Restaurant Buying Tutorial

Do you dream of owning your own restaurant?

Buying a restaurant can be a complicated procedure, from finding the right one to working out all the details required for a smooth transfer of ownership.

While there is no such thing as the “perfect” restaurant, an experienced EATS Broker knows the importance of finding one that fits your needs, talents, skills and lifestyle.

A Restaurant broker has many different types of restaurants for you to consider and the knowledge and experience to walk you through the entire process.

Below you will find some helpful information as you consider whether buying a restaurant is right for you.

For Restaurant Buyers

Going into the restaurant business for yourself is a big step, one that can be full of apprehension and even fear. Almost 90 percent of all those who purchase a restaurant or create one have never owned a restaurant. Most of them bought a restaurant that was different than what they had been looking for. 

These buyers had the opportunity to explore the marketplace and subsequently found a restaurant more to their liking. In most cases, the seller financed the sale.

Most buyers are seeking to obtain the following when considering the purchase of a restaurant:

As you begin your search, keep in mind that running your own business is more than a job; it is a lifestyle change. In most cases, it is a very big lifestyle change. Usually, you will be working longer hours, making all of the decisions, and, as the expression goes, “you will be the chief cook and bottle washer.”

In other words, you will be doing all of the work from running the business to, in many cases, sweeping the floor and changing the light bulbs.

1. How long the restaurant has been in business.

A restaurant with a long track record means there are good reasons to be operating. It will be well known in the area, and people will be used to patronizing the restaurant or using its services. The longer it has been in operation, generally, the better the restaurant.

The longer the present owner has been in business, the more likely he or she has been successful. People don’t stay in business if they are not making money.
If the owner has been in business for six months, is 37 years old, and wants to retire, you should be suspicious. The more valid the reason for sale, the more realistic the seller will be in considering your offer. However, keep in mind that after five or six years or more, people do get restless, “burn-out” sets in, and people look for new challenges. Why the seller is selling is an important question – get the answer.

The financial records are a good indication of how well the restaurant has been doing over the years. Keep in mind that tax records are not designed to show the restaurant in the best light; no one likes to pay more taxes than they have to, and restaurant owners are no different. Generally, tax returns are a worst case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation and business use of home and vehicles. A professional EATS Restaurant Broker can point these items out to you.

Keep in mind that financial records are only history. There are no guarantees that they will or can be duplicated or repeated. All of your profits are future. In the final analysis, the financial records of the restaurant are an indicator of what the restaurant has done; what you do with its future is up to you.

The simple answer is – you can’t! Not reporting income is against the law. You should consider only the income that the seller can show you. We all know, of course, especially in cash type businesses, that there is the possibility that the seller is not reporting all of his or her income for tax purposes. This “underground economy” has been well-documented and is in the billions of dollars. Many sellers will tell you about how much they are “skimming,” but you should ignore their statements, since they have no way of proving these amounts. In determining whether a business is the right one for you, you should base the decision on the figures actually supplied to you by the seller.

The bottom line

Being in business for yourself can be a daunting prospect. There are no guarantees. At some point, after all of your investigation is completed, you will still have to make that “leap of faith” that is necessary to proceed with the purchase of the restaurant.

You will have to work hard, perhaps even “tighten your belt” a little, and perform many different jobs to be successful in your own business. But, if running your own show, making your own decisions, not having to worry about job security (remember, no one can fire you from your own business), and just being on your own are important – then owning a restaurant is for you.

After taking this leap of faith, almost all restaurant owners will tell you that they would never go back to being an employee.

If you have any questions that we have not covered please don’t hesitate to contact us.

What should you look for when considering a restaurant to purchase?

Unfortunately, too many prospective buyers want to know the asking price first and then ask how much money they can make.

These are the wrong questions to ask initially. You need to know how much cash the seller requires as a down payment. No matter how good the numbers are, there is no point in looking at a business if the seller wants three times as much cash as you are willing to invest.

Remember, the actual amount of money a restarurant earns is usually much more than just the bottom line. A smart approach is to get more information on the restaurant, and even make a visit, before ruling it out or getting too involved in the numbers. It’s all part of the learning process.

One of the most common questions asked by those who have never purchased a restaurant (which is incidentally about 90 percent of those looking to buy a restaurant) is how do you actually buy a restaurant. There is no right or wrong way to buy a restaurant.

However, it is important that you get answers to all of your questions and that you have all the information necessary to make an informed decision.

Here are the steps to buying a restaurant that over the years have become the most efficient and practical:
Get the Basic Facts

Get preliminary information on price, terms, income, cash flow, and general location. There is no point in continuing the buying process if the amount of cash necessary to buy the restaurant is more than you are willing to invest. At this point, don’t worry about the full price. It’s important, but the key factor is the amount of cash that is necessary to buy the restaurant. There is very little outside financing available such as banks, etc., for those who are purchasing restaurants but EATS Broker has a great resource for bank financing. The great majority of restaurant purchases are financed by the seller. This is why the amount you are willing to invest and have on hand is a key issue.

Also, the restaurant has to be able to meet your basic financial needs. You always expect a restaurant to improve under your ownership, but you have to be able to meet your living expenses as well as meet the debt service of the restaurant. It is also important to remember that almost all purchase prices and down payments are negotiable. In fact, restaurant generally sell for about 10 percent to 15 percent less than the original asking price. There is an old adage that says, “the more cash you are willing to invest in a restaurant purchase, the lower the full price; the less cash you are able to invest, the higher the full price.

