As with any other major business acquisition, delving into the prospect of buying an existing food establishment is one that necessitates a high level of due diligence to avoid potential pitfalls. We recommend hiring a broker experienced in restaurant sales when considering existing restaurant purchases. Not only can a broker retrieve all of location’s vital information for you-which saves you time, but with knowledge of the current market conditions they’re equipped with which questions to ask and can negotiate on your behalf.
Does it meet your location and building requirements?
Remember our Location Checklist? Feel free to refer to that before visiting existing locations. Consider whether the potential building meets all of your facility and location requirements before getting into any numbers or figures. If possible, look at any information/images of the building online to see if it’s a good fit before actually scouting the location. Be sure to visit the location at various times, taking note of peak traffic days and hours (Note: the location of the restaurant is the lifeblood of your business).
Buying an Existing Restaurant Checklist:
- Why is the owner selling? (Note: If the owner is selling due to variables that may affect your bottom line you’ll want to know this upfront. Ex: Changes in area demographics, nearby construction, lack of profitability for location, high taxes, high crime rate, etc.)
- Will the lease transfer? (Note: With the high failure rate of the restaurant industry, landlords can be very adamant about turning the lease over to an inexperienced owner, so be sure address this inquiry asap.)
- How long has the business been in operation? Is the current owner the original owner?
- What’s the square footage/price compared to other similar buildings in the area?
- Are there any other stores in the area that can affect traffic such as shopping malls or small shops?
- What’s the current condition of the equipment? If used, how old is it? What are maintenance requirements? Be sure to have all equipment evaluated by a professional, and have the seller guarantee their conditions in the contract.
- Are there any existing liabilities: i.e. unpaid taxes, liens, building code violations, lawsuits, inspection issues, etc.? (You don’t want to inherit the owner’s problems)
- Can the owner verify current cash flow? (Note: not the owners personal records, but reported income/losses)
- Is there another restaurant within the area that serves food similar to your cuisine?
- Is the facility connected to other buildings (i.e. apartments, stripmall building, etc.) or does it stand alone? Can this cause any issues? Traffic benefits?
- Does the inside dining and kitchen have enough space for your serving and food prep expectations?
- Is the owner willing to sign a non-compete (Note: If not ,what’s stopping them from opening up a similar restaurant right next to yours?)
What is the asking price of the restaurant location versus its actual value? Is this within your budget?
Taking a thorough look at the price and value of a potential location is crucial, especially for novice restaurateurs who may not be familiar with the operational aspects of food establishments. When determining the value of an existing restaurant you can break down the assessment into three main areas: building, assets, and business.
Building/Real Estate: This is the actual value of the building as a sellable property, not including any business-related equipment.
Assets: A restaurants assets consist of any equipment, fixtures, and furniture that can be liquidated and sold separately from the property itself.
Business: This is the value of the business itself and can include any assets, profits, current liabilities, copyrights, inventory, etc. that the owner is willing to include in the sale.
Take a look at the owners balance sheets, cash flow statements, and other financials to determine how profitable the business is in comparison to their costs. On average, restaurants spend approximately 30% of each sales dollar on food and beverages, another 30% on wages and salaries, and about 5-8% on occupancy. With that being stated, if the potential business has costs that exceed 60-67% of total revenue, this may be an indication that the operation is in financial trouble, so be sure take a deeper look at the books.
Negotiating The Deal
Once you’ve come up with a valuation for the business it’s now time to go over the terms of the contract. Your broker should receive the list of terms and conditions from the buyer in order to prepare an Letter of Intent (LOI). Note that sellers are looking to close transactions asap, so it’s imperative that you understand all terms of the agreement and discuss them with your broker before signing any legally binding agreements.
As stated previously, sellers are looking to sell and sell fast to get the business out of their hands, which means that they’re going to want to hold you liable if you back out of the deal. Be sure to know the time frames for indemnification so that you don’t find yourself backed into a corner regarding the deal.
Getting a 5-year lease term at minimum is the goal. Including options for renewal will also work in your favor, as it would be a great inconvenience to have the seller decide to not renew your lease in a year. Note all sale contingencies (things that may prohibit either party from moving forward), purchase price and deposit, escrow amount and date, escrow company, and how the escrow will be paid.
Having the seller sign a non-compete for a specified period of time can offer comfort to new owners, assuring that the seller will not open up a similar restaurant within the vicinity to compete with yours.
This includes any and all inventory that the seller is including in the purchase. It can all sellable on-hand food/beverage items as well as supplies. Be sure to get the value of this inventory as well as purchase receipts.
As a potential buyer you want to know as much about the existing business as possible. Don’t be afraid to ask questions and “get in their business”. While disclosure laws will vary by location, their main purpose to protect potential property owners from structural issues pertaining to property that may affect their use of the property (Ex: gas leaks, lead paint, faulty electrical wiring, etc.). Make sure that you know what items require disclosure in your area and have your attorney include them in the contract.
Though we strongly recommend hiring brokers when purchasing new businesses, do remember that a broker represents the seller, and though will negotiate on your behalf their main concern is the selling of the business. To insure that YOUR particular interests are being met be sure to have your attorney involved in all of the steps in process as well. Also, do not make any assumptions when negotiating your deal. To prevent potential disagreements and breach of contract accusations make sure that everything spelled out clearly in black and white with no room for misunderstanding by either party.