With star chefs making a number of series on television these days it may seem like a glamorous path to own a restaurant. Just google “restaurant near me” and you will see hundreds of search results if you are in a developed area. The statistics in the restaurant industry can be daunting. You will read that, “Around 60 percent of new restaurants fail within the first year. And nearly 80 percent shutter before their fifth anniversary.” CNN – https://www.cnbc.com/2016/01/20/heres-the-real-reason-why-most-restaurants-fail.html
With statistics like that it is a no brainer that it is a very difficult business to operate successfully. When opening a new restaurant from scratch it is very capital intensive to equip and decorate the premise. For this reason, and the statistics mentioned above, most restaurants are reborn and most people will purchase an existing establishment.
During your due diligence, you must be calm, cool and collected. Important details must not be rushed or simply ignored even if the restaurant looks like your favorite star chef’s haven. You will likely feel the pressure of the seller to get it done quickly, and it very well may because the seller is just as anxious to get out as you are to get in. Our intention is not to scare you off at the idea of buying a restaurant but that you and your professionals carefully review the history, financial records, and operations of the business before extending any offer to purchase it.
We have provided you with a lengthy checklist of things to collect when doing your investigation into the business. If you are calm, cool and collected you will get the same and make a wise choice when making an offer and possibly buying the business. If you get, “I have another buyer who is not asking for those financials,” response, move on and find a seller who wants to cooperate and is proud to let you see what makes his/her business all that that he/she has told the broker it is.
A recipe for success will include asking the right questions and getting the right information:
- Does the seller have the authority to sell the business? Get the operating agreement or corporate governance documents to see that the person you are in contact with can sell the business.
- Trademarks, Copyrights are owned and transferable by the business?
- Why are you selling?
- Will you provide post-sale training period?
- Past owners or co-owner’s history.
- Check the Google and other online reviews. Does the place have good reputation?
- How do you advertise? What works? How much does it cost?
- Liquor license? Is it transferable? Unpaid taxes?
- Insurance Policies in place to cover losses that may be claimed pre-closing operations after the sale?
- Any lawsuits already initiated against the business?
- Workers compensation claims?
- Get Employee information. Who are the essential employees? Will they stay on board?
- Who are the vendors? What contracts are in place with them? Are they being paid?
- Health department certifications all in place? Any open complaints?
- Who is the greatest competitor?
- Who is the landlord? What will he require to allow me to assume the lease?
- Who is your accountant? Obtain copies of past three years tax returns and financial statements. Any tax issues in the past 5 years?
- Who will attest to books?
- Will they escrow monies for any misrepresentations?
- Tips? Paying and taxing cash and credit card tips?
- Service charges?
- Sales tax? Look to returns.
- Identify trends of sales and expenses.
- Are there any parking issues? Is there any future road expansion or other issues that will limit access to the premise?
- Any other franchises nearby close in the past?
- Any employee leave and start similar restaurant nearby?
- What is the percentage of take-out to dine in? Any catering business? Future reservations or catering orders?
- Past offers received? Pending? Status and what happened to them?
- What online presence do you have? Websites, Facebook etc.
This list is in no way exhaustive and in no way, can guarantee that you will one day operate a successful restaurant!