Buying a Restaurant
Starting a restaurant from scratch is complex, exhausting and expensive. Sometimes the smart thing to do is buy a restaurant already in existence. Even though it may not take the many months of preparation that building from the ground up does, there are a few difficulties for someone interested in purchasing a restaurant. You will always have to make compromises. But the bigger threat is that a purchase is permanent; you cannot undo it.
As you know, the honeymoon purchase can quickly become a nightmare if the buyer did not know what they bought. Put simply, a restaurant buyer must do everything possible to buy the right restaurant with profit potential at a reasonable price. The new owner has to adopt the purchased restaurant as if they began it themselves.
When you say buying a restaurant, you might mean one of many different things. A few of the many scenarios are buying just the location, buying the location and equipment, buying the location, equipment and brand or buying the entire company lock stock and barrel. For the sake of time, lets divide up the two main circumstances in a restaurant sale.
Keep Some of the Old, Bring in Something New
The first scenario is the purchase of the space (and sometimes the equipment). This is normally a cost saving move as new ownership does not necessarily inherit the regular customers of the previous owner. The name will change. The branding will change. Most likely, the cuisine and menu will change. It is almost like you hit the reset button.
But there are still advantages to this kind of purchase and may be better than opening a restaurant without anything in place. Normally, all the equipment is installed and the floor plan is somewhat settled. The wiring and plumbing is ready. The space fits the zoning requirements. In regard to government regulations, it may mean just a shuffling of papers.
Of course, a lot will change with customers. Other than a restaurant being in the same spot, you will have to win their business. That means effective marketing. That means also escaping the shadow of the previous restaurant, especially if it had a loyal following. These customers may be bitter and blame you despite it not being your fault.
In essence, this is a hybrid stratefy (part opening, part purchase). The figures from the previous owner are not useless but do not necessarily represent how your business will start or perform. Also, you will probably have to make major changes in personnel as there will be a big break in continuity.
Pick Up Where They Left Off
In this circumstance, you buy more or less everything and maintain the brand, the cuisine, etc. If this is a successful restaurant, this is a smart business if the purchase is at the right price. If the restaurant is on the edge of success, this may be a steal. Remember though, everyone believes they can run a business better than current management. So you should be very careful when you buy a restaurant which you think is a fixer-upper. You might want to write out the new strategy to see if it sounds as brilliant on paper as in your head. Also test your ideas out on others. Sometimes, it is not 100% clear how the restaurant is doing. Expert help can put it in context or perspective.
Say that all the numbers work out right and you decide to buy (assuming you have the financing). You have to come up with a planned out transition strategy. You don’t want to lose good workers because they are stuck in a confusing limbo and seek out other employment. You have to build relationships with suppliers and consider if or how you should inform customers. In this situation, it is in your best interest to befriend the previous owner to starting growing roots inside the operation.
Evaluating Whether to Buy a Restaurant
Every buyer should early on develop a written criteria for what they are looking for, whether you are buying the whole restaurant or just parts. This may include preferences like cuisine, location, equipment etc. It will help to do this before actually contacting sellers so you don’t make bend your standards too much when you see real restaurants. Check the market to be realistic by scanning listings online. A lot of the criteria relates to having a rough business plan (which will be somewhat on-the-fly as you probably will not have much time). These overlaps are normally related to customers. Some aspects however is unique to buying. Here are some of those elements:
Complete Organized Documentation
The financial documents are mandatory to any purchase. The seller should be able to present 3 years or more worth of financial documents, tax returns, expense reports and income statements. You should a number in mind, say a predetermined revenue (perhaps at least in proportion to asking price) to compare against actual figures. If you do not set your expectations up beforehand, you may easily be swayed on the spot. You will have an accountant and business appraiser to give their input (valuation). Along with a lawyer, they will verify if everything is in order. A good way of gaining greater insight is by paying for a report (like a D & B report). It is good to catalogue all weaknesses and think about what effect they may have on the bottom line or the value of the restaurant.
Real estate is a crucial pillar to a successful purchase. If they own, how much of a premium will the property cost. Similarly, too high a rent can cripple a restaurant. If the lease runs out soon, you may not have a chance to make a profit on your purchase. You should consider immediately lengthening the lease if the landlord is interested. Obviously this complicates the negotiating process.
Unresolved Problems (like Legal issues)
You do not want to inherit legal problems or anything else that is unresolved and the final cost/result is unpredictable. This is especially vital if you are buying the restaurant (as if acquiring a company) whole or buying the parts (brand, equipment, location). If there are past legal dispute, you most likely do not want to bear the responsibility. This is sometimes a reason to just turn your back on a deal.
The condition of the equipment, the upkeep of the space, government compliance even the training of the staff can influence a decision. Is everything ready to go? You need to take a hard look and catch the flaws. They may make the restaurant substantially more expensive. On the other hand, you can use your observations of the flaws to position yourself better if you choose to haggle over price.
You cannot overlook considering why the owner is selling which we will discuss later on.
Getting the Price Down
In today’s business climate, you are less likely to encounter an auction situation where you have to beat competing bids. There just isn’t enough financing out there. It probably will come down to one on one negotiations, and because valuing a restaurant is an inexact science (much more than say real estate), your approach can determine if you purchase at an advantageous price.
The key to negotiation any sale to your benefit is the informational upper hand. Of course, in some ways, you cannot understand the restaurant better than the owner, but bringing much more knowledge than expected to the table can tip the scales in your favor. Several surprising insights can put you ahead of the seller while confirming that buying the restaurant will not be a decision you will live to regret.
In analyzing the future potential of a restaurant, you can investigate three areas. You should pay special attention to things that aren’t deal breakers, but knock down the price in the negotiating process. So while evaluating the restaurant, find problems and give them monetary value (sharing it is sometimes not appropriate). Make sure you get an opportunity to interact with the owner and as little through an intermediary as possible.Three good approaches to go into a negotiation ready are:
1. Market & Projections
The market and its relationship to the future financial performance of the restaurant can play a dynamic role in negotiations and decision-making. The customer makeup may be influx. That may not mean the restaurant being worse off but it may show only a shift. The owner may not know exactly who is eating there and current owner’s demographic research may not be as scientific as it once was. You can scout out the restaurant by seeing what cars people drive in the area. You can even stake out the restaurant for a better look at customer demographics. The financial information the owner provides may not be as revealing as you hope. You rarely get a breakdown. Knowing group size, age and when they come is key to demonstrating the amount of work left to be done. Also incorporating large industry wide & geographic trends and future obstacles shows that modifications to the business are likely.
2. Restaurant Operations
No restaurant has operations that are perfect. There is always something out of alignment. Something cost too much. Something isn’t working right. Perhaps the floor plan is inefficient. Many times restaurant owners don’t know the market rate on things and overpay, whether employee wages or food ordering or service providers. Pointing that out might undercut the value, especially if it is hard to remedy it.
3. The Owner
Every owner has a reason for selling. All owners have insecurities. Knowing both are helpful in assessing if buying is a good business decision and negotiating good terms. Of course, you do not want to directly target whatever weak points they may have. But there is no rule against showing reluctance (especially if it exists!). In the process, you may pick up red flags or get an idea on what you can improve.
You have to be on your toes anytime you make a large purchase. It is even harder when you buy a restaurant a dynamic kind of machine where so much can go wrong. With a system and thorough preparation, you should be able to manage this process with a high likelihood of getting a good restaurant at a good price.