How to Buy a Restaurant in 5 Steps

With more than a ten of cordial reception experience, Mary has worked in some of the most celebrated restaurants in the universe. Her expertness is featured across Fit Small Business in restaurant, retail, and starting a occupation subject. Buying a restaurant is a cost-efficient way for first-time restaurant owners to enter the cordial reception industry. Buying an existing restaurant is ideal for restaurateurs who want to step into a fully operation operation. Those who want to put their touch on a outer space, however, can buy a restaurant ’ south assets—such as the rent, furnishings, and kitchen equipment—and rebrand the business .
When you are in the procedure of starting a restaurant, buying an existing business can save you time and money. An existing restaurant already has the necessity operate on permits and licenses. speciate equipment like kitchen hoods and dirt traps are already properly installed. Building and health inspections have already been done. If you plan to keep the whole concept from furniture to menus, you will besides inherit seller relationships and employees .

Pros & Cons of Buying an Existing Restaurant

Shortened open timeline

Risks may be hidden
Fewer Permits to Secure May need to rehab restaurant reputation
operation is already organized Fewer opportunities to customize quad

There are some risks, however. If the seller has failed to pay vendors, or the restaurant has broken ratings on popular consumer sites like Yelp, you may need to rebrand the clientele. Your monetary value savings will besides depend on making as few changes as possible to the restaurant distance. then if you have a ambition floor design, you may need to wait to see it built. What you buy when you purchase a restaurant will vary depending on the restaurant ’ mho profitableness and repute. Let ’ s explore the five steps involved in buying a restaurant .

1. Find a Restaurant

The beginning dance step to buying a restaurant will be finding one that is available for sale. There are a couple of ways to find restaurants for sale. The most common are working with a broke or searching on-line listing websites. Before you visit your first listing, you ’ ll besides want to take time to narrow down the type of restaurant you are looking for .

Working With a Broker

If you don ’ t have much restaurant have or many restaurant diligence connections in your area, working with a broke is your best count. 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 perturb finding person this specialized. In that lawsuit, a commercial substantial estate broke will probable have the data you need .
Working with a commercial veridical estate of the realm or clientele agent has several benefits. Brokers probable know of businesses that are available before they are publicly listed. Brokers know the market. Depending on their particular area of expertness, they may besides be able to advise you on lease terms, permitting issues, or other governmental regulations. To find a commercial very estate or commercial enterprise agent, do an internet search for “ restaurant agent ” and your location .

Using Online Listings

As an alternative to working with very estate or business brokers, you can search listing sites like LoopNet or BizBuySell. These sites list enough data to get you started, but to assess the business and execute a purchase agreement amply, you will need to retain the services of an lawyer who specializes in business transactions .
loopnet search listings of restaurants map

Determine What You Are Looking For

Before you visit restaurant locations, it is crucial to know what classify of restaurant you want to purchase. You can buy the stallion business, including the existing business entity, in a majority leverage of the whole operation. alternatively, you can form your own business entity and entirely buy sealed assets of the restaurant .
These assets can include :

  • Equipment: This can include kitchen equipment like cooking ranges, ovens, and refrigerators. It can also include bar tools (like ice bins and soda guns), general equipment like grease traps, or specialized tools like the restaurant’s point of sale (POS) system.
  • Furnishings and small wares: Furnishings include furniture like tables and chairs, or fixtures like lighting equipment. Small wares are plates, cups, and silverware.
  • Lease or property: Most restaurants do not own their location; they instead operate with long-term commercial lease contracts. Part of buying a restaurant business involves taking over what remains of the lease. If the restaurant owns its location, however, the property itself may be part of the purchase.
  • Branding: Sometimes, you may only be interested in purchasing the restaurant’s name and trademark. If the restaurant name is trademarked, make sure the trademark transfers to you in the sale.
  • Liquor license: Liquor licenses can be hot commodities, especially in areas like Los Angeles that limit the number of licenses available. Sometimes restaurants sell their liquor license separately from the rest of the business.
  • Permits and insurance policies: If you are planning to buy the entire business, permits like the certificate of occupancy or health and safety permits should come with the deal. Insurance policies that are tied to the business—like liability and workers’ compensation—should also be up for discussion.
  • Operational documents: You may want to request any training programs, employee handbooks, menus, and other documents that govern how the business operates. This also includes documents that establish the business entity such as incorporation documents that form the LLC, and sales and payroll tax ID numbers.

