Buying a restaurant can be a trying experience, because there is a lot that goes into it. It can also be a costly one, if you don’t go about your due diligence correctly.
It won’t take long to notice that there are more restaurants for sale than any other type of business. The pessimist will say it is due to business owners attempting to escape, before they are a statistic. The optimist will also notice that people successfully sell restaurants all the time.
Restaurants like other businesses for sale will sell in this market, if it’s looks like a good restaurant to buy. There is never a shortage of people looking to buy a restaurant. There is also never a shortage of restaurants for sale, because the failure rates for restaurants are really high. Therefore, it pays to make sure you go about the buying a restaurant process correctly.
The Pros and Cons of Buying an Existing Restaurant
Any existing restaurant for sale is going to have a story, so there will be plenty of info to consider. There are obvious pros to buying a restaurant franchise, because of the brand name recognition. However, that location may have a really bad local reputation, so it may be hard to make it.
Before you decide to buy your favorite restaurant or local bar make sure you consider all the pros and cons to buying an existing business. It’s also important to make sure you look at the pros and cons to buying a business objectively.
Buying an existing restaurant or bar is like starting a new business, because there are several key factors to consider. Location, vendors, staff, local advertisers, customer base and more go into buying a good restaurant at a good price. The more you know about the pros and cons to the business the more you will be able to do a proper business valuation.
In addition to these facts you will want to know the reason the seller listed the restaurant for sale. The reason for selling may tell you all you need to know about buying an existing business.
Most sellers fail to provide pros and cons list to buyers, so you have to know what questions to ask. Hence, it always pays to have an experienced business broker on your side.
Why are they listing the restaurant for sale?
There are a lot of reasons why people decide to sell their restaurant. The owner may have listed the business for sale, because of personal, health, or family problems. The owner could also want to sell due to lack of enjoyment, personal life or satisfaction running this particular business. The real reason often comes down to the business isn’t making enough money.
A good business broker will help you figure out the truth behind why the business is for sale and what your chances of turning a profit are. A good business broker of franchise consultant will help you determine which restaurants to pass up. The business broker is going to give their client the best representation possible, because you’re in the market to buy a restaurant. Selling you a restaurant is one thing, but finding the best restaurant to buy is another matter all together.
You owe it to yourself to have the best representation that you can find, because buying a restaurant is a huge decision. It’s also a decision that doesn’t always pan out. In fact, it often does the exact opposite, so having the right team to help you make sound business decisions is important.
Buying a restaurant with a lease?
Location is equally important, when you’re opening a new restaurant or buying a restaurant. Success unless the restaurant is famous or well liked among locals often comes down to location. The more people that see the restaurant the more people will eat at the restaurant.
There are also challenges with buying an existing restaurant that has an awesome location. Building owners know that a lot of people are looking into buying a restaurant too.
They may be reluctant to sign a long term lease due to getting burned in the past. Location and lease issues are two of the biggest things to consider, when buying a restaurant, so it makes sense to address this issue first.
A good business broker will know how to work with a seller, the landlord and a buyer to make it work quickly. If a good deal can’t be reached between all involved parties, then a great business broker will also be able to figure that out quickly.
A lot of business owners that are selling a restaurant have never sold a business before. You may be the first person that gets that far into the conversation, because a lot of buyers don’t ask the right questions. The seller should also want to know what the building owner thinks about signing a new lease or transferring a lease to a new owner.
You’ll save a lot of time by asking about the lease situation upfront. Buying a restaurant is a big investment, so you will want to be able to sign a lease that is at least 5 years. 3 year leases may also work depending on the sale price and your goals.
How do I determine value of a restaurant for sale?
The two most common ways to value a business are ‘asset-based’ or seller’s discretionary cash flow. Knowing how the seller went about their business valuation will give you a lot info into why they listed their restaurant for sale at their asking price. It will also give you an idea of the cash flow and assets in the business, because sellers tend to go with what builds their case.
Owners tend to only use an asset-based method, when the business is unprofitable, closing or has other issues. Therefore, it makes senses to go right into estimating the fair market value for the fixtures, furniture and equipment. That way you can make an offer based on your FF&E appraisal.
Restaurants that are doing better tend to go with the Owner’s benefit or also know as the “seller’s discretionary cash flow method.” This value is determined by adding the owner’s salary, perks, net income (on the tax return), depreciation and interest expense before adding a multiple.
Full service restaurants are usually figured at 2-3 times the annual owner’s benefit. Self service restaurants are usually figured at 1-2 times the annual owner’s benefit.
You also consider the hours of operation, when buying a restaurant and determining the value. A restaurant making a 100k a year that is open 4 hours a day five days a week is a great investment. It’s certainly better than a restaurant making the same being open 7 days a week 24 hours a day.
Buying a restaurant with unreported cash income
The industry has improved in regards to paying taxes, but there is also a lot of unreported income in a lot of restaurants for sale. A lot of people are trying to sell their businesses on profits that they can’t prove. If a seller can’t prove their income, then you also can’t be expected to pay for it. The seller has also been saving a lot of money over the years by not paying taxes, so don’t feel bad sticking to the provable facts. Paying a high price for the restaurant or bar is like paying them twice through profits in the sale.
Buying a restaurant at a good price despite unreported cash issues comes down to asking three questions. Can you prove the cash you took in? How are you going to prove it? Are you willing to prove it to a lender, or are you seeking to sell your business for cash?
These are just some of the issues that you will need to address, when buying a restaurant.
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DISCLAIMER: Make sure to also check a current FDD about any franchise you are considering. Do your due diligence and consult with a CPA and lawyer, before purchasing any franchise resale or business resale. It’s important to do your own homework, because it’s a big decision that requires serious investment.
DISCLOSURE: On Pace will also get a percentage of the franchise fee should you use us as business buyer representation. We provide free consultations, because we make our fee, when you buy a franchise or business resale.
Our success is also tied to your success. We can not be successful unless you’re, because we are in a referral business. Our goal is set you up to be successful, so you can buy multiple franchises and encourage others to use our services. Therefore, you can be sure that we have your best interest at heart.