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SO YOU WANT TO BUY - HOW TO BUY A RESTAURANT

May 13, 2011
Article #71
Author: Mel Jones

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There isn’t a day that goes-by where many business buyers call me wanting to purchase a restaurant or bar yet they have no idea where to or how to start.

First start with a self-analysis of whether you have the prerequisites to even begin searching for a restaurant or bar business to buy let alone actually buying one.  There are three criteria I use to qualify a buyer: First is whether you are credit worthy, and not so much for a bank loan as much as for the landlord.  Second is whether you have the experience running a similar restaurant or bar business and serving or bartending doesn’t cut it.  And finally, how much cash do you have in the bank to purchase the business and have enough left over as working capital. 

HOW'S YOUR CREDIT WORTHINESS?

Being creditworthiness applies to three parties involved in the transaction – the seller, the landlord and the Banker, if any – sounds like a starting line for a joke.  Even a seller that’s not carrying a note on the business typically has succession liability with regards to the lease, meaning the seller is still responsible for making sure you pay the rent.  Yes, most leases call for the seller (assignor) to make the rent payments in the event the buyer (assignee) defaults.  I’ve written many article on this topic, which often catches sellers as well as buyer by surprise. So the seller has a vested interest in making sure you can pay the rent and run the business.

The other party with a vest interest is the landlord. Obviously the landlord wants to increase his/her chances of making sure the rent is paid.  In doing so, they want the buyer to have good restaurant or bar management experience as well as plenty of cash on hand after the acquisition and a good credit history.  Landlord’s are the biggest deal killers in my business and never underestimate the killing power they have.  A good broker will do his/her best to make the buyer look like a shining star, like SellingRestaurants agent are trained to do.

Today there seems to be some notion that there is easy money out there to be given away just like it was before the financial collapse.  Let me assure you, despite what our politicians tell us and tell the press – who aren’t doing their job challenging the politicians – the banks are not lending!  The credit criteria is challenging to say the least with banks demanding loans be 100% cross-collateralized – meaning the bank wants your assets and the business assets in the event of a default and those asset values have to be at least worth as much as the loan, which most borrowers don’t have the collateral to reach that hurdle.

So, unless you have a financial statement like Bill Gates, you’re not going to get a loan these days.   Yes, I’m exaggerating to illustrate the need for you to have strong finances ready in the event you want to do a bank loan. 

In addition to collateralizing the loan, the bank demands no less than 5 years restaurant management experience and a great FICO score.   But if you buy a franchise the 5 years experience may not be needed.

HOW MUCH RESTAURANT AND BAR MANAGEMENT EXPERIENCE DO YOU HAVE?

During the good times, weak restaurant and bar operators could get away with “loose” numbers because there was volume to cover the errors of their ways. Times have changed that scenario and with the tough times only the skilled operators will survive.  To obtain these skills doesn’t mean that you’ve served tables or cooked in the kitchen, not that that’s not good experience.  Management experience means you have the financial responsibility for the restaurant and you make the payroll. It means you’ve had to manage costs, design menu’s, fire people, hire people, pay the bills and make the rent and payroll. This is the experience landlords and bankers want. The casual buyer whose had a dream of owning a restaurant or bar can offset their lack of experience with a lot of cash in the bank to cover their learning curve.  But if you’re short on the experience and short on the cash, let me save you time.  Don’t start looking for a restaurant or bar because you won’t get it!

HOW MUCH CASH DO YOU HAVE?

This is another important point.  I often get calls from buyer’s who’ve done a get job at saving money and they ought to be patted on the back.  But saving $10,000, $20,000 or even $30,000 isn’t going to get one into the restaurant and bar business.  Those amounts cover the rent deposits, license transfers and perhaps inventory, but it won’t cover the purchase price and the on-going operating costs of the business.

There is a direct relationship to how much cash you need to purchase and operate a restaurant or bar and the amount of income you need to live from year to year.  Let me knock out the “asset sale” restaurants and bars.  Asset sales means the business doesn’t have good tax returns showing profit, so in essence what’s being sold is the assets of the business…some accountants will want to get technical here namely they argue – rightfully so – that goodwill is an asset too.  But the industry definition is more along the lines of excluding goodwill.

People buy these assets to avoid cost and delays of opening a restaurant or bar.  Frankly, anyone who is building out an empty space into a restaurant probably isn’t making the best decision on this economy given there are plenty of empty restaurant spaces with at least the basic restaurant infrastructure in place. Nevertheless, some people still do it.

Back to the relationship of cash to income. If you need an annual income of $50,000 than you’re looking for a restaurant in the price range of $100,000 to $150,000 tops. So unless the seller is financing the deal, your going to need no less than $200,000 cash to buy a restaurant selling for $150,000.  Here is how it breaks-out:

 

Purchase Price                                    $150,000

Rent Deposit                                        $     5,000

Security Deposit                                  $     5,000

Escrow Closing Costs                        $     1,500

Sale Tax on FF&E                               $     5,000 (in many states)

Fees and licenses                               $     3,500

Food & Beverage inventory               $     5,000

Working capital                                    $  25,000

Total                                                       $200,000

You can see there are plenty of costs in acquiring a restaurant or bar that most buyers just don’t realize are there. So make sure you’ve got plenty of cash.

 To sum it up, if you have good credit and good restaurant or bar management experience and plenty of excess cash after the purchase, then you’re a shoe-in to buy a restaurant or bar and by all means, start the search! 


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