If you intend to keep the restaurant running vitamin a is, you want to pursue a majority purchase. A bulge purchase includes all of the assets listed above. If you plan to rebrand the business or dramatically renovate the outer space, purchasing only the relevant assets is a better option .
a busy restaurant Ask yourself these questions to help determine what type of restaurant you are looking for :

  • Will you keep the seller’s name and brand? If yes, be sure that the restaurant has a stellar reputation and the operation is currently profitable.
  • What are your planned hours of operation? Try to find restaurants that currently operate with similar hours. Some neighborhoods have zoning restrictions that limit the hours a business can operate.
  • What equipment do you need to execute your menu? Getting a chef’s guidance on this can be as easy as posting a question in an online message board.
  • Do you plan to serve alcohol? Zoning regulations restrict bars in some neighborhoods.

Consider Each Potential Space

Try to visit each restaurant you are considering anonymously as a customer first. Experiencing the outer space from a customer perspective allows you to recognize the strengths and weaknesses of each restaurant. When dining, pay attention to general features like the ambiance and overall cleanliness of the space .
You should besides note the hang of serve. Are employees able to work around customers efficiently ? Is there adequate room at the bar, in the entrance, and the guest restrooms ? several other questions can help you determine if a restaurant quad is the right match for you :

  • Are direct competitors nearby?
  • Does the layout work for your concept?
  • Is the location accessible to your target customer?
  • Is there parking or valet for customers?
  • Do you notice any bottlenecks?
  • Do the staff and customers appear happy?

If a restaurant business seems to fit your criteria, your following step is to contact the owner. Take care to reach the owner directly via e-mail, earphone, or in person. Avoid identifying yourself as a likely buyer to restaurant employees ; they may not know that the business is on the grocery store .
When you revisit the restaurant as a electric potential buyer, pay particular attention to the non-public areas of the space. If you are not an expert in kitchen equipment, try to bring along person familiar with those systems who can assess the quality of the equipment .

Check the Restaurant’s Performance Metrics

There are typically two reasons restaurants become available for purchase : the business is not performing well or the owners are selling for personal reasons. You can tell why a restaurant is on the market by asking the seller. You can verify their intelligent by looking at the restaurant ’ s operation metrics .
once you make a serious inquiry about purchasing the business, the current owners should be willing to provide you with some basic operation data. Some restaurant owners include a snapshot of this information in the list itself, such as a instruction like “ $ 250,000 annual sales. ” however, you should still ask to see the actual fiscal records to verify this. Most restaurant owners will ask you to sign a nondisclosure agreement ( NDA ) before looking at their fiscal records. Requesting an NDA is a criterion practice to prevent competitors from acting in bad religion .
restaurant's key performance metrics on laptop When you are considering buying a restaurant, you ’ ll want to get an idea of the commercial enterprise ’ s overall cash flow. Cash flow is merely the amount of cash flowing into the business, minus the cash that flows out of it. positive cash flow plainly means that a restaurant brings in more money than it spends. Cash hang is kind of a catch-all phone number, intended to provide a thumbnail cartoon of the restaurant ’ s performance .
Cash menstruation is actually determined by the restaurant ’ s performance metrics. To in full understand the restaurant ’ south cash menstruate, ask the seller for these implicit in metrics. The metrics will show you precisely how cash is flowing in and out of the restaurant. For model, overall cash hang might look finely, but the implicit in metrics may indicate problems with department of labor or food cost. The question then becomes whether or not you have the ability ( or appetite ) to fix those problems. You might prefer to continue looking at early restaurants with fewer issues .
Some keystone operation indicators to ask about are :

  • Labor cost: This number illustrates how much the restaurant spends on hourly staff wages and benefits, expressed as a percentage of total sales. Ideally, labor cost should be 30% or less.
  • Food cost: Food cost tells you how much a restaurant is spending on the food it sells. Like labor cost, you want to see a food cost that is 30% or less.
  • Prime cost: This is the combination of all the restaurant’s costs and expenses like manager salaries, rent, permit costs, and overhead expenses. You want to see a prime cost that is within 55% to 65% of a restaurant’s total sales.
  • Profit margin: Profit margin tells you what amount of top-line sales flows through to the restaurant’s bottom line. A good restaurant profit margin is 5% to 10%. Anything less than 5% indicates that the business is struggling.

Whether a restaurant ’ second metrics are strong or unaccented will dictate your future motion. If the restaurant has firm fiscal metrics, it is a bang-up candidate for bulk purchase. These restaurants are great for buyers who want to keep the same menu, name, and mark. If you plan on making drastic changes, however, it might be a waste to buy a restaurant that is performing well as it is .
A restaurant that is not performing well financially may however be an arouse place for other reasons. Purchasing this type of restaurant makes sense for restaurant owners that plan alone to buy assets and completely rebrand the business. Owners who feel equipped to correct price issues may besides be matter to in this type of restaurant. For model, a high labor cost that is negatively impacting a restaurant ’ s bottom line international relations and security network ’ t a boastful deal if you know how to reduce labor costs.

