How to Buy a Restaurant in 5 Steps

Every year, America’s restaurants serve over 2.8 billion people a day and generate more than $1 trillion in revenue. But just like the rest of their industry, restaurant profits have been on a downward trend since 2008 as costs rise while customer spending remains stagnant-especially when it comes to dining out with friends or family. diners are opting for making food at home, which has led to an increase in “fast casual” chains such as Chipotle Mexican Grill and Panera Bread that offer quick service and healthy fare-a recipe for success if executed correctly.

The “buying an existing restaurant checklist” is a guide that will help you with the process of buying an existing restaurant. The guide includes 5 steps and details what to expect while going through this process.

For first-time restaurant entrepreneurs, purchasing a restaurant is a cost-effective method to join the hospitality sector. For restaurateurs who wish to walk into a fully operational company, purchasing an established restaurant is excellent. Those who want to put their stamp on a location, on the other hand, may acquire the assets of a restaurant—such as the lease, furniture, and cooking equipment—and rename it.

Purchasing an established restaurant might save you time and money when you’re opening a restaurant. The required operational permissions and licenses are already in place at an established restaurant. Kitchen hoods and grease traps, for example, have previously been correctly fitted. Inspections of the structure and the health of the residents have already been completed. You will inherit vendor contacts and workers if you wish to preserve the whole idea, from furnishings to menus.

Pros & Cons of Buying an Existing Restaurant

However, there are potential dangers. You may need to rename the company if the seller has failed to pay suppliers or the eatery has negative reviews on big consumer sites like Yelp. Making as little alterations to the restaurant area as feasible can also help you save money. So, if you have your heart set on a certain floor plan, you may have to wait for it to be constructed. Depending on the profitability and reputation of the restaurant, you will acquire different items. Let’s take a look at the five stages to owning a restaurant.

1. Locate a Dining Room

The first step in purchasing a restaurant is to locate one that is for sale. There are a few options for locating restaurants for sale. Collaboration with a Broker or using internet listing websites are the most typical options. Take some time to narrow down the sort of restaurant you’re searching for before visiting your first listing.

Collaboration with a Broker

If you don’t have much restaurant experience or many restaurant industry connections in your area, Collaboration with a Broker is your best bet. Two types of brokers can help: business brokers and commercial real estate brokers. Ideally, you want a business broker who specializes in restaurants. In smaller markets, however, you may have trouble finding someone this specialized. In that case, a commercial real estate broker will likely have the information you need.

There are various advantages to working with a commercial real estate or business broker. Brokers are likely to be aware of enterprises that are for sale before they are made public. Brokers are well-versed in the industry. They may also be able to assist you on lease conditions, permitting concerns, or other governmental laws, depending on their area of specialization. Search the internet for “restaurant broker” and your area to discover a commercial real estate or business broker.

Making Use of Online Listings

You may browse listing sites like LoopNet or BizBuySell as an alternative to dealing with real estate or business brokers. These websites provide enough information to get you started, but you’ll need to hire an attorney who specializes in business transactions to completely appraise the company and prepare a purchase agreement.

You may browse listings of restaurants for sale on websites like LoopNet.

Make a list of what you’re looking for.

It’s crucial to decide what kind of restaurant you want to buy before seeing potential sites. In a bulk purchase of the complete operation, you may acquire the entire company, including the current corporate organization. Alternatively, you might create your own corporate organization and merely buy the restaurant’s assets.

