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Running a restaurant is an exciting business venture, but the start-up process can be challenging. If you want to skip straight to the operational phase, there’s an alternative: You can buy a restaurant. Under the right conditions, purchasing an existing restaurant can help you save money and minimize risk.
Before you start making offers, take time to learn how to buy a restaurant. When you understand how to assess costs, do due diligence, get financing, and finalize the agreement, it’s easier to identify the right opportunity.
Pros and cons of buying a restaurant
Like any business venture, buying a restaurant has both advantages and drawbacks. Both can have a significant impact on your operation, so it’s important to weigh the pros and cons before proceeding. They can help you determine if this type of investment is right for you.
Pros of buying a restaurant business
- Organized operations. You don’t need to worry about finding a space, hiring staff, or setting up operating procedures.
- Faster time to opening. Because everything is already running, you can make small adjustments and open quickly.
- Easier permitting. Assuming the current owner is in good standing with state and local ordinances, you won’t need to apply for permits and wait to be approved.
- Lower restaurant start-up costs. Buying a business may be cheaper than starting a restaurant from scratch.
- Established brand. You can build off existing restaurant branding and brand awareness to gain a stronger foothold in the community.
- Existing customer base. It’s easier and cheaper to maintain an existing restaurant audience than to find new customers.
Cons of buying a restaurant business
- Hidden risks. When a business is in full swing, it can be harder to spot the underlying risks.
- Possible lingering reputational damage. If a past owner got bad reviews for food safety or had health code violations, you may need to overcome a negative public perception.
- Potential high purchase price. The most profitable businesses may come with a high price tag; most owners try to sell for about 25% to 40% of the company’s annual operating income.
- Fewer customization options. An established brand offers fewer opportunities to make your mark; customers may not be receptive.
How to buy a restaurant: step-by-step
When you’re learning how to buy a restaurant for the first time, it’s important to allow plenty of time for the purchase. A relaxed, leisurely process enables you to do thorough due diligence — that way, you know exactly what you’re getting into.
Consider your options
When buying a restaurant, you have two primary options:
- Buy an independent restaurant business. If you want maximum control, this is a good option; you have the freedom to determine everything from weekly specials to staffing levels. However, you also bear all the responsibility for permits, fees, advertising, and other aspects of the business.
- Buy a restaurant franchise. A franchise comes with a powerful brand and helpful resources. You’ll likely get assistance with marketing, supply chain setup, and employee training. However, you’ll need to pay franchising fees, and you’ll give up control over the menu, pricing, interior decor, and more.
Search for sellers
Find restaurants for sale in your area. Places to look include:
- Commercial real estate listings
- Online business listings
- Commercial real estate brokers
- Local chamber of commerce
If you live in a small town, try networking. Let other business owners know you’re looking to buy a restaurant; it’s a great way to find opportunities before they hit the market. You can also join a local business association or professional association.
Ask the right questions
When you find a possible restaurant opportunity, it’s time to measure it against your needs and preferences. Some questions to ask include:
- Why are you selling the business?
- Is the kitchen equipment included in the sale?
- Have there been any health code violations in the past 5 years?
- What do locals and customers think of the restaurant?
- What does the restaurant’s supply chain look like?
- Are the vendor relationships positive?
- Is a brand-name trademark included in the sale?
- Is the real estate owned or leased?
- Is the owner willing to renegotiate the lease?
- What product inventory is included in the sale?
- What staff members are willing to stay on after the sale?
- Does the sale include the POS system?
- Will the owners provide training and operational documents in the sale?
- Do I want to keep the furniture and decor?
- Does the menu require any major changes?
- What is the food quality?
- Are there any problems that must be addressed before opening?
- Who are the main competitors?
- Is it a successful restaurant?
You may need to bring in professional help to answer some of these questions. If you don’t have cooking experience, for example, it may be worthwhile to bring in a professional chef to evaluate the included restaurant equipment to ensure it’s in good working order.
If you’re thorough, this process can help you uncover risks and red flags. You may find that the owner has contentious relationships with food suppliers, for example, or that the restaurant’s current name isn’t included in the sale.
Determine the valuation
Once you find a good opportunity, hire a third-party appraiser to determine how much the restaurant is worth. Find someone who has experience in the restaurant industry; they’ll know what to look for.
The appraiser will examine the financial side of the business. They examine profit and loss statements, supplier contracts, cash flow, balance sheets, tax returns, assets, and liabilities. Then, they consider growth potential and brand equity to help provide a fair market value. You can use this number to negotiate the purchase price.
Once you have an idea of how much the business is worth, it’s time to evaluate restaurant financing options. Most restaurant owners use a few common funding sources:
- Restaurant investors. Ask a business partner, friends and family, or venture capitalists to invest in your business in return for a percentage of the profits.
- Loans and grants. Find business loans from banks, the U.S. Small Business Administration, or other business lenders. You might also be able to find grants from local organizations or business incubators.
- Savings. If you have the funds, you can pay for the business out-of-pocket. Some owners use credit cards or personal lines of credit. Make sure you understand the risks, interest fees, and impact on your personal financial future before going this route.
Negotiate the sale
Work with the seller to determine their asking price. Then, use the information you gained from your research and valuation to negotiate the terms of the contract. You might be able to get a break on the price if you offer a bigger down payment, for example, or point out realistic market data and financial projections. Make sure to ask about a seller’s guarantee; it protects you against any unexpected liabilities, such as debts or lawsuits, that come up after the sale is complete.
It’s a good idea to work with a lawyer — buying a restaurant involves a great deal of paperwork and legal jargon. An attorney can help you understand each contract thoroughly so there are no surprises down the line. They’ll also help you draft a letter of intent that gets your terms in writing.
Do your due diligence
Before completing the sale, dive deeper into the business:
- Work with local government agencies to make sure you can get all the necessary licenses and permits.
- Examine the financial documents to understand the yearly operating income, net income, labor costs, food cost, taxes, and fees.
- Make sure the business is current on its taxes.
- Search for any code violations.
- Evaluate equipment and the restaurant space.
- Determine what you need to buy, repair, or replace.
- Understand necessary working capital.
This process is your final chance to uncover problems and back out of the sale, if necessary.
Make a reopening plan
Once you own the business, the fun starts. Create a detailed plan to get to your grand reopening. Depending on the business, you might include:
- Rebranding efforts
- Business plan
- Adjustments to the restaurant concept
- Changes to hiring or staffing
- Changes to the menu
- Updates to the interior
- Operational shifts
- Marketing plan to introduce the new owners
- Opening celebration
Every business is different; when you’re buying a fully functional business, you may be able to keep the doors open throughout the sale. In some cases, you’ll need to close down for a period while you make changes. Make sure to communicate with the staff to reduce turnover and increase engagement.
Kick-start your business with online ordering
Multiple revenue streams can help make your new restaurant business a success. Delivery is one option — it helps you boost sales to customers who prefer to dine at home. Grubhub has all the tools you need to get your restaurant delivery system up and running: online ordering, loyalty programs, promotions, existing delivery drivers, and marketing resources. To see how it works, get started with Grubhub today.