Reality television has a lot to answer for, especially in the food industry. It’s creating a world of wannabe chefs in which home cooks literally quit their day jobs and start up a small food business, without doing all their homework. But it’s not all doom and gloom, local producers, established small food businesses, cafes and restaurants are reaping the rewards as food consumers become more savvy and their palettes more educated.
But it was this spike in the failings of food start-ups that saw lawyer Peter Panagiotopoulos develop an education system to ensure that people know the ins and outs of the food industry before taking the plunge. As a legal professional, Mr Panagiotopoulos was seeing the same mistakes made time and time again by people getting involved in the food industry, and decided to do something about it.
“It’s better for me to educate someone, and give them guidance, then it is to be there at the end to mop everything up,” Mr Panagiotopoulos told Neos Kosmos.
According to the Australian Bureau of Statistics, there are 15,423 cafes and restaurants in Australia, the Restaurant and Catering Association puts the number closer to 40,000. The ABS records show 36.3 per cent of such business are in New South Wales and 27.4 per cent in Victoria. The ABS also projects one in five of these operations sell or cease trading annually, with roughly the same number starting or entering the sector. This is a “churn rate” of 20 per cent.
“Food and business live and die with their lease; if the lease is wrong the businesses will always suffer,” says Mr Panagiotopoulos when asked the biggest danger of starting up a food business. He says lease negotiations appear time and time again to be the undoing of many food businesses.
As a legal professional, Mr Panagiotopoulos lists these as key points to consider before starting up a small food business:
Retail food businesses are a ticking clock. They live and die by the length and conditions in their lease.
There are only two ways out of food businesses – give the keys back to the landlord (whether under duress or otherwise) and get zero return for the investment, or to sell the business at the right time for the right price.
Unlike the weekend property auction results, there is a scarcity of data available to business owners from which to review sale prices for comparable businesses. There are a couple of good reasons for this. Firstly, food businesses are effectively sold “off market” that is there is no single collection point for sales data as there is with property and share sales and transfers. Secondly, sale prices are for the most part confidential and impossible to independently verify.
Comparing one cafe to another may be easy on the surface, but the only things that drives resale value is net profit and lease years remaining. Understandably this information is not open for inspection.
The currency of food business sales is “profit per lease year”. Once the EBIT of a food business can be verified (or reconstructed – where for example the owners try justify an “off the books” cash component) it is multiplied by a factor to arrive at a sale/asking price.
These factors are known as “EBIT multipliers” and the exact multiplier used by business brokers and sales agents vary according a host of value drivers and value detractors particular to a given business.
Before signing a lease, startups need to reverse engineer the sale of their business having regard to the length of the lease and factors that drive resale value.
Business with inadequate lease years left on the lease will never achieve a high multiple or a sufficient resale because the lease years remaining dictate the multiple of lease years a buyer is prepared to offer.
“So without having an understanding of how food businesses are valued and the relationship between the lease and resale value, many operators either hold on too long, suffer under the burden of heavy rentals, or try off loading their businesses for a fraction of what they may have been worth,” he adds.
Through seminars that are open for the anyone interested in starting up a food or coffee business, and online information via his website and Twitter account, Mr Panagiotopoulos is able to pass on legal information to make sure an interested party is armed with as much information as possible before starting up their small business.
The seminar entitled ‘Winning Lease Negotiation for Cafes’, held by lawyer Peter Panagiotopoulos, will be held in Melbourne on Friday 27 July, you can book a place and find out more about the event by visiting