Considering the time, the cost and the exhaustive research that goes into opening your own bar or restaurant, buying an existing restaurant might be exactly what you’re looking for. With that said, buying a restaurant is no slam dunk. There is a lot to consider, so right here, right now I’m going to help you to avoid the devastating landmines that plague people when purchasing their own bar or restaurant for the first time. We are going to cover twenty of the most important factors to look for when looking to buy a restaurant because you don’t want your dreams to blow up in your face because you didn’t know what the hell to look for, what to do, or what to ask.
This question was recently asked on my Bar & Restaurant Mastermind Facebook Group, and there were so many great answers from the experienced owners and managers in that group. So, I’m going to cover many of the more well-known things to look for, as well as a few you might have never thought because I want you to be super savvy and know what to look for if/when you’re ready to purchase your own place.
Speaking of my Bar & Restaurant Mastermind Facebook Group, if you want to join group, you can click here to go apply, as it is a private group. You’ll need to answer three questions for us to review before accepting you into the group. Hope to see you there.
Ok, with the housekeeping out of the way, let’s get to it. For starters, you need to make sure you’re dialed into the right mindset when purchasing an existing business. I get people saying to me, “I’m not sure what went wrong. I looked at the profit/loss statements. Everything looked great. How could this be?”
Yes, of course everything looked great. The previous owners entered the information for those P & L’s and they can enter and make up anything they want. Your job as a buyer is to infiltrate and interrogate like you are a CIA agent attempting to extract information from a notorious terrorist. Then, once you find the place that’s right for you, that’s when you can start putting your own systems and standards to ensure your own success.
Because when it comes down to it, the mistake I see most from people purchasing a restaurant is that they are too trusting and they simply “take the sellers word for it”. Don’t be one of those knuckleheads. Be smart. Be decisive. And don’t be afraid of asking the tough questions. Buying a restaurant is the first step to realizing your dream. The 2nd step is to create a detailed business plan so that you can budget and foresee all obstacles before you open. Running a restaurant isn’t easy, so prepare, prepare, prepare.
So let’s get to the checklist so you can arm yourself properly before pulling the trigger to buy a bar or restaurant.
20 Factors to Look For When Buying an Existing Restaurant
1. Hire a Restaurant Broker and Accountant
Unless you are an expert in these areas, don’t mess around and try to do it yourself. There is way too much to know and to look for. In addition, you will probably need to hire a good attorney before signing the contract to make sure everything is as it should be. With that said, make sure to do your due diligence when finding professional help, because brokers in general can be filthy cockroaches (sorry but it’s true), so ask around for a recommendation on Facebook or colleagues or whatever connections you have.
2. Do Not Use the Seller’s Broker
Similar to the first one, you need to hire professionals, and you need to hire your own. If not, this is like being the defendant in a murder trial and using the prosecutor’s lawyer to defend your case. Seems obvious, but I’ve heard horror stories of this happening when purchasing businesses.
3. Ask the Seller Why He/She is Selling
They might be retiring or moving or just tired of running a business, but if it’s for financial losses, they probably won’t tell you that, so pay attention to their response and see if it’s legit. Use your Spidey senses and if you get a bad feeling, walk away right then. You can not allow your emotions to override your common sense when it comes to business and making large purchases.
4. Check the Financials
When we’re talking financials, you must go beyond just the P & L’s. I’m talking actual tax returns for the past three years, the current year’s income tax statement, bank deposits, expense reports. Yes, you must also look at their books, accounting records and P & L’s, but the tax records tell the actual amount they reported. Don’t trust them when they say that they “made more than they claimed”. You don’t know that. This is one of the most important tasks on the checklist. Did they make a profit or not?
5. What is Their Debt?
This is important, because you are taking on whatever that debt is. Their debt becomes your debt. Find out if there are any existing unpaid bills or payroll that isn’t transparent in the other financial documents.
6. Check Health Department Inspections
And don’t just check last month’s health inspection report. You need to check the reports over the past few months. Make sure EVERYTHING is how it should be and if it’s not, the seller needs to bring it up to code.