These assets may include the following:

• Kitchen appliances such as stoves, ovens, and refrigerators fall under this category. Bar equipment (such as ice bins and soda guns), general equipment such as grease traps, and specialist equipment such as the restaurant’s point of sale (POS) system are all examples.
• Furniture and small wares: Furnishings include items such as tables and chairs, as well as fixtures such as lights. Plates, cups, and silverware are examples of little goods.
• Most restaurants do not own their premises; instead, they operate on long-term commercial leasing agreements. Taking over the remainder of the lease is a part of owning a restaurant. However, if the restaurant owns its site, the property may be included in the sale.
• Branding: You could simply be interested in buying the restaurant’s name and trademark in certain cases. If the restaurant’s name is protected by a trademark, ensure sure it is transferred to you as part of the transaction.
• Liquor licenses are in high demand, particularly in locations like Los Angeles where the number of licenses available is limited. Restaurant liquor licenses are sometimes sold separately from the rest of the company.
• Documents and insurance policies: If you’re buying the whole company, permits such as the certificate of occupancy or health and safety permits should be included. Business-related insurance plans, such as liability and workers’ compensation, should also be discussed.
• Operational papers: Any training programs, employee handbooks, menus, and other documents that define how the firm functions should be requested. This also contains paperwork that create the corporate entity, such as the LLC’s formation documents and tax ID numbers for sales and payroll.

If you wish to keep the restaurant open as is, you’ll need to buy in quantity. All of the assets mentioned above are included in a bulk purchase. Purchasing just the required assets is a preferable alternative if you want to rename the company or drastically modify the premises.

Bulk purchases are ideal in a busy restaurant. (Unsplash photo by Wade Austin Ellis)

Ask yourself the following questions to help you figure out what kind of restaurant you want to go to:

• Will you maintain the name and trademark of the seller? If you say yes, be sure the restaurant has a good reputation and is presently profitable.
• What are your anticipated operating hours? Look for eateries that are presently open during comparable hours. Some areas have zoning rules that limit how long a company may be open.
• What tools will you need to put your menu together? It’s as simple as asking a query on an internet message board to get advice from a chef on this.
• Do you intend to provide alcoholic beverages? In certain areas, zoning restrictions prohibit the establishment of bars.

Think about each possible location.

Try to go to any restaurant you’re thinking about as a client anonymously first. Seeing the area through the eyes of a consumer helps you to see the restaurant’s strengths and faults. When eating, pay attention to the environment and overall cleanliness of the establishment.

You should also take notice of the service flow. Is it possible for staff to work productively around customers? Is there sufficient space at the bar, in the foyer, and in the guest restrooms? Other considerations to consider while deciding whether a restaurant facility is good for you include:

• Are there any direct rivals in the area?
• Is the design suitable for your idea?
• Is your target consumer able to travel to the location?
• Is there valet or parking available for customers?
• Are there any bottlenecks that you’ve noticed?
• Do the employees and consumers seem to be having a good time?

If a restaurant seems to meet your requirements, the next step is to contact the owner. Make every effort to contact the owner personally, whether via email, phone, or in person. Restaurant staff may not be aware that the company is for sale, so don’t identify yourself as a possible buyer.

Pay extra attention to the non-public portions of the restaurant when you return as a possible buyer. If you are not an expert in kitchen equipment, attempt to bring someone who is acquainted with such systems and can evaluate the equipment’s quality.

Check out the restaurant’s KPIs (Key Performance Indicators).

Restaurants become available for purchase for one of two reasons: the business is not operating well, or the proprietors are selling for personal reasons. By questioning the seller, you may learn why a restaurant is for sale. By examining at the restaurant’s performance figures, you may validate their explanation.

The present owners should be prepared to offer you with some basic performance statistics after you make a serious enquiry about acquiring the firm. Some restaurant owners give a snapshot of this data in the listing itself, such as “$250,000 yearly sales,” for example. You should, however, request to view the real financial documents to confirm this. Before you look at their financial records, most restaurant owners will want you to sign a nondisclosure agreement (NDA). A normal practice is to request an NDA to prevent rivals from acting in bad faith.

Sellers should be eager to answer queries regarding the major performance measures of their restaurant. (Unsplash photo by Carlos Muza)

When you’re thinking about purchasing a restaurant, you’ll want to figure out how much money it makes overall. The amount of money going into a firm minus the amount of money flowing out is known as cash flow. A restaurant’s cash flow is positive if it comes in more money than it spends. Cash flow is a catch-all metric that is used to provide a quick overview of a restaurant’s performance.

