BUYING A RESTAURANT, NOT AN EASY TASK!
Written By: Mel Jones, President
There’s a reason why buying a restaurant, bar or club is referred to as a buying “process.” Each deal has its own unique personality and each with new challenges. There are a substantial number of steps involved and much to consider, especially for anyone who has never bought a food and beverage business in the past.
This is a major decision and investment, with so much at stake it is crucial to prepare properly and be educated for this journey and take the necessary steps to be certain all the right decisions are made along the way.
According to industry statistics, nine out of ten people who begin the search to buy a business, never complete a transaction. Perhaps the biggest reason for this dismal statistic is most people simply don’t realize what’s involved. Another reason is poor brokerage services and lack of qualified brokers in the marketplace to help a Buyer through the process.
Part of the challenge is many of the restaurant buyers are “first time” Buyers. Faced with crucial decision after crucial decision, Buyers are overwhelmed and frustrated, only to abort the project. This is where a good broker can help relieve the stress and guess work.
FINDING A FOOD & BEVERAGE BUSINESS TAKES TIME
If you don’t know where you’re going, any road will take you there! As with all projects, planning is the most important step. Define the goals and detail the tasks of how to meet these goals. Knowing exactly what type of food & beverage (F&B) business to buy, otherwise the search becomes an endless road of dead-ends. Know your strengths and weaknesses. If your career has been working in the fast food business, then a full service restaurant probably isn’t a good choice. If a full-time job prevents full-time effort on the project, then block-out 5 to 10 hours a week to work on it. But make the time in any case. This is probably the second largest investment a person makes. So invest the time and thought into it.
One of the most frustrating parts of searching for an F&B business is dealing with business brokers. The industry, just like the real estate industry, has good brokers and bad ones. So manage your expectations of the industry, don’t expect too much and all will be fine. Business brokers are overwhelmed by daily demands causing non-responsiveness. Most brokers have little, if any, experience selling F&B businesses. F&B businesses are the most complex businesses to sell due to many government entities involved in the process and few banks willing to finance the deals. So if a good broker is found, stick with the broker and be patient in finding the right F&B business.
FINANCING THE PURCHASE
Speaking of financing, if getting a loan is part of the plan, than the Buyer must be qualified and have at least 5 years of F&B managerial experience, good credit and 20% down payment in cash – some banks will even do 10% down loans. If the Buyer owns real estate with 20% equity or more, expect the bank to collateralize the real estate. And of course, the restaurant must have 3 years (some banks may only ask for two years) of tax returns whereby the adjusted net income is no less than 33% of the selling price. In other words, a selling price of $300,000 would command an adjusted net of $100,000 or more. Check with a CPA to analyze the true cash flow of the business.
STARTING THE SEARCH
95% of all F&B businesses for sale is advertised on the internet, so it makes sense to start searching by surfing the net. If no computer is available at home, then go to a local library. They’ll have one. There are two types of websites: (1) websites advertising all sorts of businesses for sales by all sorts of brokers and individuals, and (2) broker owned and managed websites where the listings are exclusive to the broker. Both are good sources to find F&B businesses. Register at all the sites to get the automatic e-mails alerts. Obviously, the advertising websites have the largest selection.
Narrow the search to F&B businesses fitting the goal. Don’t chase businesses not meeting the goal! Don’t compromise because your patience is running out. If this happens, stop looking! It takes time to find a match.
SEEK LEGAL AND ACCOUNTING ADVICE
Don’t be fooled into think an attorney or CPA will make decisions for you. Seeking professional advice is very important, but remember, attorneys and CPA’s are naturally risk adverse – they over protect their clients and often kill deals. Look at it their way, if the deal isn’t done, they risk nothing and gain a good fee. They will tend to over-protect on remote issues and kill deals. Find “deal-maker” professional advice. These are professionals who know where to make issues and where not to make issues. Visit the attorney or CPA with the answer in your mind and see what the professional’s response to the answer is, then modify as needed.
More important, learn the key legal and financial points to purchasing a business such as the lease, bulk sale transfers, basic due diligence requirements, profit and loss analysis, and lessee’s responsibilities. Learn the difference between an assignment and sub-lease, a personal guarantee and UCC-1 financing statement.
HURDLES TO CLOSING THE DEAL
Depending on the complexity of the deal, there are many hurdles a Buyer must jump through in order to close a deal. There could be as many as three major hurdles: (1) Landlord, (2) Lender, and (3) Franchisor and several minor hurdles. At a minimum each major hurdle requires a personal financial statement, business and financial plan, a resume and a credit check authorization. Obviously, each could ask for substantially more information. A good broker will help the Buyer prepare these documents.
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