What You Need to Know Before Buying a Restaurant

October 5th, 2020
Guide To Buying A Restaurant

Buying a business is a significant undertaking that requires careful planning and research. For those interested in buying a restaurant, there are several crucial factors to consider to avoid bad deals and improve the odds of a profitable acquisition.

To take the stress and overwhelm out of your business-buying journey, we’ve put together this guide, which covers all the details. When you’re done reading, you’ll be ready to get out there and start your search with confidence and clarity.

What You Need To Know Before Buying A Restaurant: Finances

In the game of business, finances are king. The most important factor to weigh when comparing the buying opportunities is the restaurant’s financial situation.

Before you make an offer on a business, you need to dive deep into the financials, the good and the bad. Comb through their books, their tax records, their expenses, and their cash flow. Ideally, read through the other financials for other restaurants for sale in your area to get a good grasp of the market.

When analyzing all the details, don’t just rely on the ‘pitch’ that the seller or broker provides you with, do your own analysis. Who knows, you may find discrepancies in expenses, debts, or reach a different opinion about what the business is worth or how much it could profit in the future.

It’s also wise when buying physical businesses such as restaurants to leave room in your buying price to cover any renovations or replacements that you may need to cash out for once you take over. 

If, after your number-crunching, you are confident that everything matches up, the price is fair, and there is a strong history of profitability, then you can move on to the other factors to consider.

Buying A Restaurant: Location, Location, Location

The location of your restaurant can have a big effect on your profitability and chances of success. Unless you are a master of online marketing, a restaurant an hour out of town will always receive less foot traffic than one in a high traffic city street. 

This is why it is crucial to research the location of each restaurant. When weighing up the price and viability of an option, consider the volume of traffic in the vicinity and the ease of access and availability of parking space in the area. Being in a ‘desirable’ location significantly influences the value and profitability of a restaurant. 

You should also consider the other restaurants competing for the same target customers in your area. If you are analyzing a restaurant next to an incredibly popular competitor, you may want to reconsider the deal. 

Buying A Restaurant: Reviewing All The Details

Once you’ve done the fundamental review of the location and the other finances, you’ll want to conduct a more thorough due diligence process. To make it easier for you, we’ve created a rough checklist of things to go over before you take action on a deal. 

These are the due diligence items we suggest reviewing when buying a restaurant:

  • Review the finances in detail, as mentioned earlier. Balance sheets, income statements, tax returns, debts, and other financial matters should be checked.
  • Assessing a business’s legal records such as its insurance policies, patents or trademarks, permit, and licenses to ensure everything is as expected.
  • Taking stock of the restaurant’s inventory and existing contracts or orders from suppliers will help you further assess the business’s value and standing.
  • Gathering information on the business and its employees. Get your hands on any records like employee handbooks, salary info, schedules, and benefit plans.

When doing your due diligence, remember to keep a keen eye on the business’s overall health and standing. If you find anything that could lower the business’s price, add it to your list for the negotiation phase.

Buying A Restaurant: Negotiating The Price

Negotiating is a skill that most people struggle with. This is why it is imperative to conduct thorough location, market, and other research before the negotiation stage. That way, when you get to the negotiation stage, you can confidently present your independent valuation of the restaurant. 

One of the key factors to consider is the market value of restaurants in the area you are purchasing in. For example, in the US, the numbers nationally are:

  • Median Startup Cost (Without Purchasing Land): $200,000
  • Average Price Per Square Foot: $113
  • Median Startup Cost (With Purchasing Land): $375,000

Depending on where you are looking to buy, the figures can be much higher or much lower. Make sure you research statistics in your area and compare the buying opportunities you find to the local market values. If you find the business is overvalued, add that to your negotiation list. 

Once you’ve done your research, you should be able to go to the seller with a list of reasonable reasons why the business is overpriced, if that is the case. Ideally, you’ll walk away with a fair deal.

Here is a list of questions to also ask the owner:

  • If the business has licenses, are they part of the deal?
  • What equipment is included in the deal, and what condition are they in?
  • Have they had any health violations in the past?
  • Are you able to use the brand of the restaurant, or do you have to rebrand?
  • Does the restaurant have a good or bad reputation in the area?
  • Is the restaurant owner aware of the new competitors that just opened in the area?
  • Is the owner willing to sign a non-compete clause?

As you can see, the more questions you ask, the better understanding you will have about the business and whether you should consider buying the restaurant or not. Dig deep and spend a fair amount of time with the owner interviewing them about everything you need to know.

Buying A Restaurant: Final Tips

Once you’ve been through the entire process above, you should have eliminated almost all of the options available and whittled the list down to one or two great opportunities. 

To help you make the right decision, there are some other things we didn’t talk about that could help you to get the best deal and increase your odds of success down the road:

One of them is to ensure that you have a good credit score when buying the business. If you don’t, then expect to pay a much higher interest rate on the loan, be sure to factor that into your profitability analysis.

Another excellent tip for those who are not confident in going through the buying process by themselves is to work with a buying agent who can walk you through the process from start to finish and ensure that you get the best deal possible on the business. While this may cost you more upfront, it will save you a lot of time and potentially take the risk out of the situation. 

Whichever path you choose, we hope that this guide helped you remove some of the confusion out of buying a restaurant. Best of luck!

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