Visit the restaurant to see if you like the location and the looks of the restaurant itself – both inside and outside. This is a visual inspection. Pretend you are a customer and do not talk with any of the employees or surrounding businesses regarding the sale of the restaurant. It’s also not time yet to talk to the owner.

If you like the restaurant and want to meet with the seller or view back of house, contact your EATS Restaurant Broker to schedule a visit.
There is no point in going any further if you don’t like the physical location of the restaurant or the appearance of it.

If you like the restaurant so far, it’s time to get your questions answered. For example: Why does the owner want to sell? How does the lease terms look? What are the food cost, labor cost, rent cost, and operational expenses? What have been the sales for the past few years?

What documentation does the seller have to support the figures you have been told? Now is not the time to have the seller’s books and records completely checked.

There will be plenty of time to do that and review other important issues during the due diligence phase. This is the time to get those questions answered that have a bearing on whether you may want to own and operate this particular restaurant. It is also the time to visit with the seller to get your questions answered about the business itself.

If you are buying a restaurant to convert to a new concept the current sellers books and records are irrelevant because you will be buying the restaurant as an Asset Sale, which means pennies on the dollar. Anytime a restaurant owner cannot provide clean books and records, the restaurant will be priced based on equipment, build-out, and location.

If you now have your basic questions answered and you want to proceed with purchasing this restaurant, it is time to make an offer, subject, of course, to verification of all the information you have received. The main purpose in making an offer is to see if the seller will accept your terms, price, and structure of the sale itself. Remember, you will have the offer subject to your verification of the important information. It doesn’t make sense to employ outside advisors and go through the time and expense of due diligence unless you can come to financial terms with the seller.

At this point, you hopefully have arrived at a meeting of minds with the seller, and you are ready to begin removing the contingencies, performing what is commonly called due diligence.

Insider Tip

EATS Broker has years of experience of negotiating restaurant contracts and selling restaurants. You get the benefit of having a trained Restaurant Resale Specialist free of charge because we get paid by the seller or landlord!

If you have any questions that we have not covered please don’t hesitate to contact us.

For Restaurant Buyers

The next step to buying your own restaurant is to make sure it is the right move for you and your family.

Owning one’s own restaurant is still very much “the great American dream,” but it’s not for everybody. Here are some questions that you should ask yourself before taking the next step.

How long have you been thinking about buying a restaurant?
Many people are interested in buying their own restaurant, but are not willing to make the commitment necessary to move forward. They continue to look just like those who continue to look at new and expensive automobiles, but will never spend the money necessary to buy. One veteran observer has said that the longer you look, the less likely you are to buy.
If you are not motivated to buy a restaurant, you won’t. You must go into business for yourself for the right reasons. If you’re tired of the corporate world, just have a “job-job,” or perhaps even a dead-end job, then restaurant ownership may be right for you. Certainly if you’re unemployed or being transferred to a place where you don’t want to go – buying your own restaurant can be a viable solution.

If you are not motivated to buy a restaurant, you won’t. You must go into business for yourself for the right reasons. If you’re tired of the corporate world, just have a “job-job,” or perhaps even a dead-end job, then restaurant ownership may be right for you. Certainly if you’re unemployed or being transferred to a place where you don’t want to go – buying your own restaurant can be a viable solution.

Buying your own restaurant requires a serious financial investment. If you’re the type who does not want risk, you might want to rethink owning your own business. It is not for the faint-hearted.

Operating a small business requires continual decision making. You’re the boss, and you are in control. All of the decisions are yours – right or wrong. And, you will make a lot of wrong ones. The question is, can you recover and keep going forward? If you brood about poor decisions or they keep you awake at night, owning your own restaurant may not be for you.

Restaurant ownership is a lifestyle, if your family, especially a spouse, is not behind you 100 percent, then you should think twice about restaurant ownership. It’s very important that you have the support of your spouse. He or she has to understand that running a restaurant can be time-consuming. On the plus side, however, many restaurants do allow for flexibility so you can be at home with your family at night.

It’s best if you are open-minded, especially if you are a first-time buyer. There are many types of restaurants for sale, and you don’t want to limit your choices. You should be looking for a restaurant that will provide the income you need (or ability to do so), the lifestyle you want to live, you have cash reserves to operate, and, most importantly, that you can see yourself running.

Do you think that you can buy a restaurant with lots of cash flow for $100? It’s important that you have realistic expectations about what your money will buy. Many restaurant sellers are willing to assist in financing the sale of their business, but remember, they’re not going to give it away. Keep in mind that many restaurant owners have spent years building their business, and it may represent the biggest financial asset they have. They’re not going to just hand it over to you.

Many prospective restaurant owners do their homework, do everything necessary to begin the purchase process, and then back out of the transaction. They just don’t have the courage to go forward. There is nothing wrong with that; not everyone should buy and own their own restaurant. However, if you don’t think you can part with your money and take over operating the restaurant on your own, you may want to take a second look at restaurant ownership.

If you are looking for a guarantee or a sure thing, then business ownership is not for you. You can and should look at all of the financials, tax returns, and all of the books and records. Remember, however, that they all represent history. You can’t buy anyone else’s history. A new owner makes changes, no matter how subtle. Their management style is different, and times change. You have to look at the business with the attitude of how you can improve things. The financial history of the business is certainly important, but it does not guarantee the future of the business – you do.

If you have any questions that we have not covered please don’t hesitate to contact us.

Do you have more questions?

Be sure to visit Buyer FAQ for answers to the following questions: