to this rule include companies that dominate their respective markets.
- Brand equity: This factor is related to market position. A well-known and highly regarded caterer is likely to command a higher price for the exact same product than a lesser-known competitor.
- History of quality management: A catering company that is so small that it has only ever been managed by its owners is generally considered a mom-and-pop caterer. There’s nothing wrong with being a mom-and-pop caterer, but the odds of being able to sell the company to an outside party for a substantial amount are slim. For any caterer interested in eventually selling, it’s important to reach a size that affords the hiring of professional managers.
- A stable work force: The most valuable assets of any catering company are its personnel, and continuity is key. Having low turnover is effectively an endorsement of the company by its internal customers.
- A strong business culture: Companies that are operated as lifestyle businesses, structured more for tax avoidance than to report a profit, are often a hard sell.
- Opportunity for improved profitability: Having a history of provable profitability is key to having an attractive offering for sale, particularly to unrelated third parties. However, there is also a case to be made that for some buyers, having some runway for improved profitability is important.
- Event venue contracts: Venue exclusives are like money in the bank, particularly for contract foodservice operators. A president of a regional contract foodservice company told me that the first thing they look at when evaluating a potential caterer acquisition is how much of their revenue comes from contract venues. It’s also important that these contracts are assumable by a new owner.
- A favorable lease arrangement: Since many caterers lease rather than own their office/commissary/warehouse facilities, the cost and duration of the lease will be a consideration for a potential buyer. If the caterer also owns the facility from which the business operates, the lease would be subject to negotiation as part of the acquisition.
- Well-maintained equipment: An acquirer will not be impressed by a rundown physical plant, unless the company is for sale at a very deep discount. On the other side of the coin, a modern production facility can add value to any deal.
- Well-documented historical sales and financial information: The more reporting that is available to the buyer, with plenty of detailed back-up, the more likely it is the deal will go through. The financial reports should also be consistent with industry standards and should be easily analyzable.
- A strong balance sheet: A company that is up for sale should have a balance sheet that reflects a successful business. While there are caterers out there that have little or no invested or retained capital, that may be another red flag for the potential buyer.
- Accolades: Awards, favorable reviews and positive press coverage are also important, adding value to the selling company.
Strategies for Maximizing Value
Having spent a great deal of time working with independent caterers, I’ve learned two related things:
First, many smaller catering companies are operated as lifestyle businesses, meaning they are operated by their owners specifically to maintain a certain comfortable level of income. There’s nothing wrong with operating a lifestyle business, but they are often hard to sell.
Second, many caterers hate to pay corporate income taxes, and therefore avoid showing a profit. But without a provable profit, the amount that may be generated by the sale of a business may be minimal.
If you are planning to sell your business at some point, you should start planning well in advance, with particular focus on the following:
• Ensure that your business shows a profit every year, over and above the amount that you as the owner take out in compensation.
• Make sure that your financial reporting is clean and easy to understand.
• Regularly test your operating metrics against industry standards to determine where you can improve.
• Minimize any gray area business expense deductions. These can be a red flag for potential buyers.
• For on-premise caterers, since the opportunities for repeat business are fewer than for off-premise caterers, keep up-to-date Pace Reports for sales bookings so you can show a buyer how you are doing compared to earlier periods.
Who Should You Use to Sell Your Company?
There are several professional service providers you should consult to prepare your business for sale.
First, have your company evaluated for salability, including establishing a range of values. This can be done by using an industry consultant, a business appraiser or a CPA. Because the catering industry is relatively small compared to other hospitality sectors, you are unlikely to find an appraiser or a CPA with a lot of experience valuing catering companies. Be careful about assuming that a CPA or appraiser with restaurant experience will necessarily understand the catering industry.
If you have real estate to sell as part of your business, in every state in the U.S. you are required to use a licensed commercial real estate broker to list the property—unless you are selling the business and its attendant real estate by yourself as owner.
The rules relating to brokering the sale of a business vary by state. In some states, only licensed real estate brokers may participate in a commission or success-based transaction. But in the majority of states, anyone can broker a sale of a business. Consultants and M&A advisors are often used, particularly for larger transactions.
For transactions of any substantial size, you should expect to have attorneys and accountants involved as well.
What Is the Sale Value of a Catering Company?
Most catering industry buy/sell transactions are based on a multiple of earnings averaged over the most recent few years. The calculation is typically done based on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), plus the book value of the company. Since most catering companies don’t have amortization and taxes shown on an income statement, the actual calculation is based on the reported profit with interest and depreciation added back, times the agreed-upon multiple.
Most buy/sell transactions also allow for some adjustments to the reported EBITDA income. These are expenses that the current owner has charged to the company, but a successor owner would not necessarily be obligated to continue to pay. These must be legal for most purchasers to accept them as adjustments. Examples might include generous contributions to a pet charity, or excess rent paid to a separate real estate entity under common ownership, or above market compensation.
Regarding the multiple of EBITDA used to value caterers, a larger caterer will generally be valued at a higher multiple. This reflects the inherent safety and stability of a larger company. The average multiple that we have seen in the recent past has been in the 4 to 5.5 times range for larger caterers, and 3 to 5 times for smaller.
If you are planning to sell your company, follow as many of the recommendations listed above as possible. Even if you are planning to continue to work for many years, a selling opportunity may present itself when you least expect it. Since there are many more sellers than buyers for catering companies, keeping your business in maximally salable conditions always is crucial.
ABOUT THE AUTHOR
Carl Sacks, the managing member of Certified Catering Consultants, has spent 20 years as a consultant to the catering industry. His list of clients includes many of the most prominent and successful caterers in the industry.
Sacks is regarded as the top expert in several catering related areas, including maximizing financial returns, strategic planning, and exit strategy development and implementation; and is also widely known for his expertise in contract and venue RFP response development. In addition, he also provides advisory services to both buyers and sellers of catering companies, and has been involved in many successful transactions. To contact him, email firstname.lastname@example.org.