Buy and Sell Restaurants - a Guide from We Sell Restaurants

Posted by Eric Gagnon on Jan 19, 2009 12:28:00 PM

There are three main categories of restaurants for sale:

  • Restaurants for Sale by Owner
  • Franchise Restaurants for Sale by Franchises
  • Restaurants for Sale by a Business Broker

First and foremost, understand who's representing you.  In the case of a Restaurant for Sale by Owner, Buyer Beware prevails.  You represent yourself.  The seller represents himself.  There are no independent third parties in this situation looking out for your best interest.  Due diligence should be approached on a restaurant for sale by owner with a highly suspicious point of view.  Buyers should validate three main things when dealing with a purchase for sale by owner.

  1. TOP LINE SALES.  What can be proven about top line sales?  Good sources of data to verify top line sales include:  Sales Tax Receipts filed with the state government or Tax Returns stating gross sales filed with the federal government.  Bad sources of data to verify top line sales include:  taking the owner's word for it, observing cars or customers in the restaurant or hand written notes that don't confirm to financial filings. If a restaurant seller says their real sales are higher but they don't report it all, consider that if they're willing to cheat Uncle Sam, they might be willing to cheat you too.  Buy a business with the sales that you can see and that are legally reported.
  2. EXPENSE.  Spend less time on expenses than on sales because if you're a good operator with experience, the seller's expense won't mirror your own.  Good operators know how to control food costs and labor costs to generate a profit.  Good sources of data to verify expense information include:  Profit and Loss Statements and Tax Returns filed with the federal government (schedules).
  3. EQUIPMENT.  Understand what you are buying and who has title to it.  Some restaurant equipment (like the dishwasher) is typically leased.   Make sure you are getting title to the assets in the building (including all the equipment) you think you are buying.  I have met individuals that purchased restaurants only to learn months later (when they wanted me to sell it) that the landlord actually owned everything they already paid for.  Use a closing attorney to do a lien search and get you clear title.  Have an equipment inspector check out the equipment to be certain there are no surprises in age or operation.
In purchasing the second category of restaurant, franchise restaurants for sale, remember that again, you represent yourself.  No matter how much you want to buy this business, keep in mind the franchise represents only one party - the franchise.  They spend a lot of time putting you through hoops to "qualify" you for the transaction but make sure you are simultaneously doing your own due diligence.  Contact franchise owners and operators across the state and across the nation.  Don't use the list they give you - naturally they will give only glowing recommendations.  Looks at cities across America and call those that have markets approximately the same size as the one you will be operating in. If you're opening the franchise in a county of 45,000, don't call an Atlanta franchise restaurant operator who's pulling from a metro area of 3 million.  Lastly, I never recommend that clients open the first of any franchise in the marketplace.  No matter how hot you think this is going to be, you're wasting all the money you're paying for an established concept if you're the first to market.  You will be light on advertising because one operators means not enough advertising pooled dollars for ads.  Wait until they have multiple operators signed or negotiate to acquire the franchise but not have to start construction until six other units are launching as well.  You need some mass in the marketplace or you may as well open or buy an independent restaurant.  You are negotiating with them - you are not locked into their first offer.

Lastly, you'll be considering restaurant businesses for sale by brokers.  This is the one category that actually does provide representation for your best interests in the transaction (and generally at no cost to you as the seller pays commission).  Good brokers are knowledgeable.  They will have industry specifics and comparable financial data for the type of restaurant you are purchasing.  A good broker will be able to provide you with the due diligence materials and information you need to make an informed decision.  Restaurant brokers can be found online by looking for bars, restaurants for sale, or through recommendations.  Good brokers will guide you through the process and should always maintain a position of "no surprises" for the buyer.

Topics: Buying a Restaurant

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