Low barriers to entry and affordable asking prices continue to fuel interest in restaurant acquisitions. But there's a big difference between buying a restaurant and buying a restaurant with the essential components for sustained profitability and growth. To avoid a poor investment choice, prepare yourself by entering the market armed with the right questions.
Critical Questions When Acquiring a Small, Independent Restaurant
Restaurants are some of the most affordable opportunities in the business-for-sale marketplace. According to BizBuySell.com data, the median asking price for manufacturing businesses in the first quarter was $799,000. Restaurants, on the other hand, had a median asking price of $198,900. But affordability doesn't reduce the risk for buyers. In fact, restaurants have a notoriously high failure rate, so it's critical to know what you're getting into before you commit to an acquisition. Here are several questions you can't afford not to ask:
- Does the lease transfer? Restaurants live and die based on traffic, and traffic hinges on location. Landlords are often hesitant to assign leases to new owners, especially owners that lack prior restaurant or small business experience. So, to retain the restaurant's existing customer base, you'll need to either secure a new lease or a lease assignment before you commit.
- What is the real cash flow of the restaurant? With restaurants, the amount of income the seller reports can vary from the amount of income found on financial statements. Since restaurants typically sell for a multiple of cash flow (on average two times cash flow for all transactions tracked by BizBuySell in 2014), it's important to confirm that the asking price is based on verifiable cash flow--and not the owner's personal estimate.
- What is the condition of the equipment? As a new restaurant owner, equipment repairs or replacements are expenses you need to avoid. Have the building and the equipment inspected to make sure that it has been maintained properly and is in good working order.
- Is there a transferable liquor license? Food quality brings people in the door. But for many restaurant owners, alcohol is the real moneymaker. Since local jurisdictions typically issue a limited number of liquor licenses, verify that the restaurant's liquor license transfers and is included in the sale.
- Are there existing liabilities? The due diligence process should root out liabilities attached to the business. Go the extra mile and ask whether there is unpaid overtime, unpaid sales tax, health code violations or other liabilities that could jeopardize your ability to successfully operate the business.
- What is the restaurant's reputation in the community? Reputation is everything in the food service industry and changes in ownership aren't always visible to customers. If the restaurant has a negative reputation in the local community, revenue will suffer. Evaluate the customer feedback provided on Yelp and other review sites to gauge the establishment's reputation with local diners.
- Is the owner willing to sign a non-compete clause? Independent restaurants are frequently personality-driven businesses that are built on the owner's recipes, cuisine and culinary style. If the seller isn't willing to sign a non-compete clause, there is nothing preventing him from opening a similar restaurant in close proximity to the one you're buying.
A restaurant acquisition sounds like it should be a straightforward business transaction. But in fact, buying a restaurant is a nuanced process. To protect your interests, consider enlisting the help of a business broker that knows how and when to ask restaurant sellers the right questions.