This post originally appeared on tBL member blog SVN Southland Commercial Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
Most people dream of being their own boss, and being the captain of their future. One way to achieve that dream is to buy or start a business. There are literally thousands of business categories to choose from and people tend to gravitate towards what they know, enjoy or believe would be fulfilling. Who doesn’t love places people gather, celebrate and socialize?
If you want to start a restaurant from scratch, that will be in a different blog. This blog will focus on buying a “going concern.” By purchasing a restaurant that is already open and operational, this reduces several risk factors:
- Construction Risk: How many job sites have you ever known that were under budget or even met their budget?
- Time Risk: When starting any business, especially one that involves construction or remodeling, time is always a factor. Many projects run significantly past the projected opening date. This can tremendously affect the Proforma P&L due to no revenue coming in as expected. Extra time typically mean change orders and cost overruns (ouch-double negative).
- Concept Risk: The new restaurant idea in your head may not translate to sales and profitability.
- Menu Risk: The special food that grandma made may not be well received by the paying public.
- Brand Awareness: The restaurant has been open and operational so there’s already customers familiar with the concept
- Systems and Procedures: No need to reinvent the wheel when buying an existing restaurant, because they already have their business operational.
- Recipes and Menu: Already proven to have some level of customer acceptance
- Intellectual Property: Logos, website, social media and branding are already in place
- Location: Is the restaurant in the right area that will continue to grow and thrive long term?
- Facility: Has there been deferred maintenance or is the restaurant in need of a significant remodel?
- Lease: If the property is leased, are the terms favorable and are there enough years remaining to continue to build on the previous success?
- Reputation: The buyer needs to research and understand the restaurants reputation both locally and on the internet (such as Open Table, Yelp, etc). Whether good or bad, it will help the buyer to understand strategically how to focus their operational activities.
- Profit and Loss (P&L) Improvement: Are the operations efficient or is there room to improve food cost or labor?
When buying a restaurant, it’s common to pay a multiple of earnings, EBITDA, Net Operating Income (NOI) or whatever bottom line number you choose to use. If you pay three times earnings, you in essence are spending the next three years’ cash flow to buy the business. In other words, to reduce the risk from the equation, you are giving up future cash flow. The key is to understand if you can promote or operate better. Understand what gaps in the current business can be improved upon? Can you improve food cost by negotiating better deals with vendors, portion control, less waste or reduce theft? Can you improve labor by implementing a better labor scheduler that manages labor based on projected sales? Can you promote the restaurant better to attract new customers? Would remodeling revitalize the concept? These are all ways in which a new owner can improve a business and bottom line. In many cases, the selling party has been in business so long, they become comfortable with the status quo. They enjoy their base of business and customer and no longer have the desire or energy to do more. They are just ready hang up the apron.
When buying a restaurant, it’s important to select a broker that understands the restaurant industry. Find a broker that specializes in restaurants and who has significant restaurant sales and business experience. They will bring significant value to your deal and help you avoid costly mistakes. SVN | SouthLand Commercial deals heavily with restaurant related deals. Need help contacting an agent? Click here for more information.