I own a small restaurant. It has been operating now for five years at a profit. I ran it entirely for the first three years and then turned it over to a GM for the last two years as I moved to the city a few hours away. She has done a great job and is interested in ownership. I am going to medical school next year and I am trying to figure out what makes sense for me and the business.
Under-market lease in large tourism market. Paying $36,000/yr in rent, goes up to $46,000/yr for 2023-2028 and rent is determined by fair market value for 2028-2033.
$550,000 in revenue which yields $90,000 in profit before paying me and my bank loan (bank loan is $24,000/yr, $70,000 remaining).
GM is currently paid $65,000/yr. She is interested in all options and currently awaiting a proposal from me (minority, majority, or full ownership).
On the one hand, I've built a successful business and I could definitely use the passive income, especially through medical school and residency. On the other hand, my GM is 50 years old and I don't know how many more years she has in her. I can't afford to drop everything and go back to run the restaurant when I'm in the midst of medical school.
Some possible options:
Sell her the entire business for $400k. Post-tax and after paying off my loan I'll walk away with $200k.
Sell a minority stake. Perhaps 15% for $50,000 with an additional 10% vested over 10 years. Ability to buy back her shares at fixed price at any point.
One restaurant expert I spoke to believes the primary value is in the under-market lease and that selling the business now for "chump-change" wouldn't make sense, but rather see if I can sublease to a national company. He is going to check with his leasing friend who knows the market to see if there's value or possibility there.
My worry if I sell her a minority stake is what happens if the business loses her for whatever reason? We don't currently have an assistant manager — perhaps we should create that position to have someone backup in case?
The business is an S-corp and I am currently the sole owner. How am I to go about structuring a deal and an operating agreement? I have no idea what the first steps are, nor how to proceed. We're trying to figure something out by the end of the summer, though I'm not sure if that's a reasonable time frame to get everything together.