Restaurant for Sale: Check Out These Smart Buying Techniques
Restaurants USA, March 1996

If you're thinking of purchasing another restaurant, or if you're buying your first operation, you need to check out these smart buying techniques before checking the classifieds.
By Michael J. Strausser

Your concept is so hot, customers are lined up out the door and think nothing of waiting two hours for a table. So you decide to add another location to handle the demand. Or maybe you're a chef or manager who has worked for many years in the foodservice business and now you want to open your own operation. The newspaper is full of "restaurant for sale" ads, but which one is the best buy? That depends on your goals for your new restaurant.

A lot of smart buying techniques can be learned from successful foodservice chains. Those operators know it's a horse race to find and buy the best locations for their restaurants. If they don't find the best sites first, then their competitors will. Chains regularly lock down not one but several good locations at the same time. These companies take the buying process very seriously, because growth is their bread and butter. The secret to chains' buying success is that they have clear goals and objectives, plans for achieving those goals, ideal site specifications, and a team of professionals to guide them.

Also keep in mind that when you buy a restaurant, you buy its reputation, its structural problems, its limited parking facilities, etc. And if you think you can turn around a poor performer and make a hefty profit where others failed, you might be in for a rude awakening. Experts say that success in buying restaurants lies in a solid fundamental business concept.

What's your motivation?

Determine what your goals are before deciding to buy a restaurant. If you don't set specific goals, you could waste time with a bevy of brokers trying to get you to buy their listings, while your ideal eatery is gobbled up by someone else.

So, what are your goals for this restaurant? Do you want to make enough money from this venture to retire in 15 years with $400,000 in the bank, an annual income of $30,000 and the ability to travel three weeks out of the year? If that is your goal, then buying a single 600-square-foot luncheonette in Louisville, Kentucky, isn't likely to make that dream a reality. But owning a chain of luncheonettes might. If all you want is the satisfaction of running your own restaurant and you don't care about accumulating a lot of wealth, then a single-unit operation might fill the bill.

Establishing clear goals will cut down on the number of restaurants you consider buying and will help you avoid biting off more than you can chew. "Do you have the stamina, energy, desire and capital to handle an 8,000-square-foot eatery?" asks Michael S. Goodman, an investment broker with Grubb & Ellis Commercial Real Estate Services in West Los Angeles.

Goodman, who has owned/operated eateries ranging from 2,500 to 16,000 square feet, also encourages operators to "minimize your up-front financial exposure and be realistic, especially for your first restaurant."

Determining how much money you have to invest in a new restaurant will also limit the type of establishment you can buy and may affect your goals and objectives.

Make a plan

Research is key in creating a detailed plan for reaching your restaurant-ownership goals. Start by getting demographic information on potential customers to help focus your search. If you know the demographic profile of your target customers, then finding a restaurant to buy will be much easier. It will allow you to screen out locations that would not appeal to your targeted customers. Successful buyers include the following criteria for acquisition in their buying plans:

Net cash flow. What is the minimum cash flow the restaurant has to generate to meet your objectives? What rate of return do you require on your investment? You should know the answer to both of those questions before you set out to buy a restaurant.

Record of profits. There should, ideally, be a history of profits for the restaurant. Check the sales for the last three years — preferably five — to determine whether the operation has been in the red or in the black. Look for growth, or at least stability. If volume and profits haven't grown, find out why and whether those numbers can be turned around with a reasonable amount of work.

Price range. How much are you willing to pay for a restaurant? Calculate how much work must be done on the concept to get it up to your operating standards when figuring out how much you'd be willing to spend on the restaurant.

Location. The restaurant should be located in a market that appeals to your typical customer on the basis of demographic profiles. Commercial real-estate professionals frequently provide their clients with a demographic profile of the trade area so customers can see whether it meets their specifications. These profiles include not only the current population but also past and projected totals, growth rates, income, household size and age of consumer.
Suppliers are another good source of information for potential buyers. They can often tell you which areas of the city have increased in volume, as well as which restaurants are seeing more traffic, on the basis of their own orders from clients. Suppliers may also have inside information on restaurateurs who want to sell their operations.

Visibility and accessibility. A minimum traffic count is another spec that is used for evaluating an acquisition. It is a measure of how visible the business is to potential customers. But it isn't enough for customers to be able to see the place, they must also be able to get to it easily. So be sure to check on parking and public transportation availability in the restaurant's area.

Capacity. What are your requirements for minimum square footage and seating capacity? These requirements are based on your income goals and are critical for the survival and profitability of the business.

Lease terms. Does the building have a good lease? Can the lease be transferred to a new owner? Will you have long-term control of the site and be allotted enough time to amortize leasehold improvements? Are there noncompete clauses in the lease to keep out other similar foodservice concepts? These are a few of the details you should look for in the lease.

Government control. Are there any governmental restrictions that could affect your plans, such as limitations on population growth in your trade area? Physical limitations on water or sewer systems, and road construction, should also be researched. Are health regulations, fire-code restrictions and occupancy limits reasonable or onerous? What are the limitations on signage? Is there the potential for more parking? Will it be difficult or expensive to get a liquor license?

Type of building. Do you require a freestanding building for your operation?

Reputation. Does the operation you are considering buying have a good reputation with customers and suppliers? The restaurant's reputation may be tied to key employees. Will they stay on after you buy the restaurant?

Physical condition. What's the condition of the building housing the restaurant? Is it up to code? Will the power system meet your needs? What is the condition of the roof, and of the heating, ventilation and air-conditioning systems? Does the operation need a fresh coat of paint or new wallpaper? How does the carpet look and how much longer will it last? Will you have to do costly repairs or renovation?

Continuity. Will the owner stay on for a reasonable period of time to train you? How long has the current owner held the keys? Why is he or she selling? Are the owners current with all their business accounts? Are there any violations or lawsuits pending against the restaurant?

Get expert advice

You can improve the odds of successfully purchasing a viable restaurant by seeking expert counsel. There are too many minefields to try to handle such a large purchase on your own. You are also racing against other restaurateurs who want to expand their business, and good operations don't stay on the market for long. But on the other hand, don't let haste lead you to purchase a lemon.

You don't have to hire a full-time expert; you may need to get just a few hours of advice. An accountant can tell you whether the operation's records are in order — an indicator of whether the restaurant was properly run and whether the business numbers the current owner gave you are accurate. An accountant can also advise you on tax implications and scrutinize financial statements.

Ask an attorney to check out prospective leases to see whether you can assume them. He or she can help ensure that you will not be assuming unwanted liabilities. A lawyer can also help draft the purchase contract and other legal documents.

Turn to equipment vendors for their evaluation of the restaurant's equipment, so you'll know whether it's worth the purchase price and how long the equipment will last before it needs to be replaced.

Get an independent building inspector to examine your prospective location from top to bottom for an unbiased report on the operation's condition. Ask the inspector for an estimate of the maintenance and leasehold-improvement costs you face to get the restaurant up to your standards.

A market consultant can help you spot a restaurant in the right location, estimate future business trends in the area and determine whether your targeted clientele is moving into or out of the neighborhood. He or she can also do a break-even analysis to tell you what amount of sales you will need to cover costs and expenses before you can earn a profit, and can advise you about consumers' preferences.

And finally, business brokers may help you find good deals because of their connections.

The rewards of research

Finding the right restaurant to suit your business needs can be tricky, but there are great opportunities hidden among the risks. You can improve your odds of buying success by doing your homework before you shop around.

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