28 Jan 6 Questions to Ask When Buying an Existing Restaurant
A Few Questions to Ask When Buying an Existing Restaurant
For some people, buying a restaurant is their lifelong dream. Unfortunately, many of those same people fail to be successful and end up closing the doors. Very often their failure starts the day they start searching for a restaurant to buy. It seems as if most restaurant buyers get caught up in the excitement of the dream and don’t quite understand that owning a restaurant is much different than working in the restaurant industry! They tend to be more focused on what the menu will offer than the details that will actually make them successful.
1. Why are the sellers listing the restaurant for sale?
This should be one of the first questions out of your mouth when buying a restaurant. People tend to sell restaurants when stress levels become overwhelming. The usual reasons for selling are…
- The restaurant just isn’t making enough money. I hear this all the time! People way “I made more money as an employee with a lot less stress!”
- The restaurant is causing strain on the family due to long hours. Buyers sometimes don’t realize that they will be wearing two hats…an employee hat and a business owner hat. They will be working for the restaurant during the day as a server, cook, bar tender, etc. Then they will put on the owner hat and start crunching numbers, paying bills, hiring, firing, etc. This accounts for lots of long days until you find a rhythm.
- It’s time to retire is a very common reason but, that could mean a lot of things! Is it time to retire because of stress, finance, change in the market? Saying it’s time to retire may be legitimate but, is too general!
2. What Is the Financial Picture?
You need to get an in-depth look at the financials. This will help you uncover any hidden issues as well as give you an idea of what ownership is really like. You can make some adjustments to these financial based on the plan that you have.
You may need to sign a non-disclosure agreement (NDA) and will want to request cash flow statements, profit and loss (P&L’s), balance sheets, bank records and recent taxes. You should request a minimum of three years historical financial records. You will also want to take a look at vendor contracts. If the real estate is part of the purchase, you will want to ask about liens and look at property tax history. If for some reason the restaurant seller doesn’t want to share their books…it’s time to walk…plain and simple.
Go through the financials, consult with a commercial real estate broker and an accountant. I always recommend creating a spreadsheet in excel so that we can plug the numbers in, verify numbers, replace numbers and plan for various scenarios. If putting together a spreadsheet is more work than you want, then rethink the restaurant industry!
3. Tax or legal issues?
You should ask the question about tax and legal issues. The seller may not want to be up front and it may be an uncomfortable question to ask but, it is very important! These things can result in liens.
4. Location, location, location!
You need to consider the location. Is there high visibility? How much traffic? Is there easy access? Is it a seasonal area? What does the zoning say? Zoning could have a huge impact on your success. For example, you might be buying a restaurant that does not serve alcohol but, you plan on changing that. The restaurants proximity to churches or schools could eliminate the possibility to serve alcohol.
5. Does the Restaurant Have a Good Reputation?
You should always take the time to look consider the reputation of the restaurant. In the modern day, reputation research is extremely easy! Look at Google, Yelp, Facebook, etc. You can also take more of an analytic approach with restaurants that have a fair number of reviews by separating them by year (or even month) and looking at the average review result. This way you can compare to see if average ratings are trending upward or downward. Sometimes you can see a fairly dramatic change in reviews that may be the result of a change in chefs, management, staff, ownership, suppliers, pricing, etc. These things could be easy corrections that restaurant sellers have overlooked due to being immersed in the stress of it all!
Here is an example of a restaurant with a great reputation! The See-Zurh House in Bemus Point, NY located on Chautauqua Lake. This is a regional icon restaurant that everyone knows about! The owners haven’t been able to give it the attention that it has needed for a few years which has resulted in diminishing profits. Fortunately, these sellers want a buyer that can bring it back to its former glory and be successful so they have priced based on the value of the real estate to minimize the financial burden for the new owners.
6. What is included with the restaurant purchase?
I have seen the negative impacts of not knowing the answer to this question far too often! Examples: Buyers finding out after closing that the name wasn’t included! This is a very costly mistake and with the thin margins of the restaurant industry, this can be hard to overcome! Think about the costs of this mistake for a minute. It would mean all new menus, marketing materials, website, and not to mention…any historical value! You will want a detailed list of what is included in the sale! This may sound dumb but, I have recommended to my buyer clients to write a story. This story would be a “day in the life” and you would mentally walk through the steps. This may help you identify things that are missing.
Something else to consider. I have seen many times; someone buy a restaurant that has existed for several year and immediately they close it for renovations and rebrand. Then they wonder, after reopening, where are the patrons? Well, the buyer has essentially taken an existing restaurant and made it a startup again. Everyday that you are closed, your patrons are changing habits and finding new places to go. Then you are taking what is familiar and making it unfamiliar on top of that. Remember, even a bad restaurant has strengths that can be leveraged to improve its success.
As a final note, the restaurant industry has been decimated since the beginning of the COVID-19 pandemic. To some, this would be a huge negative to starting a restaurant. But it may be the absolute best time! When buying a restaurant now you could purchase it for less money because there is less revenue. Then you will have time to adjust to your new role as an owner and work out all the kinks. When we come out of this pandemic, people are going to come out in droves to make up for lost time and they are going to have fewer places to go since many restaurants went out of business. So, if you do your job, you could have a better chance of survival and to gain market share.
I am always available to discuss your options! Please feel free to call, text of email me to talk or to setup a free consultation.
Realtor | Associate Real Estate Broker
ERA Team VP
MLMcVinney & Associates, LLC
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