Opening a restaurant from the ground up is a tough project. You’re going to deal with things like taxes, finding skilled cooks, and you need to come up with a good restaurant business plan. However, if you’re gung-ho to pursue your dream of being a restaurant owner, then buying a restaurant that is already established is a far less risky investment.
To help you with this, finding a legitimate broker is highly recommended to help you find great restaurant deals.
In addition, you’ll want to remember to do a background check, and get help from accountants and lawyers to assure that you won’t have any problems regarding the acquisition.
Aside from that, there are other things to consider before buying to avoid dealing with problems after finalizing the purchase.
After all, buying a business isn’t like buying a home. Checking the facility with a walk-in inspection isn’t enough. It’s necessary to get information about the condition and legal status of assets you’re going to buy. Also, you need to check its finances, market, reputation, and operations.
Let’s go over our checklist you should be looking at before you buy an existing restaurant.
Checklist for Buying an Existing Restaurant
If you don’t have a checklist for buying a restaurant, you can create one right now based on the information below. This will help you make sure you have done your due diligence before buying an existing bar or restaurant, as well as help you avoid the disastrous mistake of purchasing a business with potential problems in the future.
Never let your emotion affect your decisions so you can avoid the pitfalls in buying an existing restaurant. We can’t stress this enough. The best business people in the world make investments based on sound research and analysis. Those who purchase with emotion, later have regrets more often than not.
Having said that, let’s create your checklist to make sure you are buying a business without hidden problems.
Below are the 9 steps you should consider including in your checklist. Doing the following can help you determine if you are purchasing the right restaurant. Or if you even want to.
STEP 1: LOCATION, LOCATION, LOCATION
We’ve all heard this cliche before, and there’s a reason it’s #1 on the list. Location is everything, so the first thing you’ll need to do is check if the location of the restaurant is near your target customers. You can do that by checking the age, salary, education, homeownership, gender, and ethnicity of people near the restaurant.
You can get population and demographic information about your target people in a specific area from multiple sources, including:
Claritas, so you are aware, is a company that offers solutions to businesses to gather demographic data.
Furthermore, be sure to check the psychographics in the restaurant’s vicinity as well.
Psychographics can tell you how people behave, and it provides you information about people’s lifestyles, interests, and other related matters.
Is this starting to make your eyeballs roll back in your head in preparation for a seizure? This is why you should ask for help at one of the above links. Talk to professionals. These factors will help you immensely when it comes to determining if your concept for your restaurant will work and be successful in the location you are researching.
Another major factor is to consider the accessibility of the area because it’s key to your success. The location of the restaurant must be easily accessible by your target customers. It’s unlikely that they will wade through a swamp and climb a mountain to get to your restaurant.
On the same note, you’ll want to check the parking situation. Parking space is a major factor to consider. People will avoid bars and restaurants with inadequate parking space.
STEP 2: LOCAL TRENDS
Check if the changes happening near the restaurant can affect its market stability. To do that, consider examining the following:
- Do you have a lot of upcoming and existing competitions?
- Is there any ongoing or planned roadway and/or infrastructure work near the restaurant that can obstruct traffic for a long time?
- What is the prediction for community growth or business growth?
- Are there new schools or churches opening?
- Is the population increasing or decreasing? Check if the changes happening near the restaurant can affect its market stability. To do that, consider examining the following:
Always check those factors before you decide to buy a restaurant. They can help you further determine if the area is suitable for your restaurant concept.
Evaluate the business on many levels so you can guarantee the success of your restaurant business plan. If the restaurant is facing potential problems, look for other deals.
Never take a bad deal. It’s best to walk away and find a better one.
STEP 3: FINANCIAL ANALYSIS
When you go to buy a restaurant, this is one of the most important steps in the evaluation process. More often than not, the price of purchasing the restaurant is based on different factors like its property value and profits.
Besides location, the property value will mostly depend on its age and condition so make sure that a thorough inspection is completed before moving forward.
In terms of the restaurant’s earnings, it’s best to consult a business adviser. As a general rule, restaurant owners look to sell at anywhere from 25% to 40% of their annual operating income.
Let’s assume that you purchased a small restaurant. You could expect a cheap purchase price since it has low sales and limited growth opportunities. But if you purchased a large restaurant, assume the opposite. Expect a high purchase price since it can generate more profits and it has growth opportunities.
Having that in mind, be sure to know the financial status of the restaurant before you purchase it. Aside from knowing its real value, doing this can also give you an idea of how the restaurant operates.
Study the Sales Records
To further investigate a restaurant’s financial status, you’ll want to check the sales record of the restaurant for the past three years. It’s best to study its course so you can have an idea of the restaurant’s direction when it comes to profitability.
If the restaurant’s sales are increasing each year, it’s obviously a good sign that it’s growing and doing well on the market.
There are many ways to review the sales of a restaurant, as well as cross-verify and double-check the numbers, including:
- Municipal tax rolls,
- Business tax returns
- Audited accounting statements
- The financial books
- Historical records from the POS system
STEP 3: IS THERE A LEASE?
Is the restaurant just leasing the property? If yes, ask questions like how much time is remaining on the lease. If the lease is about to end, ask if there’s a renewal clause. Do you have to talk with the landlord about the renewal or the lease will be renewed automatically?
