What to consider when buying a restaurant?
Buyer is considering purchasing a restaurant, but has never owned one before. What are the main things he should look out for?
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Question:
I want to buy a restaurant but have never owned one before. What are the main things I should look out for or consider?
Answer:
Perhaps the first thing you should consider is why you want to buy a restaurant altogether? As long as you are doing so because this type of business fits your strengths and experience, it's fine, but if it's a matter of "it's always been a dream" then think seriously because the failure rate is terribly high in these situations.
Now that we have that out of the way, here are the main considerations:
The Lease and Location
Unless you're looking at buying a restaurant that is considered a longtime "classic", chances are that the location will drive the business. Naturally, good food/service/value are critical aspects to any good restaurant you would consider buying but having access to customers is always key. As such, you must investigate the lease to determine whether it is assignable, the number of years remaining (you want at least 10 years between the current lease and available options).
Something very interesting has occurred in this business regarding leases and landlords. They (the landlords) have become very weary of assigning leases to new owners who do not possess any restaurant experience. Often times, they will simply refuse the assignment regardless of lease language, or will require personal guarantees, collateral, numerous months of prepayments, or keeping the prior owner on the lease as well. Usually, you can negotiate with any reasonable landlord, and don't take a hard nosed approach initially; however, investigating the lease and transferability thereof should be one of your first tasks in your due diligence phase.
The Valuation - always a challenge
Restaurants are notorious for having lots of unreported income. I'll leave the pros and cons aside for another column but the fact remains you'll likely see several restaurants where the books and records state one thing but the owner tells you a whole different story. It's one of those: "don't worry, there's plenty of cash sales".
The onus is on the seller to prove the figures that he represents as the "real" profit. I receive a tremendous number of inquiries from clients and subscribers about this issue of unreported income and this is a very dangerous situation for any buyer. Personally, I have always felt if the seller cannot prove it, he cannot expect to be paid for it. Unfortunately, this is easier said than done and so you need their assistance in reconstructing the figures. As such, it is important that you engage a CPA who is familiar with these situations as well. Usually, the financials can be reconstructed by reviewing supplier invoices, payroll, seller records, meal receipts, etc. Think about it as a three pronged chair (as an associate of mine once told me). If you have two legs, you can usually figure out the third one.
When it comes to unreported income, there are three questions that you must present to the seller:
- Can he prove it?
- How?
- Is he willing to?
The Equipment:
You'll want to be certain that the equipment you will be receiving with the business is in working order. If not, what are the costs to repair and or replace it? In most cities you can find a local company/individual who will examine the equipment and provide you with a report. This can be very helpful. Naturally, they will want to cover themselves and also find a few problems. Nothing is perfect and a restaurant business will need to repl
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| Get more expert advice in Richard Parker's How To Buy A Good Business At A
Great Price - the most widely used reference
resource and strategy guide for buying a business. "I highly recommend this course to anyone even thinking about buying a business." - Dylan Garland President, BizQuest |
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Richard Parker author of: How To Buy A Good Business At A Great Price(TM), the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center. Richard Parker is also the author of BizQuest's Business for Sale Blog |