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Buying A Restaurant - What Should I Look For In Due Diligence?




Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Assuming you ve been given basic financial information about the business, the first thing to do is to verify that the information is accurate. This work usually is best performed by an accounting professional experienced in due diligence assignments.

That expert will need to review tax returns, a sample of cash register receipts and vendor invoices, payroll records, checkbook, copies of leases and other contracts the business has with vendors or with employees.

The second step, if you haven t done this already, is to check on the restaurant s reputation in the area by talking to the Better Business Bureau (any complaints?), read Yelp and other reviews of the business, and do an Internet search with the business name.

Thirdly, talk to the city s planning commission to learn if there are new restaurants going into the area, potentially posing a competition risk that will reduce the customer count of the business to be purchased. Also, walk around the neighborhood where the restaurant is located to get an idea about whether it looks prosperous or if there are abandoned houses and poorly maintained properties, suggesting the area is in decline.

The fourth step would be a hands-on review: observe the business for a few days to gauge its customer count, and operate its equipment to make sure all systems and appliances large and small--are in good working order.

Great points from all contributors. Yelp reviews and other online reviews are becoming ever more important, and too many negative reviews can hurt an owner's business, so a buyer should investigate this matter. Aside from the usual items requested, such as tax returns, sales tax statements, credit card receipts, etc., a buyer should observe the business when the business when the business should be busy, either breakfast, lunch, or dinner. A buyer could also request to see how much inventory the business is buying every month, and how much inventory they have on hand at a given time.

You've heard the old saying: "What are the three most important factors in real estate? Answer -- location, location, location.

The same can often be true of a restaurant. While many factors need to be reviewed as discussed by Mark and Peter, one of the most important is the value and security of the location. Is the lease secure for a significant amount of time, at a reasonable rent? Is the leasehold fixture infrastructure sound -- grease traps, ventilation hoods, refrigeration units, etc.? Is the area safe--has their been an increase in vandalism or crime? Is there adequate lighting, and sidewalks and parking areas well-maintained? Is there adequate parking for current clientele and for any anticipated increase in patronage? Are there any construction projects planned nearby or in the street that could affect business operations? Are building codes and zoning ordinances being followed? Have there been any adverse building inspection reports? Has the fire department conducted a recent inspection? Are there any special public assessments anticipated that could be a burden to the new tenant? Are the surrounding properties well-maintained? Are there many vacancies indicating an economic decline?

Contributor: Transactional Attorney   Comment # 595
Restaurants can have specific equipment and service needs that someone not experienced with the industry may miss. If this is your first restaurant purchase you may want to look for a restaurant consultant in your area who can walk through everything from whether the ventilation is set up properly to how cooking oil is disposed of. Finding an accountant with restaurant experience can also help you better understand how the business is doing on key measures such as the cost of food and labor as a percentage of expenses.

From a legal perspective I've found that restaurants are frequently in violation of employee wage and hour laws due to their long hours and industry culture. Even if you're buying the business assets you may still take on what's known as successor liability if you don't structure the transaction properly. It's important to carefully check how employee scheduling, breaks and meal times are set up to ensure the business is in compliance.

I'd also advise that you have legal counsel review contracts, leases and any corporate records and ownership.


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