When you buy a restaurant, a good lease agreement is key to your success. Its monthly and renewal payments should be reasonable for the market. Also, the length of the lease should be long enough for you to ensure that you recover your investment.
The lease agreement should last for at least 5 years. More often than not, recovering the investment takes at least seven years.
Other than that, the lease agreement should have an exclusivity clause. With the exclusivity clause, the landlord will not lease space for other businesses.
This prevents you from having a competition near you. For example, you operate a sandwich restaurant, you wouldn’t expect another similar business opening right next to you.
Also, familiarize yourself with the triple net costs and how they are calculated. If the restaurant is in a triple net lease agreement, evaluate if you can shoulder its cost.
In a triple net lease, the cost of real estate taxes, building insurance, and maintenance will be added to your lease payment.
Lastly, the lease agreement should be transferable too. If you purchased the restaurant, the lease agreement should be transferred in your name.
STEP 4: OPERATIONAL PROCEDURES
Restaurant operations are extremely important and are usually tied directly to its success. If the previous owner has systems in place that have been documented, ask for them. If not, you will need to make sure to create systems of your own. Systemizing your bar and restaurant is one of the most important and effective strategies for running a massively successful business.
Having said that, if you plan on keeping them one, be sure to check the current management and staff of the establishment that you’re going to purchase. Know the key members and understand their value in the operations.
If you do take over the place, are you going to keep them or you will let them go? What would happen if they left their position? Will it benefit or hurt your operations?
Take time to ponder those things and be sure to address it in your restaurant or bar business plan because employees can play a major part in the success of your operations.
If you do plan on replacing all employees, be sure that you have a plan on how you’re going to replace them so there will be no complications. Keep in mind that the turnover process of the bar is already complicated and it does cost money.
Evaluate Current Operating Systems
Along the lines of operations, it’s best to have proper documentation and back up of everything about the restaurant’s operation. For example, unless you’re going to start completely from scratch, you need to save the recipes, product specifications, training programs, services standards, and management systems of the restaurant.
Doing so can help in preserving the quality of the restaurant’s operations. Losing the information like the ones above, there’s a chance that the restaurant will suffer a major blow (again, this is assuming you are simply “taking over” and continuing with the same theme).
In addition, you’ll want to contact the health or fire department to see if there are any potential problems with the bar or restaurant that you’re about to purchase. If the restaurant has had any violations of food safety regulations and building codes, you’ll want to know, as the facility must comply with safety standards.
STEP 5: PHYSICAL ASSETS
Before you purchase a restaurant, be sure to check the value of its furniture, fixtures, and equipment. The cost of replacing them could be hefty as well.
The best way to know the value of the assets is to hire a certified broker and conduct an evaluation. Doing this can help you determine if the selling price of the restaurant is reasonable.
If the restaurant owner also conducts an evaluation and its result is different from what you have, it’s best to do another assessment.
The question you’ll need to ask yourself is, do I need to purchase my own equipment, and if so, where will I buy it from and how much do I need to budget for it?
STEP 6: CHECK FOR LIENS
You’ll want to make sure to check if there are any liens against the restaurant so you don’t have to deal with them after the purchase. Getting stuck with a lien would be a nightmare. You can do this easily by reviewing public records of the restaurant, performing a lien search, or by hiring an attorney to help you.
When reviewing public records, check if the restaurant is paying taxes. Also, review the payments of federal taxes, payroll taxes, sales taxes, and alcoholic beverage sales taxes. having unpaid taxes can cause major problems for the restaurant.
STEP 7: ACCOUNTS RECEIVABLE AND PAYABLE
Take time to check the status of accounts receivables. See details such as how much cash is outstanding, how old is the debt, and what are the odds of getting the receivables?
Also, it is important to identify the status of accounts payables because they can affect the future of the restaurant. Don’t just check the amount payables. It’s also necessary to know whether they are current or if there are some past due.
If there is overdue debt, know the status of the relationship between the restaurant owner and the vendor. You can do that by calling the vendors themselves.
When talking with the vendors, try to ask how they operate and how they perceive the restaurant. Doing this gives you some valuable insight into their daily and weekly transactions with the restaurant
STEP 8: THE ADA (AMERICANS WITH DISABILITIES ACT)
An important and sometimes overlooked step is to make sure that the restaurant complies with the ADA standards. If the restaurant that you’re going to purchase is not in compliance with the current code, you need to revamp its services and remodel the facility, which can be costly.
STEP 9: FULL INSPECTION
Lastly, you will definitely want to have a full walk-through inspection of the facility. You can’t possibly see what’s going on with the naked eye. It’s best to do this with a property inspector to know the condition of the restaurant’s building structure and its mechanical and electrical components.
If there are issues regarding the facility’s condition, talk with the restaurant owner. Try to make arrangements about the issues so you can calculate how much you will spend on the turnover and rebuilding process.
In the end, you’ll want to make sure to have access and utilize professionals in each area. If you simply try to evaluate the restaurant by yourself using your own limited judgement, disaster could be waiting for you around the bend.
Best of luck, and make a million (or millions, as the case may be).