When everything goes as planned, a business owner builds value in her business over time by increasing customers, sales, and profit. When it comes time to exit the business, whether for retirement or to pursue another venture, she will be able to sell the earning capability of that business to a buyer who sees an opportunity to take it even higher.
Unfortunately, things don’t always go as planned, and if the business is unable to generate enough positive cash flow, for legal, health, regulatory or other personal reasons, that business may be forced to cease operations and close its doors.
While not necessarily a planned event, all is not lost when a business shuts down. If the business owner has material assets in the form of significant leasehold improvements, FF&E, inventory, transferable permits and licenses, or a coveted real estate location (whether owned or with favorable lease terms), they may still be able to find a buyer for these assets in place. In this type of sale, the buyer is acquiring the assets of the business and not an ongoing operation and its cash flow.
Surprisingly, far too many small business owners simply shutdown, without realizing their business still has value. In fact, a business sold for its assets alone can be quite valuable, regardless of its financial performance, and many buyers are searching specifically for these types of opportunities now and will be increasingly common looking forward. In its Q2 2020 Economic Average Report, Yelp reports that 72,842 of the businesses on its platform have permanently closed as of July 10, 2020. This total includes 15,770 restaurants, 12,454 retail businesses, 4,897 in the beauty industry, 2,429 in the bars and nightlife category, and 1,930 in the fitness industry. While the COVID-19 pandemic has disproportionately affected these industries, there are buyers willing to look past the pandemic to acquire the best locations and assets to launch their concepts.
Benefits of Selling a Closed Business for the Seller
If things aren’t going as planned for your business due to unforeseen circumstances (such as a pandemic or other market forces), what do you do? Unless you have the capital to allow yourself the time to turn things around, you can either simply walk away and turn in the keys to your landlord (who may have claim to your business assets as collateral against your lease), or try to find a willing buyer for the physical assets of your business. Here are some situations where it is worthwhile to consider the latter:
1) You have made significant leasehold improvements
If you have made significant leasehold improvements in the form of build-out or the installation of custom equipment, a new operator may value these and should be willing to pay you versus having to take on this work himself. Matt Coletta, Co-Founder and Managing Partner at M&A Business Advisors in California helped a client in a similar situation recently. The business was a high end, high volume day spa in the wine country that had previously invested over $500,000 in improvements and equipment. The business was closed due to the pandemic and the owner needed to relocate out of the area. Rather than simply walk away from the lease, Coletta was able to find a buyer and helped renegotiate the lease with a cooperative landlord to provide front-end rent relief for the buyer. In terms of valuations for a “Sale of Assets in Place”, Coletta offers: “every deal is unique and is ultimately valued based on what a willing buyer and willing seller agree to. In this case, the business was generating significant cash flow pre-pandemic, so the buyer had confidence in the potential down the road.” The business was sold at a significant discount, but the seller was able to generate some funds from the sale and Coletta was able to terminate the seller’s existing lease that had 3 years remaining on the term.
2) You have material physical assets in the form of FF&E, licenses, intellectual property or inventory
Sometimes the physical assets of the closed business may carry enough value themselves to warrant pursuing a sale. For example, in the bar and restaurant industries, liquor licenses are a valuable and coveted asset. Similarly, specialized cooking, refrigeration, and cleaning equipment is of value to a new restaurant operator. The sale of assets is extremely common in the restaurant sector, where starting from scratch can take a year or even longer before becoming fully operational, often due to lengthy permitting processes. In other sectors, such as manufacturing, there may be extensive value in existing infrastructure or in specialized factory equipment, inventory, or intellectual property that can be repurposed by another manufacturer.
3) You have a great location and a landlord who will transfer the lease to the new tenant
If you have a great location that will be in demand with other operators and you own the real estate, you are in the driver’s seat. But even if you are in a leased location, and it’s a strong location, you may have leverage in selling your business assets. Steve Zimmerman, Principal Broker and Owner of Restaurant Realty Company in the San Francisco Bay Area explains: “If you can bring a new tenant to your landlord, you save your landlord having to pay a lease commission to lease up the closed space. Additionally, if the landlord has a chance to obtain a new tenant with significant operational experience and a strong financial position, the landlord may be willing to negotiate a favorable lease transfer to the new operator that works for everyone and removes the lease obligation from the exiting owner”.
Benefits of Buying a Closed Business for the Buyer
Many buyers are specifically looking for closed businesses because they offer the right location, time savings to market, and good value. This path is particularly attractive to experienced business operators with the know-how to effectively leverage the assets of the closed business. Many existing businesses look to expand in this manner by targeting the right opportunities. In a recent BizBuySell survey, 14% of business owners who were looking to buy another business were doing so to either upgrade or expand locations. You may want to consider purchasing a closed business’ assets in the following scenarios:
1) The location is desirable, important, and hard to replicate
It’s a well-known phrase that the three most important things in real estate are location, location, and location. If you find that location and it happens to be a closed business, don’t automatically dismiss it. While it will carry higher risk than an established business with proven cash flows, if you have the know-how to get a location on its feet, it can pay dividends in the long run. Sometimes high traffic, central locations are what make or break a business. Of course, you should ask yourself why the business wasn’t successful in that location, but it could be that it was the wrong business versus the wrong location, or perhaps the wrong management.
2) You want to speed up the timeline to open
One of the advantages of buying an established business over starting one from scratch is the time-frame to profits. Successful established businesses are already generating profits. Start-ups can take a long time to get there, and many fail before ever doing so. Buying the assets of a closed business gives you an option somewhere in the middle. You are not starting from zero and will have assets that can be more quickly deployed towards generating income. Build-out, securing equipment, licenses, permits, and the like can be time consuming endeavors versus starting with the assets of a closed business which can give you a significant head-start, and at a lower price point than buying an operating business.
3) You know how to build the business and only want to pay for the key assets, not existing cash flow
One of the primary reasons that many buyers are looking at closed businesses today is they allow the buyer to acquire the “guts” of a business without having to pay a premium for any cash flow. In short, some relative bargains can be found out there for savvy buyers who have the knowledge on how to capitalize on these opportunities. These buyers need to recognize the added risk that comes along with trying to start up something in a location that didn’t work out for the prior owner, but if you can bear or mitigate that risk, there is ample opportunity for those who pursue this path.
Summary
In every major economic down-cycle, whether brought on by a dot.com bubble, financial crisis, or pandemic, there are always businesses who unfortunately cannot weather the storm and are forced to close their doors. The owners of these businesses should realize that they can get some value for the assets of their business even when it is not a viable ongoing concern. Consult with a professional business broker to see if your closed business can be sold for the value of its assets or location.
Buyers should also recognize that these down-cycles often present unprecedented opportunities. Online marketplaces such as BizBuySell.com offer the ability to search for business assets for sale. As Warren Buffet has famously stated, opportunity waits for those willing to be greedy when others are fearful. Great companies emerge during every recession, and this time should be no different.
