While there are many advantages to buying an existing restaurant, there are many pitfalls as well. Follow these tips to be sure that you are making a good business move before it is too late!
- Figure out why the restaurant is for sale. Even if the owner was in personal debt and had to sell the restaurant despite its profitability, you should check to be sure that there are no new reasons that the restaurant might go under. For example, there might be a change in the neighborhood population, a lawsuit pending against the restaurant, a new competitive business being built nearby, an increase in business taxes, any changes in nearby roadwork, etc.
- Know what you are buying. You will need to gather all of the restaurant’s financial records, marketing materials, inspection reports and menus from the previous owner. Also examine the demographic data of the customer base, as well as the pricing, square footage, parking availability, potential for expansion, utilities set-up, licenses, contracts and equipment for the existing restaurant.
- Make the lease part of the deal. Before you purchase the restaurant, make sure that the owner of the space will lease it to you. If they will not, the restaurant will be meaningless for you. If they raise the leasing rates, you can bring this up with the previous owner and discuss lowering the sale price for the restaurant.
- Limit the amount of money you pay up front. If you limit the money you pay up front and use the existing restaurant as collateral, you could save yourself from going bankrupt in case the business does not draw enough profits.
- Get the building and equipment inspected. For all you know, the owner is selling the restaurant because the $10,000 vent hood system broke down. Before you buy, always make sure the equipment is in working condition and has been well-maintained. Otherwise, you should include those costs as you project your initial expenses, or negotiate the cost of repairs into the purchase price.
- Make sure it has a good reputation. Buying a restaurant with a bad reputation can only hurt you. Customers will not necessarily be aware that it is under new ownership. Look for a restaurant with a solid customer base. Many restaurants with good reputations and customer satisfaction will go up for sale because they are mismanaged financially or because the owner simply cannot continue to run the restaurant.
- Choose a restaurant with a good location. If you buy an existing restaurant with a great location, you will have a better chance of succeeding. If you lease the space, in case the existing business does not do well, you could revamp the restaurant concept to better suit the profitable location. Or if you buy the space, and the local real estate market is booming, you may even be able to sell it for a profit.
- Examine the previous owner’s mistakes. Before you buy a pre-existing restaurant, you should examine all of the previous owner’s bank statements, tax reports, bills and check registers. Analyzing the bookkeeping will give you a good idea of the sales and expenses you can expect, and how you might improve profits. You can also interview previous customers and employees to help identify any operational mistakes.
- Determine your goals ahead of time. For example, know exactly how much cash flow you want to generate and the profit you hope to earn on that cash flow. You should also determine the amount of return on investment you expect in a given amount of time. This will help you decide if the restaurant’s revenue can live up to your expectations.
- Look for a non-compete clause. If there are not already non-compete clauses negotiated into the lease (for example, at a mall location,) the existing owner should be asked to sign a non-compete clause. This will prevent that person from opening another similar restaurant in the area for a given period of time.
Are You Starting a Restaurant?
We’ve got lots of advice for you! Learn more about:
- Funding Your Restaurant
- Choosing a Restaurant Location
- Restaurant Health Codes
- Designing a Commercial Kitchen
- Projecting Sales for Restaurants