2. Secure a Lawyer & Evaluate the Business

once you decide to purchase a restaurant, you must secure a business lawyer. Buying a business, peculiarly a restaurant, requires a lot legal paperwork then find a lawyer with restaurant expertness if you can. If you are purchasing the integral business entity, you inherit relationships with express and federal tax authorities. You will need to be doubly certain that your interests are protected .
A business lawyer will draft or assess critical documents like :

  • Letter of intent: This document memorializes your intent to purchase the restaurant and will set the basic terms and conditions of the purchase.
  • Lease agreements: Buying an existing restaurant usually means taking over a current long-term commercial lease. An attorney will assess the lease terms and raise any red flags you might otherwise miss.
  • Purchase agreement: Also referred to as a purchase contract or sales contract, the purchase agreement is the official document that governs the sale of the business. It lays out terms like the agreed-upon purchase price and any conditions that must be met by either party to complete the sale.

You can find an lawyer who specializes in occupation sales by contacting the local outgrowth of the American Bar Association. alternatively, sites like LegalZoom have searchable directories of attorneys in your area. A web site like LegalZoom is besides useful if you plan to purchase only a restaurant ’ randomness assets and need to create your own LLC ; the locate has a user-friendly interface to walk you through that procedure .
talk with a business attorney

Appraise the Business Value

The appraisal is where you place an actual value on the occupation assets and the business itself. There are many different methods to determine a fairly monetary value for the sale of a restaurant business but most restaurants are evaluated by profit. A criterion guidepost for determining a approximate range restaurant value is to calculate three times the annual net income. For case, it would not be unusual to see a commercial enterprise that earns $ 150,000 in annually profit listed for an request price of $ 450,000 .
That is merely a general number, however. The actual value of a restaurant business depends on many other factors, such as the prize of the restaurant ’ south equipment, placement, and the overall climate of the restaurant commercialize. There are besides intangible qualities that may make a business more or less valuable. If the restaurant you are considering is a beloved local landmark, this may increase the restaurant ’ s prize .
Your clientele lawyer will likely have a business appraiser they like to work with, or you can search for a business appraiser through freelancer communities like Upwork. alternatively, a business valuation provider like Guidant offers a business valuation service for $ 495. This service provides a detailed business evaluation that includes a finance appraisal and an in-depth diligence report .

3. Get Funding

You ’ ll necessitate to have your fund in line before negotiating the concluding purchase. Small commercial enterprise loans will probably be a part of your fund design. however, to present a robust application to banks, it is all-important to show that you are uncoerced to invest personally in this business .

Personal Investment

plan to have at least 10 % of the purchase price as a down payment. Qualifying for some little business loans, however, requires a down payment of up to 30 % .
If you have a 401 ( kilobyte ) from a former subcontract or a retirement bill, you may be able to use some of these funds to invest in your business. You can invest personal money from savings, gather funds directly from investors, or crowdfund with small investments from family and friends .

Loans

To get favorable financing, you should have a personal credit score above 680, letters of recommendation, and a convert business plan. restaurant clientele loans can be crafty to obtain because lenders consider the restaurant diligence as specially disruptive. Loans backed by the Small Business Administration ( SBA ) can make lenders more comfortable issuing credit to buy a restaurant .
traditional banks issue SBA Loans but the SBA backs those loans, which reduces the risk to lenders. You can apply for an SBA loan via a local bank. alternatively, you can use a lend marketplace like Lendio, which allows belittled businesses to complete a single application and strive hundreds of different lenders .

Investors

If your credit history is not potent enough to qualify for a little business lend, you will need to rely on personal resources or individual investors. Working with investors will require your lawyer to draw up an investor agreement to govern the relationship between the investors and your occupation. This agreement should lay out the timeline on which investors will be repaid, and the extra benefits ( such as dining discounts ) they may receive .

4. Negotiate With the Seller

With fund in position and a detail evaluation of the business ’ randomness assets, it is time to consider which assets you want and how much you are will to pay for them. This summons will likely require a few rounds of negotiation with the seller .

Understand What You Are Buying

You want to understand precisely what you are getting for your money. The seller will want to keep traverse of what assets he or she may still have to present to other buyers. For example, you want to purchase a restaurant that has an active liquor license that you do not intend to use. The seller can then sell that license to another buyer .
two ladies talking Be methodical ; consider every asset. Don ’ deoxythymidine monophosphate wear that an detail is included in the sale—ask. Purchasing the menu does not necessarily mean that the stream inventory of ingredients will be transferred. There are big ticket items like ovens and leases, but don ’ t forget modest items like social media profiles. You ’ ll want to get the passwords to those turned over as function of the deal .

