Buying an existing restaurant business can be a great idea. A great first option should be to find a location that was once a restaurant but is now closed. You won’t have to pay a premium for the business and the landlord will likely be very happy to include the equipment in the rent price or offer it with an installment plan. This is a very good way to open with very little out of pocket.
If you can’t find this situation then there are a couple other options. One, buy an existing business with minimal refurbishing and two, build out a non-restaurant space. Given the parameters of the type of restaurant we suggest, building a space from scratch can be expensive and should only be done if the cost is minimal. In that frame of reference, we recommend the first option, buying an existing restaurant. We covered the necessary details of the physical space in an earlier post. Here we will to talk a bit about finding and purchasing an existing business.
Craigslist
The best place to find an existing restaurant business for sale will be on craigslist under the for sale / business section (also sometimes in the commercial real estate section). Search for restaurant and several listings should come up. You can also try other online resources like loopnet, just don’t pay for a premium membership. Most of the important details are accessible with the free membership. It is possible to use a broker of your own but this will increase the cost to the seller as they have to pay the broker a commission. The broker may not have you as a priority as you are only looking to invest a relatively small amount (remember we are trying to do this for less than 30K). The brokers are used to much bigger deals.
NDA
See what craigslist is offering, reach out to the listings and ask to get a tour of the space as well as the financials. In most cases you will have to sign a NDA (non-disclosure agreement) which is fine. It is a document to protect the seller’s proprietary information from public disclosure. It is agreed to not disclose that the business is for sale and any of the financials. Just remember that if you sign one of these, it is imperative to protect the information you are given. You could be held liable for leaks and sued, plus it is just not cool.
Financials
A little detective work will be needed in deciphering the existing restaurant businesses financial statements. They tend to be bloated with unrealistic information so take them for what they are. Remember that the true revenue and profit margins are probably less than stated. Why else would they be selling? They should supply an equipment list, so you can get an idea of what they have and its worth. They will likely overestimate the equipment’s worth. Make sure you do your homework and can come up with your own estimate. Google searches and website like WebstaurantStore should help get a ball park for the new prices. Depreciate the value given the equipment’s age.
Know the area… financially
Getting your hands on a few different existing restaurant businesses financial statements can also be useful for your location research. See how much revenue the businesses are bringing in per square foot, and see what area is doing best. Do enough of these and you will have a pretty good idea of the area you are considering. Try guessing the sales of each of them. Can you guess based on their size and location? You will get better with each one, soon becoming a market expert. These skills will be very useful when estimating yearly sales for different candidate locations.
Equipment
The equipment is the most important part of buying an existing restaurant business. There may be a bit of a premium to get the seller to feel good about the sale as they tend to get emotionally attached to the business. Which is understandable. Just make sure it is a great deal and the cost is less than building out a comparable space. The goal should be to build your own business, so it doesn’t make sense to pay a large premium for the “name”. Just pay for their equipment and a little good will. Dealing with brokers will be a bit of a challenge as they will put on the hard sell and tell you that the existing customer base is worth a fortune. Well it’s usually not.
Make visits
Set up appointments to visit the existing restaurant business and be cognizant of the sellers wishes. Which might mean going when the business is closed to avoid their employees catching wind of the possible sale. Get a full tour of the place and take pictures and videos (ask for permission first) of the space and equipment. These pics will be instrumental when deciding between places, figuring out remodel costs, showing it to others and when coming up with an offer.
Remodeling
Get a feel for the age and condition of all the equipment and take notes. You will quickly forget. What will you have to replace or add that they don’t have. How much remodeling is necessary. Can you get away with just paint or will you have to build walls and counter tops. Have a ball park estimate of time and expense to open each particular spaces. Does it look like the sellers been investing in their business or do you see a lot of deferred maintenance? Check the big-ticket items like HVAC, hood unit, water heaters, plumbing and grease trap. Also find out what will the landlord fix or invest. You may be on your own.
Make an offer
I would offer what you think the equipment is worth (do your homework) and counter a little higher if the seller is close and the deal is still worth it. Don’t get attached and pay too much, it will hinder your profitability down the line. Getting open for the right price is critical. If you find a good deal and agree on a price, take the offer to your business attorney to look over and finalize the transaction.
Opportunities are out there, you never know what situation a person is in. They might take your equipment only offer right away or not even make a counter. It’s just business, move on if the deal isn’t very good for YOU.
Do you have an interesting business you are thinking about buying? Consider a Restaurant Coaching membership! We can help assess business opportunities.