Tips for Buying a Restaurant

Thinking of buying a restaurant? Read this first. We’ll cover everything you need to consider before becoming a restaurant owner.

Franchise or Independent? Which is the Best Fit?

When it comes to purchasing an existing restaurant, you have two choices: buying an independently run business or a franchise.

The benefit of buying an independent restaurant is that you’ll have more control over how it’s run. And 63% of diners prefer to eat at an independent restaurant. With franchises, you often have to follow a specific “script” for marketing, menu, and employee management.

On the other hand, a franchise comes with built-in brand recognition. You may receive help from the franchisor in terms of marketing materials and advertising.

Location Should Be Everything

When assessing a restaurant, look at its location. Is it easy to see from the road? Is there ample parking? What other types of businesses are nearby? Is there a high crime rate?

All these questions can help you assess the amount of foot traffic you’ll be able to attract, as well as the safety level both for you and your customers.

What are the Finances Like?

Naturally, you want to buy a successful restaurant that has great potential for the future. To that end, you’ll want to do your due diligence by carefully examining all financial statements, including profit and loss statements.

Look at bank account statements and ask if there is any outstanding debt. If so, how will that be handled with the sale? Will you take on that debt, or will the current owner pay it off?

You’ll also want to look at the restaurant’s expenses to get an understanding of how much you’ll be spending on things like staffing, food, overhead, rent, marketing, etc.

Finally, look at the profit margins. Restaurants are notorious for having low-profit margins (the average is 3-5%). You’ll want to understand how long it’ll take you to recoup your investment. You may need to raise menu prices if profit margins are low.

Check Out the Competition

Naturally, other restaurants will be in the area, but it’s still smart to see what they’re doing. Are there direct competitors (i.e., you’re looking to buy a pizza restaurant and there are several others nearby)? What are the other restaurants known for? Where are they lacking (this can give you an idea of how you can fill the gaps)?

Find Out Why It’s For Sale

There are a million reasons a restaurant owner might want to sell her business, but some of them should raise a red flag. If you sense any sign of financial struggle or problems that you will inherit, consider looking elsewhere for your purchase.

Get to Know the Staff

If you buy this restaurant, you’ll inherit the employees, so spend some time getting to know them. Try to find out what their relationship has been like with the current owner and if there are any large management issues you need to be aware of.

What’s the Condition of the Equipment?

Another thing you’ll be inheriting in the sale is the restaurant equipment, like the walk-in freezer and industry stoves. Make sure they’re in good working condition, and if they’re not, calculate what it would cost to repair or replace them. This will be important when you’re negotiating the sale price.

Realize that if you need to buy equipment, it doesn’t need to be brand new. You can often find good deals on used equipment at auctions or on Craigslist.

Also, make sure you are inheriting all the equipment and that the owner doesn’t plan to take some of it with him.

Look at the Supplier Relationships

The restaurant likely has relationships with a few vendors for fresh food, tablecloths, and cleaning services. Understanding what contracts are in place and what the owner is paying for services can help you understand the costs you’ll have.

It may be a good opportunity, should you buy the business, to look for lower prices or renegotiate contracts as the new owner.

Ask About the Marketing Plan

A successful restaurant relies on marketing and advertising to spread the word. Find out what the current owner has been doing. What channels are most effective at attracting customers? Social media? Email? Print ads? Coupons? 

Also, ask about the monthly and yearly marketing budget.

Is the Liquor License Transferable?

One thing you may not think about is the liquor license that the restaurant has. In many cases, they are transferable to the new owner, but in others, the current owner may want to take the license with him to his next business endeavor. 

The liquor license is gold for a restaurant owner, as liquor is one of the biggest profit areas of a restaurant, so clarify whether you’ll be handed the license upon purchase.

Get the Restaurant Valued

You probably already know the price that the current owner is asking for the sale of the restaurant, but it’s in your best interest to have the business and its assets evaluated to make sure the sale price is aligned with its actual value.

Keep those numbers for the costs of replacing old equipment handy because the valuation and repair and replacement costs can be used in the negotiation process.

Figure Out Your Financing

Once you land on an agreed-upon price with the owner, you’ll need to determine how you’ll make the purchase. If you’ve got the cash on hand, fantastic. Otherwise, look at business loans (and be prepared to have a down payment) or bring on other investors.

Realize that if you bring on investors, you’ll be sharing both the profits and the decisions with them. Not everyone is keen to dilute their earnings.

Set Up a Transition Plan

Once you’re ready to sign the sale agreement, discuss with the existing owner what the transition plan will be. If the employees don’t already know the business is being sold, when will they be told? And how long is the current owner willing to stay to help train you in all aspects of running the business, from using the point-of-sale system to employee management to managing inventory?

Plan the Changes You Want to Implement

Maybe you want to keep everything the way it’s been, or maybe you have a few ideas about the menu, layout of the restaurant, or employee management. 

It can be helpful to plan out a timeline for how and when you will make these changes to avoid disruption both to staff and customers.

And remember: making too many changes all at once may turn off long-time customers, so consider going slowly to let them adjust.

If you want to completely overhaul the restaurant with a new name, branding, and design, consider closing briefly and then holding a grand opening event to let everyone know that nothing is as it was before the purchase!

Final Thoughts

Buying a restaurant is a large decision that you shouldn’t make lightly. Do your homework to understand why the business is for sale, and get to know every aspect of the company, from finances to employees, to make sure that this is a solid and smart financial decision.