The restaurant’s performance measures are what determine cash flow. Request these underlying data from the vendor to properly comprehend the restaurant’s cash flow. The data will show you how much money is coming in and going out of the eatery. For example, although total cash flow may seem to be good, the underlying indicators may reveal labor or food cost issues. The question then becomes whether you have the capacity (or desire) to address those issues. You may want to keep exploring for eateries with fewer problems.

The following are some critical performance metrics to inquire about:

• Labor cost: This figure shows how much the restaurant spends on hourly employee compensation and benefits as a proportion of total revenue. Labor costs should be kept to a minimum of 30%.
• Food cost: A restaurant’s food cost informs you how much it spends on the food it serves. Food costs should be 30 percent or less, much as labor costs.
• The prime cost is the sum of all the restaurant’s charges and expenses, such as management wages, rent, permit fees, and overhead costs. You’re looking for a prime cost that’s between 55 and 65 percent of a restaurant’s total revenue.
• Profit margin: The profit margin indicates how much of the restaurant’s top-line revenue makes it to the Conclusion. A decent restaurant profit margin is between 5% and 10%. If the percentage is less than 5%, the firm is in trouble.

The strength or weakness of a restaurant’s stats will determine your next action. If the restaurant’s financial indicators are robust, it’s a good option for bulk purchasing. For purchasers who wish to preserve the same menu, name, and brand, these eateries are ideal. However, if you want to make significant modifications, purchasing a restaurant that is already functioning well may be a waste of money.

Even if a restaurant isn’t doing well financially, it might still be a fascinating property for other reasons. Restaurant owners who merely want to purchase assets and entirely rebrand the firm might consider buying this sort of restaurant. This style of restaurant may appeal to owners who believe they are capable of resolving cost difficulties. For example, if you know how to cut labor expenses, a high labor cost that is adversely influencing a restaurant’s Conclusion isn’t such a significant concern.

2. Secure a Lawyer & Evaluate the Business

Once you’ve decided to buy a restaurant, you’ll need to hire a business lawyer. Buying a company, especially a restaurant, requires a lot of legal paperwork, so if you can, hire a lawyer who specializes in restaurants. You inherit connections with state and federal tax authorities if you purchase the full corporate organization. You’ll need to double-check that your interests are safeguarded.

A corporate attorney will prepare or review important papers such as:

• Letter of intent: This document memorializes your intention to acquire the restaurant and establishes the acquisition’s fundamental terms and circumstances.
• Purchase of an established restaurant generally entails the assumption of a long-term commercial lease. An attorney will review the lease agreements and point out any red flags that you would overlook otherwise.
• The purchase agreement, which is also known as a buy contract or a sales contract, is the formal document that controls the selling of a firm. It specifies details such as the agreed-upon purchase price and any requirements that either party must meet in order to execute the transaction.

Contact your local section of the American Bar Association to discover an attorney who specializes in company sales. Sites like LegalZoom, on the other hand, feature searchable lists of lawyers in your region. If you merely want to buy the assets of a restaurant and need to form your own LLC, a website like LegalZoom can help; the site offers a user-friendly design that will lead you through the procedure.

Several critical papers need the assistance of a company attorney. (Picture courtesy of Pixabay user aymane jdidi)

Appraise the Company’s Worth

The appraisal is when you assign a monetary value to the company’s assets and operations. There are a variety of approaches for determining a reasonable price for the sale of a restaurant, but profit is the most common one. Three times the yearly earnings is a conventional formula for calculating a ballpark restaurant value. A firm that makes $150,000 in profit each year, for example, may be offered for $450,000.

However, it is just a rough estimate. The real worth of a restaurant relies on a variety of other criteria, including the equipment value, location, and the broader restaurant market environment. Intangible attributes may also increase or decrease the value of a company. If the restaurant you’re contemplating is a well-known local landmark, its value may rise as a result.

