Buying a Restaurant

2misi.com

http://www.2misi.com/article/2012/07/buying-a-restaurant

If you've spent time looking at restaurant for sale listings, you probably realize that there are more restaurants listed than any other type of business. The question is whether this a good or bad thing? There's really two ways to approach it: the optimist will say that there's a great market when the time comes to sell; while the pessimist will want to know why all of these people are selling their business? Actually, they're both right.

On the positive side, good restaurants, just like any other solid business, will sell quickly; especially in the current market with so many people looking to buy a restaurant. On the other hand, the failure rate amongst restaurants is so staggering that many people simply want to get rid of them before they become another statistic. With this in mind, there are a number of critical issues you need to be aware of so that you're certain when you buy a restaurant, it will be successful with you as the owner

The Lease

Unless a restaurant has a long established, storied history, most often the location will play a significant role in its success. Traffic can be driven by its proximity to office workers, a movie theatre, a mall, or a thoroughfare. Whatever the reason one can see that location is crucial and this is directly related to the lease in place.

More and more landlords are being cautious or downright difficult when it comes to assigning a lease to a new restaurant business buyer. Some flatly refuse an assignment unless the buyer has prior experience in this field. Or, they may require the former owner to remain on the lease (very difficult to convince them to do so), or they may insist that the buyer puts up a significant advance of the rent into escrow.

With these potential challenges, it is recommended that you address the lease portion of the deal as soon as possible with the seller. It is imperative that any purchase contract contains language (a condition/contingency) whereby the deal is contingent upon you the buyer getting the lease assigned or a new lease in place that is satisfactory to you. Once you have a deal in place, you'll want to arrange to meet with the landlord.

The seller may require you to complete your financial review first which is understandable however; your best strategy is to convey to the seller that if the landlord will not assign or enter a new lease, the sooner everyone knows, the better it will be. Plus, the seller will surely want to understand the landlord's position for any future prospective buyers. Insofar as terms and conditions, obviously you'll want a long term lease including options. Anything less than five years is not recommended.

Valuating a Restaurant Business for Sale

There are two main methods for valuing a restaurant: 'Asset Based' or Seller's Discretionary Cash Flow' (Owner's Benefit) multiple formula. The Asset Based method is appropriate for an unprofitable or closed location where you are simply purchasing the equipment in place either from the owner, or maybe even the landlord. Get a reasonable valuation done on the equipment and made an offer.

Dealing with Cash Sales Unreported Income

While the industry has got better, there is still a tremendous amount of unreported income in the restaurant industry. The problem of course is that sellers expect to get paid for their total profit, yet often times they cannot even prove it. My attitude has always been: if they cannot prove it; you cannot pay for it. Furthermore; they can't expect to have it both ways: if they've been cheating the government for years and benefiting tax wise, they cannot reap the benefits a second time in the sales price of the business.

Costs

Food and labor costs are the key considerations in a restaurant business. Costs will vary based upon the type of restaurant whether full service or fast food.

Other Issues

• Unless you're an expert, take the time to have the equipment evaluated by a professional.
• Health department regulations and compliance will form a key part of your investigation. Check public records for any prior infractions. You may also want to check the online archives of the local paper since they'll usually report on these health issues. As you know, people want to eat in a clean environment. If there were any health issues, it is almost guaranteed that the public was made aware of them and there's no faster way to put yourself out of business then a published report in a local paper that your establishment is bug infested, or in default of health or safety regulations.

So there you have it. Buying a restaurant can be very exciting. Lots of people have built tremendous restaurant businesses. However; there is a lot to consider. Make sure that you educate yourself properly, especially if buying a restaurant is new to you. After all, you want to buy and build a successful operation and not allow yourself to become another statistic.