Exit Strategies for Cafes and Restaurants | Hilton Smythe

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Exit Strategies for Cafes and Restaurants

Learn how to plan your exit strategy for your cafe or restaurant business, and get support from our expert business exit advisors every step of the way.

Planning how to leave is as important as planning how to start. No business is immune from these requirements. Within a notoriously fickle industry, hospitality entrepreneurs also require a business exit strategy.

After all, as of 2022, the number of restaurants falling into insolvency increased by more than 60% due to economic changes caused by rampant inflation and the COVID-19 pandemic. It demonstrates how vital having a contingency plan is.

What is a business exit strategy for the hospitality industry?

Whether your hospitality business has the stomach for an economic rollercoaster or not, the purpose of an exit strategy is to prepare you for anything. In short, an exit strategy for the hospitality industry accounts for various contingencies that could necessitate your departure, such as:

  • Mergers and acquisitions
  • Management buyouts
  • Liquidation
  • Bankruptcy

The goal of your exit strategy is both offensive and defensive. As a company director, you will refer to your exit strategy to maximise your gains and minimise your losses.

Are business exit strategies important for cafes and restaurants?

Exit strategies are integral to any business, but the hospitality business requires exit strategies more than most because of this niche’s built-in volatility. After all, around 60% of small businesses fail within the first three years, with hospitality seeing some of the highest insolvency rates.

If you’re wondering why cafes and restaurants need exit plans, here are some of the primary reasons:

As you can see, while most people talk about exiting a hospitality business from a negative standpoint, exit strategies also help define your growth.

Risks of not having a business exit strategy for your restaurant

Substantial risks accompany not having any form of a business exit strategy. Simply praying things go right for you is not a recipe for success – yet, two-thirds of SMEs find themselves in this scenario.

Not able to meet your goals

The whole point of starting a business is to achieve a personal or business goal. Without an exit plan, you risk departing without reaching these goals.

These goals could be retirement, the desire to pass on your business, or launching a new project in the future.

Reduced business value

Are you getting the full value for your business?

Without a plan, you’ll never know the truth, and it puts you at a disadvantage during negotiations, making you vulnerable to buyers looking to pick up your restaurant at a discount.

Remember, there are plenty of investors going out of their way to find successful businesses that have been undervalued. Knowing your value and your potential defends you against selling for less than you’re worth.

Not mentally ready to exit

Exit planning also supports entrepreneurs in knowing when to go. Developing that mental state to leave without regrets is tricky for any business owner.

With an exit plan, you have a defined picture that will support you as you make for the exit.

Challenges of selling a cafe or restaurant

Deciding to sell your café or restaurant is the best-case scenario for your venture. The problem is ensuring that you get the correct figure for your business. After all, the last thing you want is to sell your restaurant franchise for £1 million when its value was £2 million.

So, what are the main challenges of selling your business?

Valuations – Determining your value is notoriously tricky. This is where independent valuation companies come in because they can value your current business and its potential.

Market Saturation – The UK hospitality sector comprises 143,000 businesses employing 1.8 million people. Selling in a saturated market results in natural challenges; because why should someone buy your café and not someone else’s?

Employee Transition – Hospitality has a high employee turnover, so how will you manage the insecurity created by a potential sale?

It takes longer than you think to prepare for the sale of a business. Without adequate preparation, you risk chaos and disruption, regardless of whether the sale goes through.

Best types of exit strategies for cafes and restaurants

Technically, hospitality businesses follow the same exit contingencies as other sectors. Ultimately, while the nuts and bolts of running a restaurant or café differ, the ways you can exit remain the same.

So, what ideal exit strategies should you consider as a café or restaurant?

  • Management buyout
  • Merger and acquisition
  • Employee buyouts
  • Family succession
  • Liquidation
  • Bankruptcy

Note that this is a non-exhaustive list. Some restaurants may become franchises and create an Initial Public Offering (IPO). Still, since this is relatively rare, it’s unlikely that this contingency will get triggered.

What is important in a cafe business exit strategy?

Café business exit strategies require firm planning and preparation. The most essential piece of advice is to plan early. The worst time to plan for your exit is when you are already listing your business for sale.

Entrepreneurs should always begin exit planning during the early growth stages of their hospitality businesses. Beyond that, here’s what a founder must consider.

Market conditions

Your exit plan must include a complete analysis of current market conditions. Understanding your asset within the context of the hospitality landscape is critical to preparing your business for sale.

This is where you’ll notice significant crossover with other business plans, including growth and marketing strategies.

Capital

Money is everything in planning your exit strategy, including its timing. Defining a tripwire for a positive return on investment or loss will help you to trigger different contingencies.

For example, you may decide that an overall investment loss of 50% is enough to launch the liquidation aspect of your exit strategy.

Asset performance

Measure your asset performance for your hospitality business. Your asset’s performance is another limit you can apply when defining your exit strategy.

For example, if your restaurant is packed to the brim, it could illustrate the right conditions for selling your stake to an investor.

Your expectations

An exit strategy also accounts for your expectations. Not every investor wants to be serving drip coffee at the counter twenty years from now.

Any good exit strategy sets out your expectations. It could include a set retirement date or a desire to earn a specific amount to move on to your next project.

Exit options

All hospitality businesses must have every potential exit option outlined. On the other hand, you should define your ideal exit from day one.

These focuses could be on building a business ready to pass on to your child or the desire to sell to a large hospitality group when you’ve reached certain thresholds.

Exit timing

Finally, there’s timing. Sometimes, exit strategies are thrust upon you due to economic conditions. However, the optimal scenario is to depart on your terms.

When determining exit timing, you must consider various factors, including:

  • Project expectations
  • Market cycle
  • Optimal exit strategy
  • Your personal goals

Ultimately, you cannot control every part of your exit timing, but with proper planning, you can grasp your destiny with both hands.

How to choose the right exit strategy for your cafe

Exit strategies can be boiled down to a select few categories. The definition of a successful business exit is family succession, selling your stake, an IPO, an employee buyout, or planned retirement.

In other words, a successful exit strategy enables you to leave on your terms and set yourself up for your future plans, whatever they may be.

Choosing the right exit strategy is a matter of accounting for the overall goals of your café or restaurant and establishing the likeliest outcome based on the current state of your firm.

In short, only you can determine what the right exit strategy is, and that’s something that will differ for every entrepreneur because it’s something highly personal tempered by the expectations for the business.

How Hilton Smythe can help with restaurant and cafe exit strategies

Exit planning is a complex endeavour, no matter your business. Trying to tackle it alone with no experience is the wrong way to go about it. Instead, enlisting a team of experts, like ours at Hilton Smythe, ensures that you take control of a successful exit.

Our exit strategy experts are equipped to advise on a range of scenarios, including:

  • Evaluating the value of your business.
  • Defining an exit plan based on your goals.
  • Making targeted recommendations for how to go about your exit.

Regardless of where you are, Hilton Smythe professionals are friendly and approachable and will always provide an objective overview of your current exit plans and hospitality business. Talk to our team now to schedule a consultation call.

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