Tips and Traps When Buying an Existing Restaurant Business

Tips and Traps When Buying an Existing Restaurant Business

Buying an existing restaurant business can be a great way to get into a successful and profitable business with low risk and high rewards. But there are definitely things to watch out for when you are looking at a potential purchase, and you want to go into the process with your eyes open.

Here are ten things to take into account when buying an existing restaurant business:

1.Be sure you find out everything you can about the location. Has it been a restaurant for a long time? Does it have enough parking? Can you get a good lease (the lease shouldn't be more than 10%, and preferably 5% or less, of the gross sales)? Is it secure? Does it meet permit requirements? One of the
biggest problems new restaurant owners face are undisclosed issues with the building or landlord, or a lease that is impossibly high.

2.Verify the current business is doing the sales the owner claims. Most independent restaurants have terrible books, and often the owner won't disclose their tax returns, because they are underreporting their income. It is very difficult, therefore, to know exactly how much business they are doing. If you never see anyone in the place, however, and they are claiming great sales, you should be very suspicious. You should be using a restaurant specific financial projections tool to help you estimate all your startup and operations costs, such as the one available from http://www.restaurantfunds.com.

3.Make sure you understand what your actual payroll costs will be. The current operation may be profitable because the owner has his family working for free, and the employees are paid under the table. Don't base your figures on what the current owner is doing, base it on what it is actually going to cost you to run, then see if it still makes sense.

4. Figure out where the customers are coming from, and make sure you will continue to get them and can grow the business. If the location is maxed out, or if the customer base is likely to go with the current owner because they are mostly friends of his, find that out ahead of time.

5.Be wary of owners that require all cash buyouts. If they aren't willing to take at least a reasonable portion of the price of their business over time, it may be because they know something you don't about your chances of success once the deal closes.

6.Get the owner to sign a fair non compete agreement. You don't want them to open a new place right down the street from the place you just bought using the money you paid them, and then have them take all the business you thought you would be getting.

7.Find out how seasonal the business is going to be. It may look great during the summer tourist season, but turn out to be a money loser the other nine months of the year. Talk with other owners in the area, and try to get at least bank statements showing deposits going back a few years so you can see what the sales trends are going to look like for you.

8.Figure out ahead of time what kinds of terms you can get from the vendors who supply the food. This is going to make a difference in your cash flow situation, and you want to know ahead of time that you will be able to set up accounts to supply you with the materials you will need to make the business run.

9.Check the equipment for anything that will need to be refurbished or replaced in the next twelve months. You don't want to walk into a situation where you will need to outlay a lot of cash upfront to get the place in shape. If you do find problems, use them to negotiate a better price.

10.Get everything in writing, and use an escrow service or a lawyer, or both, to review and complete the deal. You are making a big investment, and you don't want to get taken advantage of or find out too late you bought something other than what you were expecting. The small cost of these service providers is nothing compared with the cost of a bad purchase.

Use these basic tips to make sure you aren't getting yourself in trouble and are buying a profitable and long term cash cow with your hard earned investment.