7. Check All Licenses and Permits
Check to make sure they have them, and then check to make sure they are current. This includes all city, state and federal requirements and code standards, meaning building codes, fire codes, handicap, etc. Again, don’t take their word for it that they are current. Cross-check with the proper entities. If they have a liquor license, can it be transferred to you? In some states transferring liquor licenses can be a long drawn out process so you need to find that out.
8. Check All Equipment and Building Structure
These should be in good working order. If it needs to be repaired, the seller needs to repair it. This includes the entire building structure, roof, the plumbing, electrical, HVAC system. Furthermore, any piece of equipment that is a hunk of junk, get rid of it and plan on getting your own, and then of course make sure it is removed from the price of the sale. In addition, run the AC and heater for at least an hour. And yes, you need to run both. If it’s winter time and you just run the heat, you’ll have no idea if the AC is broken, until June comes and then you’re SOL.
9. Is Their Equipment Leased or Owned?
Once you find out the answer to this question, you need to find out if it’s part of the sale. Some owners will hike up the price tag on the sale because they include the equipment and furniture, only to find out that the landlord actually owns the equipment. In addition, you need to decide first if you even want their equipment, because if you don’t, your next step is to remove it from the price of the sale if necessary.
10. Have a Broker Go Over the Lease Thoroughly
This only applies if you are taking over a lease, of course. You’ll want to make sure to get the approval of the landlord before signing anything. The landlord will often want to perform their own due diligence and make sure you have experience and know what you’re doing. They don’t want some bumpkin taking over the business and having it go belly-up in 6 months, because that hurts them.
11. Check the Location
We all know the timeless mantra: The three most important factors in real estate are location, location, location. It’s cliche, but it’s also still as true now as it ever was. You need to ask yourself some questions: Is it easily accessible? Is there good parking? Can the sign be seen from passing traffic or is it buried behind trees? Is it in a good part of town? Does the demographic match the style of restaurant you’re opening? Make sure this is a location that will be easily seen and easily found for your guests.
12. Check the POS Situation
A restaurant POS system is one of the most important decisions you’ll ever make. Owners are often locked into long contracts, so you need to ask yourself if you want to take that over or find your own POS system. My two favorite are: 1) GoTab (Free POS system) and 2) Upserve for full service restaurants
13. Are There Any Outstanding Liabilities?
You need to ask if the restaurant has any past, pending or potential lawsuits. There’s nothing worse than purchasing a restaurant and suddenly find out you’re being sued because of the previous owner’s mistakes.
14. Non-Compete Agreement
You need to have a non-compete agreement written up with the seller that states he/she will not open a competing restaurant within a specified radius for at least five years. You need a lawyer for this.
15. Ensure Vendor Relationships
You will, of course need supplies, so you need to make sure all vendor relationships are intact. Ask for a copy of the current contracts with suppliers so you can have some idea of their pricing and so you have a starting point to negotiate with them. That means you’ll need a list of all vendors, the contact information of the rep and if there are any outstanding balances.
16. Check Online Reviews
If you’re changing the name and theme of the restaurant, that’s good, but you need to find out if people have a negative connotation with that location? Low reviews mean people are pissed at that place and won’t soon likely return, even if it does change hands.
17. Find Out if They Sell Gift Cards
If so, you need to get a printout of outstanding gift cards so you can be compensated on the sale because you will have to redeem those.
18. Are You Taking on Current Employees?
If so, you’ll need all of their records, files, payroll information, etc. If you’re coming in with your own training manuals and employee handbook, that’s good. If not, ask the seller to include theirs if they have them. At the very least, you’ll have a template to work with to create your own.
19. Acquire Contractors’ Information
This includes any people or companies that do work for the restaurant, including carpenters, plumbers, gardeners, night cleaning crew, etc.
20. Look For Anything You Don’t Need
This means to look for anything in the contract where the seller is trying to charge you for something you don’t need. That includes equipment, furniture, their recipes, the name of the restaurant (which is intellectual property)…anything that is excessive and that you don’t need.
There it is. Now, that’s not an exhaustive checklist, meaning it’s not everything you need to cover when looking to purchase a restaurant. There are a lot of little details you’ll need to look for, and have your broker and accountant look for, but these are some of the biggies, some of the most important factors to look for when purchasing your own bar or restaurant so you don’t get taken.
Thanks for being here. I’ll see you next time. Cheers,
Dave