Tips for First Time Owners Buying an Existing Restaurant
You need to understand what you are buying!
Do not I repeat do not try to do this alone, find help from experienced restaurant people.
It is not a Do-It-Yourself business, whether it’s going through the finances, inspecting the equipment, proofreading the final sale and purchase agreement, this is a major decision!
Surround yourself with people who can help you get there; it will be worth it.
First of all, find out why the owner is selling.
If it sounds fishy or too good to be true, it probably is.
If you’re negotiating to buy a restaurant and you think the seller is giving you a great deal, be very suspicious.
If you are comfortable with the reason they are telling you, then proceed with the next most important question, what is the selling price?
The business has a track record; look at the business’ books, records and tax returns and get some sense of how much money you will make.
If the business is open and generating money, then figure out the profit (the provable profit, not what the seller tells you). This will give you an indication of how much you should pay.
But there’s still a risk. Whenever you buy an existing business and look at its records, you’re looking at the past. There are no guarantee things won’t change in the future.
If the restaurant is closed and not generating any money, then you should pay for the assets and have them adequately appraised.
Get a feel for the restaurants local market. Walk around and ask people about their experiences at the restaurant. Reputation is everything in the restaurant business.
There’s no doubt that buying an existing restaurant is less risky than starting one from scratch.
~Unlike a startup, the restaurant has the equipment and possible inventory/products.
~The restaurant already has a location, and maybe there could be a few more years left on the lease.
~The restaurant has employees, some of whom you may want to keep.
~The restaurant has customers, most of them will probably stick with you and give your food and service a try.
When I sold my Corporate business Catering business the buyer had all of the above options available. It was the reason why we were able to sell it at a very profitable price.
Tips for First Time Owners
Buying an Existing Restaurant
When doing your “due diligence” on a restaurant business, you want to buy, consider these five tips:
Owner’s Discretionary Income: This is what the seller is taking after paying his suppliers, his employees, his rent, his overhead expenses and his taxes. If you can’t live on that, or if their income has been declining for several years, be careful! The business is going downhill. Get the seller to put it in writing, and hold back on naming your purchase price for a few months so you can confirm the seller’s income numbers are accurate.
What is the location of your nearest big competitor? Chances are there’s at least one franchise, or competitor close by there may even be several. Be sure they can’t wipe you off the map and check to see if any others are being built or locating in the area anytime soon.
The restaurant’s reputation: Don’t rely on just data. Go to the library and check the local newspapers going back at least five years.Was the business active in the community? Was it written up frequently? Check social media for customer feedback. Go to the local police station and ask if there are frequent complaints by or against the current owner.
Demographic Temperature: If lots of business owners in town are looking to sell, there’s a reason. How is the community changing? Is the population increasing, or declining? Is the population older, or younger? Go to the local Planning and Development Office to see if there are any changes proposed for permitting at the restaurant’s location.
Sales taxes: If your seller has been underreporting his sales taxes, and the state tax authority finds out about it, they can come after you for everything the seller owed. You can sue your seller, of course, but by then he’s fled to the ends of the earth and can’t be tracked down.
I hope this post has given you some helpful advice!
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