You’ve decided it’s time to follow the dream you’ve carried with you for some time. You’ve done your homework. You know the type of restaurant you want to open. Now you’re left to decide if you want to buy an existing restaurant or develop one from scratch. Learn from those that came before you and consider the advantages and disadvantages before making your decision.
Buying an existing restaurant that is profitable has inherent benefits. A turn-key operation often requires less start-up costs and offers a quick opening. Seller financing may also be available. Operational procedures are in place and, if it’s profitable, they just might be good operational procedures. You have a workforce in place and can capitalize and grow from an existing client base. You have immediate positive cash flow.
The Big Picture
Sign the NDA and take a look at the books. Check food cost, labor cost, check averages and turnover rate. Determine their prime cost and sales per square foot. What percentage goes to rent or occupancy? Restaurant benchmarks will tell you if the seller’s figures, P & L and balance sheets create a unified picture of profitability or if you’re being offered a poisoned chalice. They may explain it away on unreported cash sales, which is hard if not impossible to prove. Put on your best disguise and check out the restaurant on a Friday night.
If you’re considering buying a restaurant that is not profitable because you can get in at a good price and turn it around, think again. With the advent of social media and online reviews, prior reputations are hard to overcome. If the restaurant is on a down-turn, chances are so are their reviews. By the same token, check into past health inspections to ensure there are no red-flag violations that caused closer or complaints that caused unannounced inspections. Take a good look at their reputation before signing on the dotted line.
Past reputations can haunt closed restaurants as well. Considering an asset-based purchase in which you’re only purchasing the equipment can seem like a good deal financially until you open up the doors to trickle-in traffic.
If you are creating a totally new concept, you will have the benefit of the “new kid on the block” syndrome for a brief period of time. Under new ownership will need to be splashed across all marketing platforms as well as your enticing menu and updated décor. Make sure the restaurant is at its very best before opening the doors. Gone are the days when you could tweak your concept, menu, pricing and operations after the initial hoopla. Every potential customer that enters your doors will decide by that first impression whether they will return or opt for the other restaurant just down the street.
Before you Sign
With the advent of numerous TV shows romanticizing the restaurant industry, the number of people entering the business with no basic experience has skyrocketed. For this reason, many landlords are requiring restaurant owners to have experience in the industry, references, or a good track record in a similar venue. Determine the status of the lease and the landlord’s expectations before signing.
For every nightmare you hear about restaurant ownership, there is another restaurateur that wouldn’t trade it for anything in the world. Do your due diligence to ensure that you fall into the latter category.