Your company attorney may have a preferred business appraiser, or you may look for one on freelancing sites like Upwork. Alternatively, Guidant, a company assessment firm, charges $495 for a business appraisal. This service comprises a comprehensive company appraisal, as well as a finance analysis and an in-depth industry study.

3. Obtain financing

Before you can negotiate the final purchase, you’ll need to have your finances in order. Small business loans are almost certainly going to be a component of your finance strategy. However, in order to make a strong application to banks, you must demonstrate that you are prepared to invest directly in the company.

Individual Investing

Make a down payment of at least 10% of the total purchase price. Some small company loans, on the other hand, demand a down payment of up to 30%.

If you have a 401(k) or a retirement account from a prior employer, you may be allowed to invest part of these assets in your firm. Personal cash may be invested, funds can be raised directly from investors, or funds can be raised via crowdsourcing with modest donations from family and friends.

Loans

You’ll need a personal credit score of at least 680, letters of reference, and a compelling business plan to secure favorable financing. Restaurant business loans are difficult to come by because lenders see the restaurant sector as particularly volatile. Lenders may be more willing to provide financing for the purchase of a restaurant if the loan is sponsored by the Small Business Administration (SBA).

SBA Loans are issued by traditional banks, but the SBA backs them, reducing the risk to lenders. A local bank can help you apply for an SBA loan. You might also utilize a lending platform like Lendio, which enables small firms to submit a single application to hundreds of different lenders.

Investors

You’ll have to depend on personal resources or individual investors if your credit history isn’t good enough to qualify for a small company loan. Working with investors will need having an investor agreement drawn up by your attorney to control the interaction between the investors and your company. This agreement should spell out the repayment schedule for investors as well as any other perks (such as meal discounts) that they may be eligible for.

4. Work out a deal with the seller

After you’ve secured finance and completed a thorough assessment of the company’s assets, it’s time to decide which assets you want and how much you’re prepared to spend for them. This will very certainly need many rounds of negotiations with the vendor.

Know What You’re Getting Before You Buy

You need to know exactly what you’re receiving for your money. The seller will need to keep track of what assets he or she still has to show to potential purchasers. For example, suppose you wish to buy a restaurant with a valid liquor license that you will not utilize. The license may then be sold to another customer by the seller.

With the seller, consider each item and its worth. (Unsplash photo by CoWomen)

Be thorough in your approach and take into account all of your assets. Whether you’re not sure if anything is included in the transaction, ask. The existing inventory of items will not necessarily be transferred if the menu is purchased. There are large cost goods like ovens and leases to consider, but don’t overlook little details like social media presence. You’ll need to get the passwords for those who were given to you as part of the arrangement.

Signing a Letter of Intent is a good way to start.

After you and the seller have agreed on the assets you want to buy, you’ll need your lawyer to create a letter of intent. A letter of intent is a non-binding contract that lays out the main terms and conditions of the ultimate transaction. It will contain the estimated acquisition price based on the business’s evaluated worth. This letter effectively states that, absent any unusual findings in your attorney’s review of the company, you plan to purchase it at this price.

Signing a Letter of Intent demonstrates your seriousness to a seller. (Unsplash photo by Scott Graham)

Make sure you’ve done your homework.

Due diligence is a procedure that is comparable to the performance metrics analysis you completed earlier. Due diligence, on the other hand, is a more thorough process. Cost-cutting and cash-flow issues are only the beginning of due diligence. It examines the legal, structural, and operational aspects of the company in depth.

The goal of due diligence is to have a detailed picture of the whole health of the company, not just the cash flow. Before confirming the sale, you must complete this step. During this process, you may learn about items like unpaid sales taxes or workers’ compensation claims that may impair your willingness to buy the company.

