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How to buy a restaurant

how-to-buy-restaurant

Buying a restaurant comes with several advantages. By purchasing an existing food business you will have access to its equipment, existing brand recognition, and built-in customer base, which may translate into an immediate profit.

However, purchasing a restaurant also comes with risks that may be imperceptible at first sight. Follow our guide to buy a restaurant knowing that your investment is safe.

1. Find a restaurant

Have you already seen a restaurant that interests you, or are you looking for one? If you chose the second option, there are several ways of finding the restaurant that is the best fit for you.

Where to find a restaurant for sale

Analyze your options

From the start, you need to have a clear idea of your budget and the kind of restaurant you want.

Before getting involved in the negotiation, you could begin disqualifying target restaurants on your own.

It is a good idea to personally visit the restaurants you are interested in and act as a regular customer so you can see the strengths and weaknesses of the business.

If you are not able to go to the business by yourself, you can always use social media, Yelp, Google My Business, Trip Advisor, or the Better Business Bureau and other online platforms to get a better idea of what people think of the business and the products it offers.

What to consider before buying a restaurant

Location

Where is the restaurant located? You need to carefully analyze whether the place where the business operates has good affluence and if it will keep being that way.

  • What is the size of the restaurant?
  • Are there enough potential customers at key hours?
  • Is the restaurant easily visible? Is it inside a mall?
  • Is it in a place where there are direct competitors nearby?
  • Is there accessible parking for customers?
  • Is the place adequate for what you have in mind?
  • Do other customers seem to be comfortable with the illumination, atmosphere, space, and furniture of the restaurant?

Service

The quality of the service tells a lot about the overall performance of the business. A poor service may indicate there are operational issues that may be the reason behind the sale.

It is of the utmost importance to buy a business that is in good shape, for its past reputation could heavily affect you.

  • Are the dishes served in a proper amount of time?
  • Is the staff prepared and handles difficulties accordingly?
  • Is the quality-price proportion adequate?
  • Is the food in a good state, does it have a good flavor?
how to purchase a restaurant business
It’s key that the location, concept and service of the restaurant you intend to own align with your business goals

Concept

It’s key that you discover if the business has the potential of being differentiated from others. Get a better sense of the type of restaurant it is and if the cuisine and service it offers is what you have in mind.

  • Does the menu offer unique dishes?
  • On what kind of occasions do people seem to visit the business?
  • Is the business formal or informal?
  • What kind of food does it serve? Is it fast food, or fine dining?
  • Does the business offer home delivery?

Make sure the restaurant you want to buy is offering something that people are looking for and cannot be found nearby, which means you would be filling a niche.

2. Start informal negotiations with the restaurant owner

Once you have chosen the restaurant that fits best your personal and professional goals, you are ready to start the initial discussions with the seller.

This is the time when you demonstrate your interest in the restaurant acquisition and you gather all the possible information that will help you decide if you should move forward in the negotiation.

There are several questions you can ask a seller when buying a business that will give you a deeper understanding of the performance of the restaurant and help you make an informed decision.

This conversation can be a great opportunity to ask the seller why is the business on sale.

Is the business not performing well? Is it for personal reasons? This question can be a game changer in the negotiation.

Since at this point of the M&A process the seller will disclose sensitive information, you can be asked to sign a Non-disclosure Agreement (NDA), which conditions you to keep certain information confidential.

In this stage, you will have access to basic performance data. Take the chance to ask about the restaurant’s financials, market environment, workforce, and any matter that will give you more supporting information to continue with the negotiation.

These are some aspects that you should consider when buying the restaurant business:

  • Financial Statements: An indicator of the profitability of a restaurant is its cash flow. If it is positive, it means the earnings of the business are greater than its operating costs. You can also ask for access to the profit margins, for these numbers will make it clearer for you if the purchase is a good investment. A good bet is a profit margin greater than 5%.
  • Food costs: This parameter will tell you how much of the restaurant’s expenses come from food. A food cost of 30% of the total sales or less could imply the business is a good option.
  • Labor costs: Any restaurant relies heavily on its staff, for the personnel wages and benefits are key expenses that you ought to consider. The labor cost should not exceed 30% of the total sales.

3. Hire a lawyer and begin the negotiation

Once you have reviewed the information and you are convinced this investment is moving in your best interest, it is time to sign the LOI, the letter of intent.

The LOI is a non-binding document that documents your formal commitment toward buying the restaurant.

Ideally, this is the stage where you involve a business acquisition attorney.

The best practice is for a corporate lawyer to write the LOI, which will contain the tentative purchase price, the assets included in the sale, and other basic terms of the negotiation.

By handling this part of the purchase, the lawyer will ensure you are not yet entering into a binding agreement.

Even when an LOI is not an enforceable document, both parties need to abide by its conditions to show they are serious about the negotiation. The terms in the letter of intent are the backbone of the deal and usually make their way into the final purchase agreement.

The business attorney will continue to be helpful throughout the formal negotiation. The lawyer will provide guidance in the acquisition, assist in the due diligence process, write the necessary contracts, and assist when required.

4. Conduct due diligence

Now you will be able to make an in-depth inspection of the business. This is the part of the acquisition process in which you coordinate with other professionals to gather all the possible information to confirm the restaurant’s profitability.

In this period, you will evaluate the financial health of the restaurant, its performance, and the risks associated with it.

restaurant-due-diligence
Conducting proper due diligence is the best way to ensure the profitability of your target business

FINANCIAL RECORDS

An accountant can intervene in this stage to make an in-depth analysis of the balance sheets, financial statements, and tax returns for three last three years, minimum.

