So you want to open a restaurant. Maybe it’s to take your grandmothers’ recipes to the masses. Maybe you want to share your love of tacos with the world. A place to call your own, perhaps? The dream of opening a restaurant is held by many, and it hasn’t been sullied by the pandemic. Despite the unfortunate closures, new restaurants are opening every day, and at rates close to what they were prior to March of 2020.
There are generally two ways to go about opening a new restaurant: buying an existing one, or starting from scratch. Each has advantages and disadvantages. In this post, we’re going to focus on the former.
Buying a restaurant is, in many cases, the budget-friendly option. You have the advantage of a built-out kitchen with equipment, bars and dining rooms, technology, parking lots, and more. With restaurant startup costs restaurant startup cost averages at $275,000 or $3,046 per seat for a leased building, According to Sage accounting. For owned buildings, costs get a bump to $425,000 or $3,734 per seat. Tack on obtaining permits and licenses, and you could be in for a pretty big check.
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How much does it cost to buy a restaurant?
According to recent data from the National Restaurant Association, restaurants overall sell for a median price of $150,000. The average price sits around half a million dollars, according to data from Restaurants for Sale. However, restaurant prices vary widely, based on region, location and type.
According to Investopedia, a restaurant will generally look to sell for about 25 to 40% of its annual operating income. For example, a restaurant that does $1 million would look to sell from anywhere between $250,000 and $400,000, depending on the area and market
With restaurant startup costs as high as they are, there are clear benefits of buying an existing restaurant over starting from scratch. Once you’re ready and funded, here are the steps to take to realize the dream of ownership.
How to Buy a Restaurant
1. See What Your Local Market Looks Like
Once you’re ready to buy, the first real step is to decide where and start looking for properties. It’s not just as simple as looking around town for “For Sale” or “For Lease” signs. You may have to do some digging. See what restaurants have been bought or sold in the past few years to get an idea of what the local market has to offer. The aptly named Restaurants For Sale Online is a great place to start. Local commercial real estate brokers, online classifieds, and hospitality associations are also a great place to look.
The types of information that these listings will have include previous purchases and sales, square footage, zoning information, and information about the building itself such as year built. You’ll also want to get an idea of what the competition in the surrounding area is like—is there a popular restaurant across the street that may be fierce competition? Or is it the only restaurant of it’s kind in the area? You may want to take a look at the Google MyBusiness listing to get a sense of traffic and compare the number of reviews to other restaurants in the area.
Local demographics are vital to understand as well. Is it a walking neighborhood or a driving one? Is it a middle-class family neighborhood, a college student hub, or an affluent suburb? Understanding the role that restaurant plays in it’s part of town is essential.
2. Find Out Why the Restaurant is for sale
There are many reasons that a restaurant owner may be putting their restaurant up for sale. Perhaps they’ve enjoyed a long and successful career and are looking to retire. They may be looking to move on to a new career. They could also be trying to get out of a bad situation—be it management, building, or market related. The restaurant may be good to go with a strong reputation, or in desperate need of a re-launched concept. A clear understanding of why the restaurant is for sale can give you an advantage in everything from negotiating contracts to how to position the reopening once you have the keys.The best way to find out why to is simply to talk to the current owner. Come prepared with a list of questions that you’d like to know as a buyer.
3. Do Your Due Diligence
Once you’ve determined that you’re interested in purchasing a restaurant, and you’re on board with why it’s for sale, you’re going to want to start doing your due diligence. A restaurant is a big purchase, and you want to ensure that you have a complete understanding of the ins-and-outs of what you’re looking to buy. Your local hospitality association may also have resources for opening a restaurant their region.
Things to consider are:
- Local Sentiment
- Taxes or Violations
- Licenses and Permits
What is the local sentiment towards the restaurant?
In the restaurant business, reputation is everything. One bad meal can lead to one less recommendation and a loss of business. On the flipside, one stellar meal can provide immeasurable new business to your dining room. To get a clearer picture of a restaurant’s local sentiment, head online. Spend some time looking through the restaurant’s reviews on sites like GoogleMyBusiness, Yelp, Nextdoor, TripAdvisor, Facebook, and local business associations.
Both positive and negative sentiment can have pros and cons. A beloved local institution may garner harsh and quick criticism from existing guests. A less-than-stellar restaurant may turn off new guests. Both situations can also offer tremendous opportunity—but knowing what you’re buying will set you up for success.
Find out the true costs
Understanding the businesses food and labor costs, monthly overhead, and a clear picture of the business cash flow. A complete picture of both fixed and variable costs include labor, food and beverage, utilities, linens, equipment, supplies, technology, and even things like music licensing. The restaurant seller should be able to provide you with a look at the restaurant’s books. For the full picture, here are some additional questions worth asking:
Questions to Ask: Find out the true costs
- What vendors does the restaurant purchase from and have they been paid on time?
