How to Get A Really Good Deal when Purchasing A Restaurant

The restaurant business can be very volatile and this will often be reflected in the number of restaurants for sale at any one time. As the rate restaurants close their doors permanently can be so overwhelming, you should really find out the reasons for the sale, and then make up your mind whether you think you’ll be more successful than the previous owner.

One of the first points that you should think about when going over the documentation is the lease terms. Location is all-important when it comes to a restaurant, and most of the time its proximity to a large number of potential and repeat clients can make or break its chances of success. These days landlords are looking for security and will often heavily question the credibility of a new owner. Communication with the landlord should happen early on in your due diligence process, to make sure that there are alternatives available in case something unforeseen arises.

Placing a value on a restaurant can be quite a challenge. Basically, there are two methods that can be used: cash flow multiple or asset-based. If the business you’re thinking about purchasing has been inactive, or you’re just buying the equipment, then it’s quite reasonable to utilize the asset-based method where you just set a value to the assets, and then that’s the figure you pay. On another note, however, if the business in question is ongoing, you can reach a fairly accurate estimate of its value by calculating a multiple of the owners benefit. Ordinarily, the benefit can be calculated by adding any owner salary or other benefits to depreciation and interest expenses, combined with the business net income. Self-service restaurants can specify two times the owner benefit for consideration, while full service restaurants can specify two to three times this figure.

Bear in mind that the hours of operation of a restaurant have a great impact on the owner benefit. Carefully consider the incredible number of work hours involved, and then compare this to the benefit figures to make up your mind on whether the deal is actually worth your while. Many analysts like to use a fairly general rule of thumb, depending on the number of meals and/or the number of days the restaurant is open for business each week. If the restaurant is open five days a week, specify 70% of gross annual revenue; six days a week: 60%; seven days a week: 50%.

You might find it frustrating trying to value revenues as the industry is well known for not reporting income. Sellers will expect to be paid for the total profit, but often cannot prove it. The devil’s advocate could easily say that if they’ve been taking money “under the table”, and benefiting with their taxes, they shouldn’t have any expectation of reaping the benefits yet again upon completion of the sale. It might be possible to re-create a fairly accurate financial picture, but you should ask yourself whether you’d actually believe the end results of this exercise, whether the process is worth your while and whether you want to bother with it anyway.

The two major costs in a restaurant operation are food and labor. While costs will vary greatly depending on the type of restaurant and whether liquor sales are involved, as a general rule of thumb the combined total of labor, rent and food costs should not exceed 65% of total revenue. Pay close attention to this rule as you do not want to operate in the red.

Many believe the typical breakdown of costs should be as follows:

Food Costs: 30 to 33%

Labor: 20 to 25%

Rent: 6 to 10%

Again, you should not exceed approximately 65% when combining these items.

The exercise of due diligence is important whenever you buy a business and is especially true when you are considering a restaurant. This critical stage can lead to a review of 125 separate items and you should maintain a critical checklist as you proceed.

When reviewing equipment, bring in an expert. A nearby restaurant supply store can provide you with names to choose from and remember that there is a very large market for used equipment so you should be able to replace any faulty products at reasonable cost.

When you are checking out the reputation of a business, turn to public records to see if the business has performed to health department regulations. You should also include a “representations and warranties” section within the purchase agreement, to document that there were no previous health violations resulting in a fine, closure and so on. Health concerns are paramount when it comes to your restaurant’s reputation and there’s no faster way to put yourself on the street than by enduring a public report in the paper that the establishment has serious bug problems or is not complying with regulations.

You should educate yourself well when it comes to buying a restaurant, especially if the business is new to you. Don’t become one of those negative statistics and make sure that you buy well and build a successful restaurant in this highly competitive environment.

Richard Parker is the President and founder of the prestigious Diomo Corporation - The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream of buying a business.

Popularity: unranked [?]