There is a lot to be said for buying a restaurant for sale as a way to get into the industry- even if you have previous experience and even if your "real" dream is a completely unique concept of your own:
There are lots of reasons to do it. But that doesn't mean it is easy or that you can't get burned. Read on to find out what you need to do, or if you want help with the process from our restaurant acquisition professionals, go here.
If you decided to go the route of buying a restaurant then your first task is finding a restaurant for sale to buy.
This isn't that hard as restaurants change hands fairly often and even if one isn't listed for sale that doesn't mean you can't go in and inquire- many times owners have been thinking about selling for a long time but simply haven't gotten around to starting the process. Or, they haven't been thinking about it but if you catch them at the right time it may sound like a pretty good idea.
The best advice at this stage is to be open minded about it- don't fall in love with one place and decide if you can't have that you won't take anything because that will make you A) miss lots of other places that are probably better deals and B) be prepared to overpay and overlook problems in the place if it is available that you wouldn't be willing to take in any other location.
Spend the time to find the right place because once bought you can't change the location and you can't get your money back out unless you make it a success. Don't make your job harder than it needs to be by rushing the search.
After you read the rest of this article, check out our other in-depth restaurant for sale articles:
Once you have developed a list of potential candidates it is time to cull your options further so that you don't waste time looking at restaurants that you will never end up buying. The least important consideration to use when evaluating restaurants is the asking price. Most owners start asking more than is realistic And in fact many will end up selling for a small fraction of what they originally were hoping to get. The more important criteria to evaluate other gross sales and net profits. You also want to evaluate every restaurant for sale on these five criteria.
You also want to consider how long the restaurant has been in business and the availability and terms of the lease. Ideally you want a restaurant with healthy sales for its size and the long operating history showing profitability and a lease with a lot of time left or else a landlord who is willing to either grant lease extensions or write a new lease with plenty of time.
Generally speaking restaurants that don't disclose their profits are losing money. A restaurant that is losing money is not worth more than the value of its equipment because obviously a money-losing operation doesn't have any goodwill to pass on. The other very common problem with restaurants is that their bookkeeping is either incomplete or nonexistent. In order to make more money personally many independent restaurant owners don't declare their cash on their books which lets them avoid income tax but also gives you no way to verify the sales and profits they are claiming.
While you can use the number stated in their online profile or in conversations with the owners you should never buy a restaurant business without independently evaluating the sales and profits and making your own determination of how well the business is doing. Use the numbers they give you merely as a starting point and plug them into your own financial software to see if they make sense using what you are an e-mail or will learn about what food and labor cost, what the lease is, what the other expenses for the business are and what you can observe with your own eyes in terms of the volume of business restaurant is doing.
For each restaurant you find that seems to fit the initial requirements get the address and hop in the car drive over to see what it looks like from the outside and how well it presents- its curb appeal so to speak. Visit had a couple different times and see how busy it seems to be and whether or not the actual number of customers you see lines up with what the owner is claiming he is doing in business. Determine if the location is one that you think can be successful in his one that will work for you and meet your goals for restaurant ownership. If the restaurant passes this initial stage and you can move onto the next and more formal restaurant due diligence. Or you can really dig into what the restaurant is doing and determine for yourself what a fair price would be.
As a buyer the right price to pay is the lowest one you can get for a place that makes sense. Price by itself means nothing because buying the wrong place is simply throwing your money away no matter how "low" the price. Overpaying means a longer payback time or even a failure if you spend too much buying the restaurant and don't have enough left over for operations and then you hit a slow patch or sales turn out to be less than promised or expenses higher, or usually, both.
As a baseline, the typical restaurant sells for two times the most recent twelve months cash flow. There are other formulas but anything that relies on sales is pointless because sales alone don't tell you how well the business is doing. So if a restaurant has an annual cash flow of $100,000 then the starting price should be $200,000 if everything else was "normal". But no two are the same and so any fair price must be adjusted up or down for the actual conditions of the restaurant.
Here are some reasons the price should go down:
There are fewer reasons that the price should go up, and they are mostly the mirror images of some of the negatives:
Once you have looked over the operation you should use the above factors to figure out what a fair price to pay for the business is based on the actual numbers it is doing. The more favorable factors, the less risk, the more it makes sense to pay. Price is directly related to risk and a new restaurant with declining sales and a high lease is a risky business- if you buy it at all you should pay very little for it- maybe .5 times cash flow. On the other hand, a beautiful well known waterfront location with a 20 year history as a proven money-maker is going to command a premium, maybe as much as 5 times cash flow, because the chances are good it will continue to make a great profit for anyone with half a brain who buys it.
You have to determine where your restaurant for sale opportunity lies between those two points and offer a price accordingly. Don't base your offer on the asking price (unless your offer was going to be higher!) and don't worry about insulting the seller. Your offer may be a lot lower than they were asking but it may be the only one they get and they may be glad to take it. It's business- don't pay extra just to stroke someone's ego. If they say no, move on to the next one or negotiate but don't go over whatever price you have decided is the top it is worth.
If you need help with this process, we can do that.
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