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BUYING A RESTAURANT, NOT AN EASY TASK!

Mar 17, 2008
Article #2
Author: Mel Jones

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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.

LANDLORD
With our experience, if the Buyer prepares a professional package for the landlord containing the above outlined items, chances of success increases many times. Likewise, if the Buyer fails to prepare a good package, chances of failure increase many times.  The Buyer and broker should read the lease carefully looking for deal killer issues such as limited menus and hours of operation, signage and usage constraints, are lease options personal to Seller, substantial rent increases between option periods, etc.

Landlords have a bad reputation for a reason. Not all are bad, but those few can certainly spoil the bunch.  Some landlords knowingly over-step their bounds in an effort to improve their position and to test the Seller’s determination to take legal action.  In one recent deal a landlord arbitrarily increased the rent by 20% with no contractual basis to do so.  As the landlord’s attorney said – “SUE ME!” The Seller and Buyer accepted the Landlord’s new terms.  Landlord 1, Tenant 0!

LENDERS
The lending process is quite paper intensive, long, and doesn’t begin until a purchase agreement is signed. The two biggest F&B lenders are CIT and Banco Popular.  Completing the initial application can take a couple weeks while it could take another month before the loan is approved by the underwriter.  The bank will publish a long laundry list of documents needed before funding the loan.  It could take another 30 days to gather those documents.  A good broker will coordinate this process.

Keep in mind the lender will require collateral meaning they will place a lean on your home if the equity in the home is greater than 20%.

FRANCHISORS
Transferring a franchise is much like transferring a lease.  In fact the lease and franchise agreement look and read very much the same.  Read the franchise agreement and under key elements such as hidden costs, transfer, training, and remodeling, and the franchise fees.  Know what kind of support to expect from the franchisor. 

GET THE FAMILY INVOLVED IN THE DECISION!
Owning a F&B business has great rewards, but not without sacrifice.  If not managed properly, the business can consume every waking moment of an owner.  Get your spouse to buy into the deal.  If there is not a consensus, don’t buy the business. Two minds are better than one.  Respect each others opinion and views.  But don’t let the purchase become a burden on the relationship.  It isn’t worth it!

HOW MUCH DO YOU WANT TO SPEND?
Determine with absolute certainty how much cash is available to invest. Don’t depend on family and friends for money.  The best way to break-up a family or friendship is to borrow money and lose it.

If given the choice between buying a profitable business netting $150,000 for $400,000 and a losing restaurant for $75,000, I’d choose the profitable restaurant every time.  Don’t be so concerned about taking on the debt.  The bank won’t loan money unless the bank believes you and restaurant will succeed.  The bank performs its own due diligence. Even after servicing the debt, there will be plenty of cash remaining to have a comfortable living. But most important, there will be far less stress on the Buyer then trying to turn a restaurant around – a daunting task at best.

Leveraging your money is a good thing.  With the same amount of cash, one can purchase a profitable restaurant compared to a 100% cash deal for an unprofitable restaurant.  I has been perplexing to me how people spend $100,000 on a losing venture, but they won’t spend the same $100,000 on a profitable one?

HOW LONG DOES IT TAKE TO CLOSE A DEAL
Depending on the complexity of the deal, it could take anywhere from 45 days to 120 days to close escrow on an F&B business.  There are techniques used to gain “early possession” of the restaurant, meaning the buyer takes possession before escrow closes, but this takes a skilled F&B broker to navigate through the rough waters to properly structure the transaction.

SPEAKING OF BROKERS – Do You Need One?
It depends.  Of course, I’m a restaurant broker and I should say yes.  But my firm only represents Sellers and we sell nothing but Restaurant, Bars, and Clubs.  Our agents are well trained to close deals and to deal with Buyer honestly and supportively.  Our forms, contracts and procedures are designed to do one thing - sell and close restaurant deals – we close 90% of the contract we enter into.  We encourage Buyers to seek legal and accounting advice.  We’ve made the buying process simpler than any other brokerage firm.

In any case, a good broker should:
• have sold many food and beverage businesses in the past.
• provide access to a vast database of food and beverage businesses for sale.
• understand financials and be able to perform detailed financial analysis.  And be able to explain the numbers in plain English.
• keep the deal moving forward when obstacles are encountered.
• identify solutions and negotiate compromises to obstacles.
• ensure all documents are properly prepared and executed to close the deal.
• be honest in his dealings and maintain his integrity throughout the transaction.

SUMMARY
Commit to a deadline for buying a food and beverage business (not just “looking” for one).
1. Set aside time everyday to work on the project, even if it’s only an hour a day. Stay focused on the objective.
2. Organize your finances. Understand your financial strength and weaknesses.  Don’t over shoot your financial goal and don’t undershoot it either. Define how much you need to earn.  Determine if your cash on hand can purchase a business that earns that much.
3. Work on determining what type of restaurant will thrive from your strengths and not suffer from your weaknesses.
4. Seek professional advice from a qualified accountant and attorney during the purchase process.  But be careful, most attorneys are hypersensitive to over protecting their client to the point of killing deal.  Get a deal-maker attorney, not a deal-breaker.
5. Unless you have a wealth of experience buying restaurants, then educate yourself about this process. Learn as much as you can. When it comes to investing in your future, you can never know too much!


Contact Mel at www.SellingRestaurants.com or 800-576-3615.


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