Cost Versus Risk - “Pros & Cons” of Buying vs Building a Restaurant

In my line of work, as a Certified Restaurant Broker, I speak to hundreds of folks every week looking to own their own Restaurant, Bar, Café, or Treat Shop. Many are looking to purchase an established operating and profitable business while others are looking to launch their own. This important decision applies equally to independent restaurants as well as franchises, Fast Casual as well as Full Service… At the end of the day, I believe strongly that the decision comes down to two key factors; Cost and Risk

Consider the Cost

Building out a new restaurant from scratch can cost hundreds of thousands of dollars and take many months to complete. During that time you may be paying rent, likely be paying off a loan, while not realizing any revenue. Once you open there will be “ramp up” time establishing your business/brand in its new location. When buying an existing independent or franchised restaurant, your budget and earnings goal dictate the cost. Established restaurants are valued and sold based on current revenue and Owner Discretionary Earnings (ODE). Depending on the restaurant’s financials, you may be able to acquire an open and operating restaurant for much less than the cost of building out a new one. Most Franchise websites will tell you how much is will cost to build a new location from scratch.

Consider the Risk

Building a new independent or franchised restaurant does not guarantee success. Over 50% of new restaurants close within the 1^st 3 years. The average lease term is 5-10 years as is the loan it took to build that restaurant or franchise. While there are highly successful restaurants that were established three years ago or less, the odds are against you. When you buy an existing independent or franchised restaurant, you typically have access to years of financial history. You can examine key factors such as rent expense, cost of goods, salaries, all as a percent of sales, to determine the profitability of the restaurant. This is a powerful advantage that puts the new owner in the driver’s seat.

Consider the Reward

For many of us, owning our own business, being our own boss and in control of our financial well-being is an aspiration. Unfortunately, we don’t always have the stomach or are in the fiscal position to take that leap. But consider this…the average successful independent restaurant sells for 2-2.5 times verifiable owner earnings. Franchised restaurants sell at closer to 3 times earnings. If you need to replace an income of $100,000 per year, which would put you in the to 10% of all US wage earners, you should be able to find an established and profitable independent restaurant for under $250,000 and a Franchised restaurant for under $300,000. SBA lending is an option so assume you will need approximately 30% of the purchase price for acquisition and initial working capital. “Do the Math…” for as little as $60,000 you can own a business that provides you with a six figure income! Sometimes the current owner will even consider Seller Financing.

Consider the “Risk vs Reward

Ultimately, everyone’s individual situation will dictate how they go about making the leap to restaurant owner. For some, the risk of starting up a new independent or franchised restaurant from scratch is appealing. For most of us, however, our current financial responsibilities combined with a need for a secure and guaranteed income makes acquiring an existing restaurant a much more viable and palatable option. We Sell Restaurants is the largest restaurant broker in the country with close to 500 restaurant for sale listings available throughout the United States. We would be happy to help you find the perfect restaurant to support your lifestyle and financial goals.