Wondering how to buy a restaurant and curious about the status of lending? Bankers assess risk when creating loans for buying a restaurant with financing. They want to minimize their risk by knowing that you, as the buyer, have strong character. They use your past credit performance or credit rating to indicate how you pay your bills. They also look at the performance of the business. With the upheaval to the industry in 2020, here are tips from this Restaurant Broker on how to overcome hurdles in buying a restaurant with financing today.
Increase your down payment. Cash is king and a stronger commitment to the project reduces the risk any lender has in the game. For those deals with SBA lending, this helps to securitize the bank and offer more guarantees. Between the SBA strong guaranty and a buyer commitment to more upfront capital in the form of a down payment, this reduces risk and improves the deal for lending.
What is realistic in today’s market? Buying a restaurant with financing at ten percent down is not possible today. We encourage our buyers to put as much as 50% into the deal to make it the most appealing for lenders. This can be accomplished through cash or through a combination of cash on hand and a rollover of your 401K. Despite current economic conditions, the stock market remains at nearly historic highs so rolling over a portion of those funds in a tax free way to free up capital can allow you to buy a restaurant with financing today with payments spread over ten years at a great valuation.
Ask the seller to take an SBA Standby Agreement. An SBA Standby Agreement means the seller does not get any loan payments until the SBA loan is paid off. This accomplishes the same thing as a larger down payment as the lender sees this as equity into the deal. In this instance, the additional equity is coming from the seller but counts toward you as the buyer.
This allows the lender to reduce the down payment requirement dollar-for-dollar with the amount of standby financing in the transaction.
For example, if you are purchasing a restaurant for $350,000 and you have $80,000 to put down, the seller can do an SBA Standby Agreement for another $70,000. Combined, the lender views that as $150,000 as a down payment (your $80,000 plus his $70,000 equals $150,000). That reduces the risk to the lender to $200,000 on a loan before the SBA guarantees the bank’s risk at 80%. That is a scenario many lenders will accept.
Bypass the SBA and Seek Owner Financing. A third way to buy a restaurant with financing today is to bypass lenders altogether and seek owner financing. Part of the push forward through any form of trying times is mental. If you are bullish on the future and the seller is exhausted with the present, strike a deal for owner financing that allows you to bring a minimum amount to the table now with a “balloon” or large payment in several years. That allows you to operate, create cash flow through the business and then get lending for a payoff if a few years to pay out the seller.
Structure an Earn Out to Buy a Restaurant with Financing. An earn out is money that comes to the seller in the future based on future performance. Imagine that you are looking to buy a restaurant with financing that has a great track record in 2019 that was seriously impacted by 2020. You and the seller are confident that when life returns to a more normalized existence, the sales will return to 2019 levels or above. You pay some form of the payment today and the future payment is “earned” or paid out based on future performance.
For example, if you are purchasing a restaurant with financing based on a valuation for $255,000 that was primarily based on 2019 earnings, agree to the seller to pay $155,000 today at closing and have “at risk” or an “earn out” of the additional $100,000 purchase price based on the store achieving some level of sales in the future. This Restaurant Broker highly recommends these scenarios be built on sales, not earnings as these are too easy to manipulate.
A seller could even achieve a number above the $100,000 balance in my example depending on how the sales trend. While every deal is written and negotiated differently with the assistance of a Certified Restaurant Broker, it could look something like this:
- Average store sales of $40,000 per month Q1 – Payment of $25,000
- Average store sales of $45,000 per month Q2 – Payment of $30,000
- Average store sales of $50,000 per month Q3 – Payment of $33,000
- Average store sales of $55,000 per month Q4 – Payment of $35,000
In this Restaurant Broker’s example, the seller gets more money than the original balance of $100,000 because of the sales outperform the original expectations. When you win, the seller wins based on future performance.
In challenging times, it can take creative means to keep deals together to buy a restaurant with financing. Our experienced Certified Restaurant Brokers can guide you through opportunities to acquire one of the many restaurants for sale that are flourishing in today’s market which includes anything with a strong carry out and delivery presence and of course, pizza restaurants for sale.
Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.