Buying a restaurant that is in trouble and turning it around into a profitable business can be a great way to make a huge return on a small investment. It can also drain your bank accountant and be nothing but a disaster from start to finish.
So which one is it? That depends of course on why the restaurant is in trouble in the first place and what needs to be done to turn it around- if a turnaround is even possible. Like flipping real estate, you want to find a troubled restaurant with "the right things wrong with it".
Here are the types of deals to stay away from at any price:
The problem with the above problems is they can't be fixed or at least not for more tahn it would cost to simply buy a good restaurant or start one from scratch.
Other types of problems are the ones that are relatively easy to fix with new ownership but will cause the restaurant to sell for sheap because the current owners can't or don't want to be bothered:
The last probem there- franchise squeeze- is where the restaurant, if it was independent, would be profitable but because of the royalty payments and other obligations of the franchise it is losing money or only breaking even. If you can buy it at the end of the franchise agreement and change it over to be independent, assuming that it can maintain the customer base can do very well.
In most cases, having the ability to manage the restaurant right is 90% of what is needed to be able to pull off a successful turnaround. That means that this is not the place to invest if you have never run any kind of restaurant before. You need to be able to keep a tight lid on expenses and then invest in marketing and building the business up. You need to have the cash and credit required to get in the good graces of your vendors and you must be able to motivate and manage the staff to get them give 110%.
The best time to get into a turnaround is when the owners are so down on the business they are about ready to simply walk away from it but at the same time it hasn't completely gone off the cliff yet. Many owners first think about selling and then in three or six months they act as though they've sold even if they haven't yet. This may mean they start closing extra days, shortening hours, cutting back on the menu and sales go down accordingly. You want to rescue it before their reputation has sunk too far and you still have customers coming in to provide cash flow to help you boost the business back up.
Once a restaurant has closed its doors for as little a week or two it should be considered a total restart rather than a turnaround and you may as well stay closed as long as it takes to get things back in shape and reopen with a new name and new menu rather than try to breathe life back into a corpse.
The bottom line on restaurant turnarounds:
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