Many people are fond of the Confucius quote, "Choose a job you love, and you will never have to work a day in your life." It's an inspiring idea, and one that has motivated thousands of foodies and aspiring chefs to entertain dreams of running a restaurant. Realistically, passion for the product is not enough to guarantee a restaurant's success. To avoid becoming a failure statistic, here are ten very important questions an entrepreneur must be able to answer before buying a restaurant:
1. Why is the restaurant for sale?
The reason for the sale of the restaurant will shed light on any possible problems the next owner may have. What if a larger, more competitive restaurant is planned to be built nearby? There may be an increase in taxes, a change in traffic flow because of construction, etc. On the other hand, it is possible that the owner has personal reasons for wanting to sell a profitable business, meaning that it holds promise for a new owner.
2. How does its valuation shape up?
Every business buyer should request a valuation of the business in question, and this is especially true in the case of restaurant purchases. The purchase of an average open restaurant involves more points to be investigated than most other business purchases. Health issues, equipment, suppliers, and many other line items must be accounted for in the financials and scoured thoroughly by an expert. Restaurants are notorious for having unreported income, so the seller must be very trustworthy and prove that the reported profit is accurate.
3. Is the location prime and will the landlord agree to lease to a new owner?
Unless the restaurant's impeccable reputation alone is enough to drive the business (which is not probable), location plays the most important part in attracting customers. The landlord of a prime piece of real estate very much has the upper hand in these cases; the landlord may be cautious about assigning a lease to a new restaurant business buyer who does not have experience in the industry. It is possible that the landlord may even request that the former owner remain on the lease before agreeing to a deal, but most sellers have no interest in remaining tied to the old business. Address the lease issues right away before wasting time and money on further inquiries into the sale.
4. What is the state of the restaurant's current reputation?
No matter how many changes a new owner plans to make to their acquisition, if the restaurant's existing reputation is poor, winning over customers may be an uphill battle. It is important to check all review sites, ask questions of locals, and exhaust all possible avenues to gauge the restaurant's standing in the community. Do not assume, however, that a business for sale is a business in trouble. It is possible for it to have an outstanding reputation, and the current owner has other reasons for not continuing to run the business.
5. How much must be paid up front?
Because one must always be prepared for any eventuality, a potential buyer should have a plan in the event that the business does not perform as well as hoped. The best course of action is to limit the amount of money paid up front and use the existing restaurant as collateral. In doing so, the buyer will be able to avoid filing for bankruptcy if the business does not earn enough profits.
In Part 2 of this series, we will discuss the remaining five questions one must ask when considering buying a restaurant. If you need help determining if a restaurant purchase is appropriate for you, please contact George & Company, located in Worcester, MA. We have honed our business skills over decades of appraising, selling, and financing small companies, including a significant number of restaurants.