Buying a Restaurant

While other industries may be experiencing slow growth, the restaurant industry is booming and growing considerably, making buying a restaurant an appealing prospect. One way that you can get into the foodservice industry is to start your own restaurant, which is an excellent option for those with lots of restaurant experience. But, if you don't have a background in foodservice or any ownership experience, a better option may be to buy an existing restaurant. In this article we'll cover how much it costs to buy a restaurant and the steps you need to take to purchase a restaurant.

You can use the links below to jump to the different sections in the process:

1. Check for Restaurants for Sale
2. Assess the Sale Price and Cash Flow
3. Establish Credit and Get Funding
4. Negotiate a Contract
5. Complete a Due Diligence Checklist
6. Create a Transition Plan
7. Host a Grand Opening

How Much Does It Cost to Buy a Restaurant?

Buying a restaurant can be significantly less expensive than buying a business in a different industry, which, coupled with the growth in the industry, makes it a worthwhile investment. But, before you consider buying a restaurant, you should know roughly how much you can expect to pay.

Here is how much it costs to buy a restaurant, on average, according to a recent survey:

• Median Startup Cost (Without Purchasing Land): $275,000
• Average Price Per Square Foot: $95
• Median Startup Cost (With Purchasing Land): $425,000

You should also note that the numbers listed above are averages, so it's possible to find restaurants for sale for significantly below these prices. When considering how much a restaurant might cost in your area, you should also think about your location. For example, it will be more expensive to buy a restaurant in an urban area than in the suburbs or a rural location.

How to Buy a Restaurant in 7 Easy Steps

The process to buy an existing restaurant can be convoluted and confusing, especially if you're unfamiliar with the restaurant industry. But, we boiled the procedure down to 7 simple steps to help guide you through the process.

1. Check the Market for Restaurants for Sale

The first step in purchasing a restaurant is to check the market and see what's available in your area. Restaurant listings will have a lot of useful information, such as the sale price, size, zoning description, information about when the building was built, and any other features and specifics about the building.

But, there is some important information that you should research yourself when looking at a restaurant listing that you're interested in. Here are some things that you should research when looking at restaurant listings:

• Competitor analysis: When looking at a restaurant listing, make sure to note any other restaurants nearby and their popularity. If there is stiff competition in the area, it may not be a good investment.
• Location analysis: You will also want to complete a location analysis to determine if the restaurant has good foot or driving traffic, if there is ample parking space, if it's in a desirable neighborhood, and more.
• Cash flow and profitability: If you're buying an existing restaurant you will want to find financial data about the business and its profitability. Some restaurant listings will include this information, but you may have to reach out to the seller or realtor for this information if it's not displayed.
• Why the owner is selling the business: You should also inquire why the owner is selling the restaurant in the first place. Is the owner retiring or do they just want to leave the restaurant industry? Or are they having problems with the business or not maintaining profitability?

2. Check Sales, Costs, and Prices

You should already have financial information like the sale price and the cash flow from your initial research. Your next step is to crunch all of the numbers and determine if there is a potential for profit if you decide to purchase that specific business. You can find out if the business will be profitable by comparing the sale price to the business's revenue and cash flow. But, be sure to also leave room for any replacements, renovations, and upgrades you may need to make when you take over the business.

If you determine that buying a restaurant will be profitable, you can proceed with acquiring funding and drawing up a contract.

3. Establish Your Credit and Acquire Funding

The third step is to find out your credit score. Your credit score is measured on a scale of 300 (worst) to 850 (best). Your credit score is determined by five major factors: credit payment history, money owed, length of credit history, new credit, and types of credit used.

Your credit will play a major role in receiving loans and startup capital. For example, if you have a high credit, banks will be more willing to offer loans, because you have a history of paying off your credit. If your credit score is low, you can still receive funding, but you will probably have a higher interest rate and less negotiating power.

