6 Questions to Ask Before Buying an Existing Restaurant
What to Know Before You Buy
Buying an existing restaurant can be a great way to fulfill your dream of being a restaurant owner. You skip the difficult early years of getting a restaurant off the ground. As with buying a restaurant franchise, you gain instant name recognition and a built-in customer base. You don't have to build a business plan and menu from scratch. But, in a purchase, you inherit the good, the bad, and the ugly. There might be a financial or legal mess waiting for you. If the existing establishment doesn’t have a stellar reputation, you may never be able to shake the baggage.
Before you jump to make an offer on your favorite diner or pub, you should thoroughly examine what you'd be buying. Just because you have a chance to dodge the difficulties of being a startup, that doesn't make buying an existing restaurant an easy ticket to success. There is still as much to consider as there is when you open a new restaurant. It's like buying a used car: you want to know everything before you end up with a lemon. Here are some key things to consider.
1. Why Is the Restaurant for Sale?
This is the biggest question—why do they want to sell in the first place? After all, if the restaurant is successful, then why would they want to get rid of it? There are two main reasons to sell:
- The restaurant owners may want to retire or they may be tired of being their own bosses. It's a demanding job, and the long hours can take a toll. Health complications, family issues, or other personal problems may make owning a restaurant too difficult for some people. If it's not right for them, make sure owning a restaurant is right for you.
- They may not be making enough money to cover their overhead (warning bells) and want to unload the restaurant before they lose their entire investment (louder warning bells).
2. What Is the Financial Picture?
Before you buy a restaurant, you need to know if it will be a viable business for you. No matter how much you love that taco joint, or how successful it looks, you need to put its financials under a microscope. This will make you aware of any significant issues from the outset. If you are planning to apply for a small business loan, you need to create a detailed outline of the finances for your restaurant business plan, anyway.
Profit and loss, cash flow statements, balance sheets, bank records, and tax history—all are fair game for you and your accountant to run through with a fine-toothed comb. Things you should look at include food and beverage sales (monthly and yearly), labor costs, food costs, and check averages. Also look at the cost of utilities, rent, insurance, and taxes. Examine existing vendor contracts and the state of any assets (especially equipment) you'd be inheriting. Look at the liabilities you'd be taking on—to whom will you owe money, how much, and what are the monthly payments?
If the current owners don’t have any loans, but you plan on borrowing money, you will need to figure that cost into your restaurant business plan as well.
If an owner is reluctant to show you their books, don’t proceed any further. Anyone serious about selling should be ready to give a clear picture of the financial health of their restaurant. Keep in mind, though, that you may need to sign a non-disclosure agreement stating that you will not share their information with any other parties.
3. Are There Any Tax Problems or Legal Issues?
Failure to pay sales or payroll taxes is one of the most common reasons for restaurant closures. These obligations compound quickly under government penalties, and you don't want to inherit that mess. There are many other legalities to watch for: unpaid wages, customer lawsuits, back rent, health department citations, and more. Enlist the help of a lawyer to review all public records so that your restaurant dream doesn't become a legal nightmare.
4. How Is the Location?
Unless you are very familiar with the restaurant that is for sale (you either worked there or frequented it) you should find out how the location is working for the business. Is it located in a busy area? Is it visible enough to bring in foot traffic? Is there enough parking to encourage business? What is the competition like nearby? Have any new restaurants opened recently that might hurt business? If the property is rented, is the rent fair for the neighborhood? What are the future terms of the lease?
5. What Is Its Reputation?
Even if you're a loyal regular at the establishment, take time to look at it through the eyes of the broader community. What do other locals think of the food and service? You can glean some of these insights through fly-on-the-wall observation. But take advantage of resources like the Better Business Bureau, Yelp, Google, and social media to see what people are saying about their experiences. While it's true that you can always earn second chances by promoting that the restaurant is "under new management," a terrible reputation may be hard to overcome.
6. Will You Buy the Whole Brand?
If you do decide you want to buy the restaurant, you still need to determine if you want the whole thing—the name, logo, and menu—or just the space and the equipment. It's not uncommon for restaurants to rebrand after a sale, and this may be a good option if the reputation needs work. In some ways, though, this may feel like starting from scratch. If you don't plan to make any big changes initially, then it might be best to keep the current restaurant name and branding. After all, if it ain’t broke, don’t fix it.
Restaurants are risky ventures. Even established ones with a good track record are never a sure thing. If you feel passionate you can make it work, though, and you do your homework, buying that existing restaurant could be your path to success.