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Buying A Restaurant: What Not To Do When Searching To Buy A Restaurant

A lot of people think it's a good idea to buy a restaurant and make money by catering to one of the most basic of human needs. And there are a number of success stories to reinforce the idea that owning a restaurant equates with achievement in business. That goes for the fast food restaurant owner in a high-traffic location who can do enough business in a few hours to cover all the day's expenses and make a profit, and for restaurateurs whose popular dining houses help provide them with notoriety and prestige in their communities.

But there also are plenty of stories that don't have happy endings. They too should be kept in mind when someone is deciding what kind of food service to buy and how much to pay for it, as well as if this really is a good idea. Some of the most important things "not" to do when looking for a restaurant to buy are:

1. Not understanding the difference between a fast food service and a dining establishment.

They both sell prepared food, but they almost are like two separate kinds of businesses. Business opportunities professionals often complain about restaurant "buyers" who can't make the distinction, and so it's difficult to give them good service in searching for an appropriate business to buy. And of course, there are many hybrids, such as a pizza restaurant that has a limited menu and fast meal turnaround - characteristics of a fast food operation, but also accommodates the customers who aren't in a hurry to leave and may remain at the table for more than an hour, which is a characteristic more closely related to a dining establishment. Looking at the various options, and without having a clear idea of what he or she is looking for, the buyer may spend a lot of time examining completely unsuitable businesses and remain confused about what to buy.

What may help a buyer understand the differences is to carefully examine the financial reports. Would you prefer to work with part time employees and typically high employee turnover in a business that makes dozens of sales per day and is profitable only if it has a high volume of customers? It appeals to customers who want to pay less money for a meal, often under ten dollars for dinner, and be able to leave quickly. If so, the fast food business might be the right choice.

The dining establishment owner, on the other hand, works to build a reputation for good service and high quality food. There won't be as many customers coming through the door as in a fast food place, and the bill for each customer will be higher. While the fast food operator will probably generate gross profit of a dollar or two per meal, perhaps less, the dining establishment owner, with lower rate of customer turnover, will need to realize a higher markup on food and employee costs for each transaction in order to pay all the bills and show a profit.

2. Not being prepared for the demands of the food service industry.

Regardless of what a seller may say, a restaurant - either fast-food or dining - is not easy to operate and may not be suitable for a buyer who hasn't got experience in the business. The best choice, if someone wants a business in this industry but doesn't know much about it, might be to look at offerings from a franchisor, or a business owner in a franchise system who wants to sell. Most of the highly successful owners of dining establishments are chef s who actually spend part of their time preparing meals.

Since less skill is required to prepare hot dogs and French fries, or scoop ice cream cones, the fast food establishment owner may find the most productive way to operate the business is to hire people to handle food prep while much of the owner's time is spent analyzing business patterns, working on marketing campaigns and dealing with vendors and employee issues. The individual with a business background will be most likely to succeed.

And buyers who see food service business owners spending time in what appears to be the leisurely interaction with customers and suppliers, should not get the impression that the work is not demanding or the hours brief. Many people in this industry, regardless of the type of restaurant they operate, put in at least eight hours a day, and many, if not most, need to be at their business at least one weekend day every week.

3. Not being willing to pay a premium for a worthwhile restaurant.

Yes, that's right. It's smart to pay 2.3 to 2. 7 times seller's annual adjusted earnings from a coffee shop or American food restaurant that shows a steady level of business and some increase in revenues over the years as its menu prices adjusted upward to stay current with increased operating costs. But it's not smart to insist on paying a price arrived at by using a standard industry multiple when the business is in a rapidly growing area, or has a long-term under-market lease, or when the seller agrees to stay on to train and to cook for six months at little or no cost to the owner.

Buyers seeking all kinds of businesses, but particularly when looking at restaurants sometimes encounter offerings worth more than the industry's average formulae; and priced at what they're worth. The trick is to know when you've been shown a business that is better than average, and to have the good sense, if you're able, to "pay up" in order to buy it.  I'm reminded of this failure, the failure to meet a price for a great restaurant, every time I drive by a business that I know was sold for a multiple of, say, three times owner's annual adjusted earnings. Usually those businesses are doing very well. And often I am reminded of restaurant buyers who are now kicking themselves because they were too hung up on the standard formula, or paralyzed by the fear of over paying, to take advantage of a good deal while they had the chance.

While it's true that many people who buy a restaurant in California know what they are doing and make smart choices, there also are many people interested in the food service industry who are likely to fail to buy a sound restaurant - or any business at all - because they don't understand the business, aren't prepared to work successfully in the business or are unwilling to pay what a good offering is worth.

For Buyers And Sellers Of California Restaurants - Find The Best Info Below:

Find A Restaurant Broker Or Agent Go To: All California Professional Restaurant Brokers And Agents

See All Restaurants For Sale In California: All California Small & Mid-Sized Restaurants For Sale & Wanted To Buy

To Sell A Restaurant In California - Go To: Sell A California Restaurant Online

Restaurant Resources To Buy Or Sell A Restaurant - Go To: Restaurant Advisors, Due Diligence, Financing, etc

Find Financing To Buy Restaurants - Go To: SBA & Non SBA Loan Restaurant Financing For Buyers - Get Pre-Qualified

How To Buy & Sell Restaurants - Go To: Buying, Selling Restaurants - Strategies, Good Tips, etc. - Articles & Blogs

#photo#About This Author: Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor) at BizBen (started in 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, business owners/sellers, brokers, agents, investors, & advisors). Phone him at 925-785-3118 to discuss strategies regarding buying, selling, (or financing a puchase of) California small to mid-sized restaurants.

Categories: BizBen Blog Contributor, Buying A Business, How To Buy A Business


Blog Comments

Posted By: Joe Ranieri, Business Broker: LA, Orange Counties

A mistake I see commonly in novice buyers is that they don't understand labor costs in relation to their monthly gross sales. A new buyer will either understaff or overstaff, and so customers are either standing around waiting to be served or employees are standing around because there is not enough to do. A new owner, especially in regards to restaurants, must learn when their business peaks during the day, so possibly in the morning they have two employees, and later in the day have one, with the owner working along side. The new owner should also be aware of times during the day when they might be able to get away to the bank to make a deposit or go to the restaurant supply store to pick up inventory.



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