4. Hire a Lawyer and Negotiate a Contract

After establishing your credit and lining up your funding, you can begin negotiations with the owner to buy the restaurant. This stage is where you will also want to inquire about all of the assets and liabilities of the restaurant and what specifically will be included in the sale. Here are some questions to ask the owner when negotiating the restaurant sale:

• What are the restaurant's assets? Things like equipment, staff, furniture, etc.
• If the business has a liquor license, is it part of the deal?
• What is the quality and age of the equipment? When was it last serviced and does anything need to be repaired or replaced? Does all of the equipment meet current safety standards and regulations?
• Will you be taking over the restaurant's brand or will you be starting from scratch using the space?
• Are there any outstanding health inspection violations or pest problems that need to be addressed?
• Will you be allowed to use the same recipes or will you have to design a new menu?
• What is the restaurant's current reputation like in the community?
• Will the landlord transfer the lease to you, or will you have to negotiate a new lease?
• Is the restaurant owner willing to sign a non-compete clause?

Asking questions during the negotiation process can help you assess more in-depth if this is a good deal or not. Plus, depending on the restaurant owner's answers, you may have some leverage in the negotiating process to drive down the asking price or make some other concessions.

5. Perform a Due Diligence Checklist

A due diligence checklist is a process you undertake when purchasing an existing business. A due diligence checklist should cover the financial, legal, structural, and operational side of the business in detail. To do a due diligence checklist, you should ask for detailed information from the restaurant owner. Here is a list of things that should be on your buying a restaurant checklist:

• Financial information such as balance sheets, income statements, and tax returns.
• All records regarding the legal standing of the business, such as insurance policies, permits and licenses including liquor licenses, and any patents or trademarks the business may own.
• Information regarding employees and the business's organization. This includes employee handbooks, information about salaries, schedules, and employee benefit plans.
• Be sure to inquire about the restaurant's current inventory including disposables and food items. You will also want to ask about the restaurant's food shipments and any existing contracts with vendors.

The point of a due diligence checklist is to get a clear picture of the business as a whole and how healthy it is. It's important to do this step before signing any documents or finalizing the sale though, because you can discover things during this step that can affect the sale price.

6. Create a Transition Plan for the Restaurant

After you officially buy a restaurant and all the papers are signed, you can begin to plan the transition. There are two main areas of the business that need transition plans: the staff and the business itself.

Staff Transition Plan

Your new employees will need time to get to know and trust you as an owner. One great way to create a good first impression is to implement an open, transparent policy. This also gives employees a chance to offer their input, which can be valuable since they'll be able to tell you if new ideas will be compatible with existing policies. Plus, because the employees have been working for your new business, they'll have insight on how to make the business run more efficiently.

Transitioning Your New Restaurant

You will also need to create a transition plan for the business itself. This can include things like renovations, creating a new menu, or replacing old equipment. Your transition plan should be comprehensive and also include completion dates to keep your new restaurant on track. During this step, you can also begin marketing the new restaurant and putting out notifications on social media that the business is under new ownership to create interest.

7. Hosting a Grand Re-Opening and Marketing Your New Restaurant

After dealing with the transition, getting all of your new policies in place, and making any necessary renovations to the business, you're ready to re-open the doors to the public. This is an excellent opportunity for your new business, and you should promote your grand re-opening on social media to create interest and awareness among potential customers.

In addition to online advertising and marketing, your restaurant should also use outdoor and physical marketing, such as hanging open signs, adding the date of your grand opening to the business's sign, or handing out flyers. Additionally, depending on the size of your establishment and your community, you can also reach out to your local newspaper, radio station, or news affiliate for coverage.

Buying a restaurant can be an excellent alternative to starting a new one because you acquire an existing business with trained staff, legal permits, and an established customer base. But, while this may be a less stressful option, there are still many factors and considerations that need to be made, so be sure to hire a lawyer who understands the process thoroughly to help you make decisions.