- Do any contracts exist with vendors?
- What are the last 3-5 five years of financial statements? Has the business improved or declined?
- What percentage of the total costs are food?
- What is the cost of goods sold (CoGS)?
- What is the labor cost percentage?
- Is the restaurant turning a profit?
Recommended Reading: Ultimate Guide to Restaurant Costs
Taxes and Violations
Taxes. They’re inevitable in life and in business. When buying a restaurant, you’re going to want to make sure that someone else’s taxes don’t become your problem. You may be on the hook for any taxes owed or debts held by the previous owners, so knowing where your potential purchase stands is essential.
Other violations you may encounter are health code, building code, and pest violations. A history of any of them can impact your ability to run a successful business at that location. If the owner is not forthcoming with that information, you can find history via local government websites and health departments.
Questions to ask: Taxes and Violations
- Are all taxes up to date and paid? This includes but is not limited to sales tax, payroll tax, property tax, and corporate tax.
- Have there been any tax audits in the past three to five years?
- Have there been any health or fire code violations in the past five years?
- What have health code ratings been for the past three to five years?
Equipment Costs and Condition
More than likely, you’ll be purchasing all of that equipment when you buy a restaurant. Just like buying a used car, you’re going to need all the information you can get about the restaurant’s equipment and furnishings. Get service records, purchase information, and warranty information from the owner. You’ll also want to bring in your own experts to check in on the plumbing, electrical, heating, ventilation, and air conditioning to ensure the building itself is running in top shape. If anything isn’t up to snuff, work with the current owner to have it repaired or replaced so you don’t end up fronting the cost once you get the keys.
Questions to Ask: Equipment Costs and Condition
- When was the last time the walk-in cooler or range hood was serviced?
- Have there been any major equipment repairs in the last six months to a year?
- Has there ever been any major water, fire, or earthquake damage?
- Which piece of equipment breaks down the most?
Licenses and Permits
The restaurant business is full of different types of licenses and permits that allow them to do business. Here are some of the most common licenses, permits, certificates you will come across:
- Liquor Licenses
- Food Service Permits
- Certificate of Occupancy
- Sign Permits
- Health-related Permits
Here’s a full list of permits that you may encounter in the restaurant business
Questions to Ask: Licenses and Permits
- Are all permits and certificates required up to date?
- Is the liquor license included in the sale?
- Were there any issues in obtaining permits or licenses?
These are just some of the items that should be included on your due diligence checklist. It is imperative that you spend a considerable amount of time and energy on this stage. The more you know about what you’re buying, the more chance you have at running a successful operation.
Once you’re gotten to know your future restaurant inside-out and sideways, it’s time to get serious about the legal process. The easiest way to go through this is to hire an experienced restaurant attorney to guide you through. Reach out to local restaurants and hospitality associations to steer you in the right direction. You want someone on your side who knows the business, can help explain and negotiate contracts and make the process as smooth as buying a restaurant can be.
It’s also important that you take the time to read and understand any contracts or legal paperwork yourself. It’ll help the next time you buy, and ensure that nothing goes unexplained.
Make sure you come to the negotiating table with a solid offer to speed up the process. Once your offer and the terms of the deal have been accepted, it’s time to think about getting the restaurant running your way.
Recommended Reading: How to Make Your Grand Opening a Grand Success
4. Make a Reopening Plan
You’ve got the keys and you’re a restaurant owner! It’s unlikely that the restaurant will remain operational as the owner transitions out, so you’ll need to come up with a reopening plan. Here are some of the questions you’ll need to ask.
If you’re planning on keeping the restaurant name and concept:
- What staff changes need to be made?
- Will the menu change at all?
- Will the branding remain, or will there be updated logos, signage, etc.
If you’re planning on changing the restaurant name and concept:
- What will the new concept look like?
- What staff will remain and who needs to be hired?
- What is the new name and design of the restaurant?
- What needs to be renovated, replaced, or removed?
Here are a few 7shifts resources to consider when creating your transition plan:
5. Open Your Restaurant
The long process of searching, due diligence, contract negotiations, and planning is over: the big day is finally upon us. Before you cut the red tape, let the public know about it!
Restaurant marketing is more important than ever before. Make sure you have access to all of the restaurant’s social media and internet accounts to promote the opening. If you don’t already have a marketing plan, it’s time to create one.
Closing Thoughts: How to Buy a Restaurant.
The dream of restaurant ownership is alive in many. Buying an existing restaurant is an easier and more cost-effective way to get into the business. By making sure you do as much research and due diligence as possible, you can be assured that you're making the right purchase. We hope this guide will give you the tools and ideas you need to make that decision.