The Pros and Cons of Buying a Restaurant
If you are interested in opening a food service business, you may have asked yourself, “should I buy a restaurant instead of starting one from scratch?” It’s a good question, but the answer is not so simple. Like with anything, there are pros and cons to buying a restaurant, so it is important you weigh your options to find out what would be best for you.
So, what are the pros?
Buying an established restaurant prevents you from having to create a business plan and come up with a menu. You also won’t need to build up a reputation or customer base since generally this already comes with the business. This can certainly be a relief if you dread the whole start-up process and just want to jump right into restaurant operations.
And what are the cons?
The purchase of a restaurant is not à la carte. You have to take the good with the bad. This includes financial troubles, problem customers, and issues with the building itself—and for better or worse (or until you sell). Knowing what to expect before you sign on the dotted line is therefore a crucial part of the purchasing process.
The Steps to Buying a Restaurant
How can you make sure your investment is a smart one? It is a good idea to follow this checklist before you commit to buying a restaurant. With each step, you will gather the information you need so you can make your final choice with confidence.
Step 1: Determine Your Ideal
If you do not already have a specific establishment in mind, this step is kind of a big one. Ask yourself what type of restaurant business you would like to own, as this will determine the rest of the purchasing process. How to buy a restaurant franchise is completely different from a food truck, a bar, or a café. It is essential you make a list of the things you are looking for, so you know the next steps to take.
Step 2: What to Know Before You Buy a Restaurant Business
Your favorite bar in town is looking for a new owner, and you’ve always dreamed of being behind the bar! Should you go for it? Well, if you are buying a restaurant with no experience (or even if you have some), there are several questions you should ask to make sure you don’t find yourself in a sticky situation. A purchase of this size is an enormous investment, so here are some key things you will want to consider.
Why is the restaurant for sale?
You don’t want to buy someone else’s problem. If the current owner is retiring or hoping to change careers but the financials of the restaurant itself look good, then you shouldn’t have a problem. If, on the other hand, the establishment is being sold because it has an issue of any kind—legal, financial, or even hypothetical—then you might not want to invest. Follow up on the answer you are given by doing some investigative work on the restaurant yourself. As much as we’d all like to believe in forthrightness, it is always best to double check.
What is the value of the restaurant?
Some market research may be required for this. Figure out how much the restaurant is worth as well as its potential for growth. To do this, examine the establishment’s key performance indicators. This data will allow you to establish the cash flow of the restaurant, which will in turn help you negotiate price when the time comes to signing the contract. The main indicators you want to look out for are:
- Food & alcohol costs – What are the food and beverage expenses of the restaurant? Consider the fluctuations of the market and current deals with suppliers. Generally, an eatery should expect to pay 30% of total sales or less. Menu engineering is one way to mitigate high food costs
- Labor costs – How much does the establishment pay out in wages and benefits for staff? This expense should not exceed 30% of total sales at the very most.
- Prime costs – These are all the miscellaneous expenses required to run a restaurant. Permits, licenses, software, maintenance, rent, utilities, and a budget for appliances, dishes, and cutlery should all be factored in. Expect prime costs to be between 55% and 65% of total sales.
- Profit margin – What can you expect to see in your pocket? This indicator is important because it can help you determine whether a restaurant is struggling. On average, a healthy profit margin for a restaurant is between 5% and 10%. If it’s anything less, take it as a red flag.
What is the reputation of the restaurant?
A bad reputation can greatly harm an establishment. Check reviews online through OpenTable, Yelp, Google My Business, Foursquare, and Facebook to see how the restaurant is viewed by the public. If there is negative feedback, figure out how you will respond to it. Rebranding an image is possible, but it takes a lot of work.
How is the location of the restaurant?
“I want to buy a restaurant near me: it would be so easy to run because I already know the community!”
Stop. Back up. And ask yourself about the viability of the location. Find out what the demographics of the area are to determine the type of clientele you will likely bring in. And to anticipate potential threats, comb over upcoming real estate plans for competitors or major construction projects that might put a wrench in the restaurant’s development.
Are there any tax problems or legal issues with the restaurant?
If the restaurant you are hoping to purchase is associated with any debts, taxes, or legal actions, this should trigger some alarm bells. You can be responsible for these if you become the owner. Make sure you take a close look at public records to prevent yourself from potentially falling into a legal mess. Hiring a professional to guide you along the way could be a good idea at this step.
Step 3: Secure Funding
Now that you have answered all your questions and have a better idea of what to expect from your restaurant, you need to get the money to fund it! This will likely be required before you negotiate the final purchase. A small business loan is usually the way to go. To show a bank you are serious, it is recommended you elaborate on how you are personally invested in the establishment with a marketing and payment plan.
Step 4: Negotiate a Contract
Don’t know how to negotiate buying a restaurant? The first rule: don’t expect to have it done in one go. Negotiation takes time and a lot of back and forth to ensure both parties feel like they have received what they are asking for. Determine the assets you would like to buy and establish how much you are willing to pay for them while being ready to make some compromise. Other aspects of contract negotiation entail the following:
Step 5: Implement a Transition Plan
You have signed your contract, now what? It generally takes about two months for the sales process to be complete. During this time, follow a transition plan so you have all the tools and knowledge you need upon the closing date. This can include becoming familiar with administrative tasks, applying for permit updates, and getting to know the staff.
If you can, shadow the owner for a few weeks to fully understand their day-to-day operations. This will allow you to grasp certain systems, create a relationship with continuing vendors, and introduce yourself to regular clientele.
Step 6: Market Your Restaurant
Now you have the keys in hand: congratulations! But you are not quite done yet. No matter how successful the restaurant you’ve purchased may be, marketing is essential to keep it up. People love the idea of new, so promote the ownership change through social media, pamphlets, and banners outside the physical location. You might even want to look into Search Engine Optimization (SEO) and how it could help you reach more customers.
A grand opening is also an excellent way to create some buzz around your establishment, so invite your loyal customers, friends, family, and the media. You can also use this occasion to celebrate your accomplishments and reward yourself for all the hard work you have done.
The Takeaway
Purchasing an existing restaurant can be an excellent means to enter the industry, though it is important you take the time to do your research beforehand to protect yourself and guarantee it is the smart move and cover all the questions associated with buying a restaurant. Do not hesitate to turn to professionals to get their expertise and specific thoughts on the process. Then enjoy your new establishment and have fun making it grow!
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