You should evaluate the following with the help of your attorney:

• The lease for the restaurant is as follows: How much time is left on the leasing agreement? Are the terms in your favor? Is it possible to sublet or transfer your lease in the future?
• Financial information: Confirm the restaurant’s financial performance records by looking at balance sheets, income statements, and tax returns.
• The restaurant’s general liability policy, workers’ compensation policy, and employee health insurance coverage are all worth looking at. Are the premium rates reasonable, or are they about to rise? You’ll want to know about recent workers’ compensation claims, particularly if any are still pending.
• Determine whatever permissions and licenses are associated with the company and ensure that they have been renewed when required. You will receive the tax history if you purchase the full company. You should double-check that all current taxes have been paid.
• Patents and trademarks: If a restaurant has a trademarked name or a copyrighted technique for making the finest chicken wings in the world, be sure these assets stay with the company you’re buying.
• Confirm labor cost and prime cost performance measures by looking at employee compensation information, payroll documents, average schedules, and employee incentive programs.
• Inventory and vendor contracts: You should also inquire about any current vendor contracts, particularly if the cuisine relies on uncommon or difficult-to-find items.

Ideally, nothing unexpected arises throughout your due diligence investigation. If anything does happen, though, it’s common practice to alter your recommended purchase price or include restrictions in the purchase agreement. If due diligence finds that the restaurant is behind on sales taxes, your attorney will almost certainly require that those taxes be paid before you proceed.

5. Complete the transaction

It’s time to make the deal official after you and the seller have agreed on the parameters of the acquisition. To begin, you and the seller must agree on a closing date—the day on which the company will be transferred to you. Then, to prepare a purchase agreement, contact your lawyer. The transaction will be completed on the closing day if both you and the seller have signed the agreement.

Transition & Closing Date

Meet with the seller to discuss the specifics of the transition before deciding on a closing date. A restaurant’s closure date is usually set at least two months after all parties have agreed to sell. You and the seller should transfer all of the restaurant systems throughout the period between reaching an agreement and closing on the purchase. Administrative chores such as updating permits and vendor accounts with your contact information and officially meeting staff may be part of the changeover.

The merchant may offer to train you for a few weeks in certain situations. He or she may wish to teach you how to utilize the point of sale system, as well as the payroll systems and buying arrangements. This training is especially beneficial if you are purchasing a long-established restaurant with a dedicated client base. You’ll want the merchant to personally introduce you to your frequent consumers.

Allow time for the following things during the changeover period:

• When a company changes ownership, several local licensing authorities mandate renovations. Make sure you’ve satisfied all of the relevant standards by checking with the proper authorities.
• Improvements: During the transition period, you or the seller may undertake any necessary renovations.
• You could wish to publicize the fact that the restaurant is currently under new management. If the company has a social media presence, make sure that those accounts are transferred as part of the transition.

It’s possible that learning the restaurant’s POS system will be part of your transition strategy. (Unsplash photo by Nathan Dumlao)

Create a Purchase Contract

The purchase agreement is a legally binding document that controls the sale’s conditions. This document will be created for you by your lawyer. The purchase price, closing date, and warranties and transactions that must occur before to closing are often included in the agreement. It will also contain a list of unpaid bills, such as closing fees, remodeling costs, and the cost of transferring permits, as well as who is accountable for them.

Sign the Purchase Contract.

You transmit the contract to the seller when your attorney has finished drafting it. Before signing, the seller will almost certainly have his or her attorney evaluate it. A non-compete provision in the purchase agreement is often included by the buyer’s attorney. A non-compete agreement bans the seller from launching a competing restaurant in the same market as the one you just acquired.

When the closing day approaches, you give the seller the money and the seller gives you ownership of the business. Congratulations!

Conclusion

Purchasing a fully running, existing restaurant is an excellent way to enter the food industry. Before you make a selection, do research and due diligence to ensure that you are aware of the benefits and disadvantages of each potential restaurant. A qualified business attorney is required to review papers like as leases and insurance policies, as well as to draft a purchase agreement that is beneficial to you.

If you are looking to buy a restaurant, but don’t have any money, the “how to buy a restaurant with no money” is for you. This article will teach you how to do it and includes 5 steps.

Related Tags

• how to buy a building for a restaurant
• red flags when buying a restaurant
• buying a restaurant guide
• how much does it cost to buy a restaurant building
• checklist for selling a restaurant