Sign a Letter of Intent

After you and the seller are on the same page about what assets you plan to purchase, you need your lawyer to draft a letter of captive. A letter of intent is a non-binding agreement that outlines the broad terms and conditions of the final sale. It will include the expect purchase price based on the survey value of the business. This letter basically says that, barring anything strange appearing in your lawyer ’ south psychoanalysis of the company, you intend to buy the business and at this price .
a man signing a letter of intent

Do Your Due Diligence

Performing due diligence is a similar process to the performance metrics analysis that you did previously. due application, however, is more necessitate. due application goes beyond cost-control and cash-flow considerations. It looks at the legal, morphologic, and functional side of the business in detail .
The luff of the ascribable diligence process is to gain a clear picture of the health of the entire business, not fair the cash-flow. This step is essential before finalizing the sale. You can discover things during this step—like unpaid sales tax or workers ’ compensation claims—that may affect your desire to purchase the business .
aboard your lawyer, you should assess :

  • The restaurant’s lease: How much time remains on the lease contract? Are the terms favorable? Do you have the option to sublease or transfer the lease in the future?
  • Financial information: Consider balance sheets, income statements, and tax returns to confirm the restaurant’s financial performance records.
  • Insurance policies: You will want to look at the restaurant’s general liability policy, workers’ compensation policy, and employee health insurance policies. Are the premium rates fair or are they due to increase soon? You’ll want to know about recent workers’ comp claims, especially if there are any outstanding.
  • Permits and licenses: Determine what permits and licenses are tied to the business and confirm they have been renewed when necessary. If you are buying the entire business, you will inherit the tax history. You’ll want to confirm that all current taxes have been paid.
  • Patents and trademarks: If a restaurant has a trademarked name or a patented system for cooking the world’s best chicken wings, be sure these assets remain with the business you are purchasing.
  • Personnel information: Look at employee salary information, payroll documentation, typical schedules, and employee bonus plans to confirm labor cost and prime cost performance metrics.
  • Inventory and vendor contracts: You should also ask about existing contracts with vendors, especially if the menu depends on obscure or difficult to source ingredients.

ideally, nothing surprise pops up during your ascribable diligence analysis. If something does, though, it is accustomed to adjust your proposed purchase price or add stipulations to the purchase agreement. For case, if due diligence reveals that the restaurant is deep on a sales tax payment, your lawyer will likely stipulate that those taxes are paid before you move forward .

5. Complete the Purchase

once you and the seller agree on the terms of the purchase, it is meter to make it official. First, you and the seller should decide on a closing date—the date the business will transfer to you. then, reach out to your lawyer to draft a buy agreement. Once you and the seller have both signed the agreement, the sale will be arrant on the conclusion date .

Transition & Closing Date

Before you choose a close date, meet with the seller to discuss the details of transitioning the commercial enterprise. typically, a restaurant completion date is scheduled at least two months after all parties agree to the sale. The time between reaching an agreement and close on the share is the prison term when you and the seller should transition all the restaurant systems. The transition can involve administrative tasks like updating permits and seller accounts with your contact information and formally meeting employees .
In some cases, the seller may offer to train you for a match of weeks. He or she may want to show you the ins and outs of the payroll systems, purchasing arrangements, and how to use the point of sale system. This coach can be peculiarly helpful if you are buying a long-standing restaurant that has a patriotic customer base. You will want the seller to introduce you to your regular customers personally .
During the passage time period, you should besides allow time for :

  • Code updates: Some local licensing authorities require upgrades when a business changes hands. Check with the appropriate authorities to ensure you have met all the necessary requirements.
  • Renovations: The transition time also allows you or the seller to make any renovations that are required.
  • Marketing: You may want to let the public know that the restaurant is under new management. If the business has a social media presence, ensure that transferring those accounts is part of the transition.

a man learning the restaurant's POS

Draft a Purchase Agreement

The purchase agreement is a tie down condense that governs the terms of the sale. Your lawyer will need to create this text file for you. typically, the agreement contains the purchase price, the close date, and lists the warranties and transactions that must take place before closure. It will besides include a tilt of outstanding costs—like close costs, renovation expenses, monetary value of transferring permits—and who is responsible for paying them.

Sign the Purchase Agreement

once your lawyer has drafted the narrow, you send it to the seller. The seller will likely have his or her lawyer review it before signing. It is common rehearse for the buyer ’ s lawyer to include a non-compete article in the leverage agreement. A non-compete clause prevents the seller from opening a alike restaurant in the same grocery store that could directly compete with the restaurant you fair bought .
When the closure date arrives, you release the money to the seller and the seller releases ownership of the restaurant to you. Congratulations !

Bottom Line

Buying a in full operational, existing restaurant is a great way to get started in the restaurant clientele. Do your research and your due diligence to ensure that you know the strengths and weaknesses of each prospective restaurant before you make a decision. A good business lawyer is necessary to assess documents like leases and policy policies, and to write a purchase agreement that works for you .

reference : https://www.peterswar.net
Category : Finance