Examine the operating costs of the restaurant.

  • Food and beverage costs
  • Labor costs
  • Non-food supplies
  • Rent
  • Services (gas, water, electricity)
  • Professional services
  • Maintenance

This is also the time to search for other liabilities, such as outstanding debts for the restaurant and bank statements.

The accountant will be able to analyze the growth projection of the restaurant based on the previous information and the spending per customer and the number of daily customers.

LEGAL

Your business acquisition lawyer will examine the legal concerns that need to be addressed and the liabilities the business purchase entails.

Contracts
It is likely that the restaurant is engaged in contracts with its employees, suppliers, and other key parties that contribute to the business. The lawyer will review leases and other contracts to ensure they are written in the best terms for your restaurants.

Regulations
The lawyer will verify if the restaurant complies with the regulations of the industry and if there are any licenses and permits that need to be taken care of.

Litigation
Food poisoning lawsuits and health code violations are very common in the restaurant and hospitality industry.

Other issues in the restaurant industry are those related to unpaid overtime and issues with tip distribution. A lawyer will tell you if there are pending or past litigation conflicts that may affect the good standing of your business.

The attorney will note the liabilities that come with the restaurant business and keep them in consideration when writing the purchase agreement. The lawyer’s objective will be to adapt the purchase price based on the findings from the due diligence process and write the contract in such a way that it protects the restaurant purchaser.

ORGANIZATION

Learn about the structure of the business and everything regarding its employees and organization.

Consider past and present employee satisfaction and learn who are the key employees that it would be important for the restaurant to keep.

Know detailed information about the employees and managers regarding salaries, experience in the restaurant, schedules, and benefit plans.

Analyze whether the current staff is prepared to provide the service you plan to give to your clients. Are they professional? Do they have the necessary training? Are they courteous?

STRUCTURAL

Carefully scrutinize the physical and intangible assets of the target restaurant that are going to be included in the sale. You should look at the condition of certain elements of the restaurant, such as:

  • Equipment (Dishwashing facilities, refrigeration, sinks, cooktops…)
  • Layout of the kitchen
  • Utensils
  • Tools
  • Inventory
  • Furniture
  • Facilities
  • Property
  • Pest control
  • OH&S compliance
buying an existing restaurant checklist
Ensure the equipment and facilities of the restaurant are in good condition

Besides the physical aspect of the business, you should look at the intangible assets, such as the restaurant’s:

  • Intellectual property
  • Software
  • Liquor licenses and other permits
  • Social media profiles and website
  • Customer base
  • Vendor contracts

The objective of due diligence is to make an extensive research and identify what factors could negatively impact the profitability of the restaurant business.

It is of the utmost importance to do due diligence before signing any binding documents so the buyer does not get involved in a risky deal.

RESTAURANT APPRAISAL

Although a preliminary purchase price has been set in the letter of intent, the due diligence process will confirm whether it is a fair offer.

Usually, it is a third party who performs the business appraisal. The appraiser will give an approximate value based on internal aspects of the restaurant, such as its financial health, and external factors, such as its potential for growth.

There are several ways to determine the worth of a business, but for most restaurants, their annual profits represent a solid base of appraisal. With this method, the purchase price will usually be three times the annual profit.

Another valuation method is based on the assets of the restaurant. By making the sum of the costs of every asset the business owns such as the location, equipment, cash, and inventory, you can calculate the purchase price.

A business valuator will choose the appraisal method that provides the most accuracy depending on the specific

5. Draft a Purchase Agreement and Close the Deal

After the business lawyer is aware of all the liabilities the restaurant carries within, he is going to the necessary information to write a purchase agreement that aligns with the interests of the buyer.

This purchase agreement may have a new price adjustment and will come with specific provisions to protect the purchaser from potential liabilities.

This part of the restaurant transaction usually involves negotiation, reviews, and amendments from both parties. After some rounds, the parties will get to an agreement and both will sign the purchase agreement to close the deal.

6. Start the Transition

Now that you have ownership of the restaurant, it’s time to transition to it.

There is a considerable amount of paperwork that has to be done, but nothing to worry about with an efficient business lawyer by your side. The attorney will handle the employment contracts and do any modifications regarding the business structure of the restaurant.

The previous business owner may offer to help with the transition and he can personally introduce you to the staff and show you how the business operates. Try to fully understand the day-to-day activities the previous owner was in charge of and study how could you make improvements.

It’s key that you plan in advance the modifications that are required for your acquired restaurant. You may want to remodel the facilities, add items to the menu, replace equipment, or add new members to your staff.

It is fine that you want to make things your own way with your just-acquired restaurant, but always keep in consideration what worked for the past owner and what didn’t.

While the transition takes place, you can start promoting your business re-opening, and launch related marketing campaigns.

7. Consider having a re-opening

It is not necessary that you do a big re-opening for your new restaurant acquisition. Whether you do this or not depends on how are you going to continue to operate the business.

If you plan to do slight changes to the business, then there is not a real need to do a big re-opening. On the contrary, if the previous performance of the restaurant was not very satisfying, you can announce your re-opening.

Now that you know all the rewards and challenges implied to buy a restaurant, you have everything you need to make an informed decision about your purchase. With a prepared business attorney by your side, all there waits for you is a smooth restaurant purchase.

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