Jul 13

What to Look for When Buying a Restaurant Business

Are you considering purchasing a restaurant business? Here are five things you should look out for.

If you’re planning to become a restauranteur, it may be more practical for you to purchase an existing restaurant instead of starting from scratch. Starting from square one entails ideating an original concept, leasing a location, developing a menu and design based on the concept, hiring the appropriate staff, buying equipment, and so on. On the other hand, existing restaurants will already have most, if not all, the necessary elements to operate.

The challenge with buying a restaurant business is finding the best fit for you. The matter of cost is a given, but you must also comb through various factors that impact performance and profitability.

Here are five keep things to look out for when buying a restaurant business.

5 Factors in Buying a Restaurant Business

1. Reason for Selling

This seems like a no-brainer question for any prospective buyer, but this opens a whole can of worms when unpacked. There are endless possible reasons why an owner may be looking to sell their restaurant, and it pays to understand why before you sign on the dotted line. It can give you an initial feel of what you may be facing and allows you to decide if it’s worth investigating further or if it’s not worth your time. 

Sometimes, it’s a harmless reason such as the owner wanting to retire, pursue a different career path, or relocate. But it can also be a critical reason such as sales or management challenges. If it’s the latter, this signals that you’ll need to make some major changes to turn it into a more profitable or efficient business.

These changes, which may include rebranding or revising the business model, may entail significant cost and manpower implications. That’s something you need to be ready for, aside from shelling out the cost of buying the restaurant.

Some owners may be hesitant to be fully transparent about the reason for wanting to sell their restaurant. You will still need to exert due diligence by combing through their financial records and confirming the information they share with you. If you do decide to continue looking into the restaurant, you may also consider asking the owner if they are willing to train the new owner/s and ensure a smooth transition.

waiter holding tray

2. Financial Records and Competitive Landscape

As a prospective buyer, you have the right to look into their financial records to get a sense of market trends and profitability. It will help to have an experienced financial advisor review the information and help compute a reasonable offer.

You must also deep dive into the local market and conduct a competitive analysis – what are the other restaurants in the area and what demographics do they cater to? Is there a direct competitor in the area, and if yes, how are they performing compared to the restaurant you’re planning to buy? Are there plans to open new food and beverage establishments in the area? 

It’s also crucial to study the restaurant’s brand equity and the role they play in the community. If there are any reputation issues, you might have trouble getting customers through the door, and you’re in for some serious image rehabilitation. Check out customer reviews online, ask around the area, gauge the regulars. You might also decide to pivot the business into a new direction – from a family-friendly establishment to a fun Happy Hour hangout, or from low-key casual to upscale high-class dining.

3. Business Assets

Comb through the nitty-gritty that makes the business run. First, consider the employees. Who is expected to stay, and who is expected to leave after the transition? If some of those expected to leave are key staff, these may have a direct impact on the business.

For example, the departure of the head chef will affect the quality of the food as the replacement may not be able to fully replicate the menu. Or if a beloved manager leaves, it might prompt lower-level personnel to consider leaving too as they may fear a change in company culture. If you’re already serious about the purchase, review employment details such as training procedures, tipping guidelines, payroll, shift scheduling, and if there any existing employee concerns.

Second, review all the owned assets of the business. This includes physical and operation assets such as the actual restaurant site, the kitchen and front office equipment, chairs, tables, etc. Ask questions regarding the equipment’s age and condition, repair history, and any applicable warranty. Check if there’s anything that requires fixing or updating.

For example, if the restaurant is still working with an outdated traditional cash register, it’s time to switch to a POS system that can help you run the business more efficiently.

Other business-owned assets may also include a website and social media accounts, trademarks for logos and slogans, and other things you may need for advertising.

woman sitting at bar with bartender

4. Legal Matters

When you buy a restaurant, you inherit everything – the good and the bad. Make sure to check if the restaurant has any existing or previous issues such as ongoing litigation concerns, health code violations, labor code breaches, current or previous tax concerns, outstanding financial obligations, and complaints from residents in the area. Look up the restaurant on apps such as HD Scores, What the Health, and the local government website to review the latest inspection results. You may also want to check the business’s status of insurance coverage.

Inquire about the business’s standing with the local government, health department, labor union, residents, and other agencies that have an impact or will be impacted by the restaurant. Check the status of any licenses and reviews. For example, if the restaurant serves liquor, check with the local government if the license is transferrable with the purchase of the restaurant or if you would need to reapply as the new owner.  

It’s also common in the industry to request for the previous owner or departing employees to sign a non-compete agreement formalizing that they not start a similar or directly competing business. This is particularly crucial if the previous owner is a beloved community fixture and plans to stay in the area (hence, if they start a new restaurant, they can attract their regulars to them), or if key personnel who was privy to trade secrets will resign (like a cook who can replicate the dishes).

5. Location and Community Culture

While these may not be within the seller’s control, external factors like the surrounding environment and demographics will impact the business. For example, it may not make much sense to have a fine dining establishment in a suburban area with families and school-aged children. 

It’s also important to take note of location challenges like parking restrictions, waste disposal, crime or vandalism, zoning information, and potential changes in the customer base.

If you do your due diligence, finding the right restaurant business to purchase will feel much more manageable. If you need help managing the day-to-day responsibilities of running a restaurant, contact True POS today.

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