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Why Restaurant Buyers Typically Fail: Best Pro Tips For Buying A Restaurant

Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor

Buying a small to mid-sized restaurant can have many pitfalls, and potential restaurant buyers should know how to avoid getting burned! Several restaurant advisors weigh in with (Peter Siegel, MBA at BizBen) and discuss tips for buying a restaurant in California.

Tags: buying a business, deal structures

Potential buyers planning to buy a restaurant might imagine the great food coming out of their kitchen and the happy customers lined up at mealtime to get a seat. But there's more to know about owning this kind of business. Five things (and possible a lot more once contributors start adding to this discussion!) you need to understand to make it easier to find the right restaurant to purchase.

Many Americans harbor a dream that starts when they buy a restaurant and become well known and respected members of the community, putting out terrific food to an appreciative clientele. At least that's the picture we get when we see a movie about a popular restaurant or watch a television program featuring a celebrity chef.

That dream might become a reality for some prospective restaurant buyers. But they need to acquire the right type of restaurant - one that matches the purchaser's experience and business style. With the knowledge someone needs to acquire when shopping for a restaurant are these five fundamental points to understand.

1. There is a difference between a full-service restaurant and a fast food business. I've talked to a number of prospective buyers (in the BizBen ProBuy Program) who don't recognize the difference and aren't completely clear, at the beginning of the search, about what they want. As a result, some potential restaurant buyers are frustrated that the picture they have of the perfect business does not look anything like the for-sale opportunities to which they are exposed. As a general rule, the owner of a full service restaurant should have some understanding about food preparation and the job of a wait staff. Running a fast-food restaurant requires solid business skills more than "kitchen-smarts." The informed buyer understands the difference and is clear from the beginning about what he or she wants.

2. A restaurant franchise may be the right choice for someone without a background in the industry. There is more to know about a restaurant business, in order to be successful, than most people realize. Even a fast food operation with a limited menu and no need for professional food preparation can be a reasonably complex business. Typically, the business will have small margins (the difference between total income and total costs) that must be maintained in order to show a profit. That's where a reputable franchise with a strong management support function can make a difference. Someone with general business knowledge, good judgment and a willingness to learn the companyís rules for success from franchise headquarters has a better chance of doing well than someone who thinks he or she has nothing to learn about the industry and expects to run the business "his way."

3. If any alcoholic beverages are sold at a restaurant being considered for purchase, the buyer will need to qualify with the agency of the state that issues liquor licenses and "keeps an eye" on all of the licensees. In most states, for example, an individual with a criminal record is unlikely to be approved for a license. Also unlikely to be approved is someone who has the money to make the purchase but canít or wonít explain to the licensing board how that money was earned or received. Just because the seller has a license does not mean the buyer will receive one. A hearing may be conducted to determine whether the prospective new owner of a restaurant is considered a responsible citizen who can be trusted to obey the state's laws about the sale of liquor, and even beer and wine.

4. A cash flow projection with realistic assumptions should be prepared by anyone contemplating the purchase of a restaurant. And it should include a cushion of cash in case the profits donít start coming in as soon as the buyer takes possession. I've heard restaurant purchasers say that they wished they had been told, or had figured out, that discretionary earnings enjoyed by the old owner probably would not be available to the new owner for at least several months. Not only are there start up costs for licenses and permits, up-front cash required by new vendors, and other expenses not always included in a business plan, but there are mistakes often made by a new owner that impacts the bottom line. Adding ten or fifteen percent to the costs, when preparing a pro forma, enables the new owner to be prepared with extra working capital, rather than being surprised by the actual dollar figures, after taking over the restaurant.

5. Many successful restaurants have an intangible aspect that contributes to that success. It has to do, in part, with the appearance of the premises - more casual or more formal depending on the clientele, and the barely-noticed things like photos on the walls and color of the carpet, that contribute to that appearance. It also has to do with the appearance and the demeanor of the employees, whether they are behind a counter serving up hot dogs, or bringing expensive wine to the table, or somewhere in between. Such aspects are hard to explain. Some business brokers refer to it as the "karma" of a food establishment. Itís important for a buyer who is touring a restaurant for sale to pay attention to his or her subtle reaction to the premises. Does the place feel comfortable and inviting? Or is there some factor that would discourage you from coming again if you were a customer? This aspect can be discussed with an expert on restaurants, and the astute buyer visits several food service businesses and pays attention to what is desirable or undesirable about each in order to start acquiring an education about that intangible aspect.

The purchaser who aspires to be a successful restaurant business owner, whether in the corner pizza parlor or in a destination restaurant - or in an establishment in between, needs to get an education about the industry, including understanding these five points above. They can be helpful in selecting the right purchase candidate and preparing properly to be a successful restaurant owner!

Replies To This Comment
One of the things I remind my buyers, especially those who may be coming out of the corporate world, is the amount of time they will be at the restaurant or servicing it. Owning a business or restaurant for that matter is NOT a 9-5 Monday-Friday job, they will be there or thinking about it ALL THE TIME.

When a restaurant is in decline, I have experienced those who don't know when to sell and cut their losses. Many times I have spoken with potential sellers who were thinking about selling or were running out of money, and I encouraged them to sell before it was too late. I would take with the seller, they would decline to list it, and six months later or more, I would drive by and the business had closed their doors.



The most common mistake I encounter with some prospective restaurant buyers is looking at viable, operating restaurants that have substantial value from an established cuisine, robust sales, good profits, loyal customers, great staff, and a solid reputation. This sounds like the perfect restaurant, right? All those attributes will justifiably command a relatively high price--there's real value there.

So why would it be a mistake? When the buyers intend to close down the restaurant for 2, 3, 4 months while they gut the interior and redesign the kitchen and dining room, change the cuisine, change the ambience, change the name, then hire new staff, commence marketing from scratch, and hope for new customers to arrive, they have wasted perhaps hundreds of thousands of dollars they spent for the intangible goodwill of the business. They would have been better off leasing a vacant built-out restaurant. Or, even a vacant retail space they would build into a restaurant from scratch.

The simple lesson: the restaurant might be "worth" the asking price, but only if the buyer is going to actually use the tangible and intangible assets that he buys. Don't pay for "value" that's not valuable to you.


Contributor: Business Broker, SF Bay Area

For some reason there is, as Peter stated, some attraction people have to the restaurant industry that other businesses don't have. Restaurant listings get a lot of response and many business buyers are interested in buying a restaurant. The main problem with buying a restaurant is experience. It has been stated that 80 percent of small businesses fail within the first 5 years. But a lesser known statistic is that 80 percent of small businesses started by someone with managerial experience in the industry succeed after 5 years. The majority of businesses that fail are started by someone with no experience.

If you want to buy a restaurant, my advice would be to get managerial experience first. Many buyers don't want to do the dirty work, they want to own the restaurant but don't want to wash the dishes and sweep the floors, however, sometimes that's what business owners have to do. It's not so much doing the dirty work but the willingness to do it. Gaining experience for a year or two in the industry is much more important than having good credit and being able to qualify for a loan when it comes to buying a restaurant or any business for that matter.



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