We have all heard the terrifying statistics: 25% of restaurants fail in their first year, 60% by the third year, restaurant owners work 80+ hours a week, never sleep, are destined to be overworked and underpaid…and so on. And yet the allure of owning a restaurant or bar is as strong as ever, filling aspiring restaurateurs with dreams of their own haven of culinary perfection. For many, instead of building a restaurant from scratch, the first step is to buy an existing restaurant. But like anything else, this path is fraught with its own risks. So what do you do if you are thinking of buying a restaurant, but have little or no experience?
This is also called due diligence, but it simply means that you need to fully understand what you are buying. This includes financial statements (remember that most restaurants are cash businesses, so a lot of income may not be reported), inventory, assets, staff, lease, permits, official documentation…the list goes on. It can be daunting, but doing your homework ahead of time will save you a lot of pain later one. And obviously, find out why the owner is selling. If it sounds fishy, it probably is.
Figuring out how much to pay for a restaurant is probably the most delicate part of the discussion with sellers. This might require some financial know-how, and it might be worth seeking help. The short story is that if the restaurant is shut down and not generating any money, then you should pay for the assets (and have those properly appraised). If the business is generating money, then figure out the profit (the provable profit, not what the seller tells you). This will give you an indication of how much you should pay.
It’s a tired cliche, but it’s tired because it’s true. Understand the neighborhood, the customers, the competition. Get a feel for the potential of the restaurant in the local market. And don’t be afraid to walk around and ask people about their thoughts on the restaurant. Reputation is everything in the restaurant business.
Do not try to do this alone. You will need help from more experienced hands at all stages, whether its going through the documentation, to inspecting the equipment, to proofreading the final sale and purchase agreement. This is not a Do-It-Yourself project, this is a major step in transforming your life from aspiring restaurant owner to successful food guru. Surround yourself with people who can help you get there, it will be worth it.