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Tips For Restaurant Buyers: How Do You Change A Restaurant Concept?



Posted By: Joe Ranieri, Business Broker: LA, Orange Counties.   Joe Ranieri, (Orange County Business Broker) discusses how to convert restaurants: buy an existing inexpensive restaurant and then converting it to another concept. He discusses finding the right location, working with the landlord, notifying existing clients, and observing restaurant trends.

A good way to buy a restaurant business with limited funds is to find a restaurant that is either mismanaged or suffers from too much competition. Doing a build out from a scratch can be quite expensive, and tough for the buyer to recoup their expenses when they eventually sell, but finding a running restaurant and changing the concept can turn into a successful endeavor. As a Business Broker, I will include in the advertisement what other food types a restaurant "can do" if it can "convert" if the business has low monthly gross sales. I've had many clients who have bought restaurant businesses and later changed the concept with successful results.

Tips for restaurant buyers:

1. Find the right location and gauge if your concept will work.

A buyer should look for a business that is visible, but is an oversaturated area for the type of food they serve. I remember taking a listing for a taqueria Mexican restaurant, which had decent food, but had low monthly gross sales, because there was so much competition from other Mexican restaurants, and the woman who bought it later turned it into a country style morning and lunch caf , and it was a huge success. The woman had noticed that similar style restaurant had closed in the area, but the square footage was too much and rent too high, so her restaurant of 1,200 square feet and low rent took many of the customers from the previous establishment.

2. Notify the landlord of what you plan on doing before the close of escrow.

Usually if a business is successful enough to pay a high rent, a landlord will be less likely to letting a buyer changing the concept. If a business has low rent and low monthly gross sales, a landlord is more risk averse to a buyer doing their own food type. It s important for the buyer to let the landlord know what they plan on doing, because if the business is in a strip center another business might have an exclusivity clause in their lease, which conflicts with the new buyer s ideas. A buyer should create a business plan and menu of what the new concept will be and submit it to the landlord, and get approval in writing that they will be able to do their concept after close of escrow.

3. Notify customers of planned changes.

After the close of escrow and during the renovations, make sure to announce that the business is closed only temporary, if you need to close the business at all. Even though a buyer is changing the food style, they still have an opportunity to capture some of the previous foot traffic. A buyer can send out coupons or mailers within a 1-2-mile radius for the first couple months to get people in the routine of coming into their restaurant.

4. Observe restaurant trends.

About 10-15 years ago, I noticed that many of my buyers were interested in converting businesses to sushi restaurants, because it was popular and trendy and there was a shortage, but after a few years when many decided to sell there was a glut on the market, which lowered their sales price. If possible, a buyer should observe what is going on in the market, and observe food trends, of course if their food is really good, people will always find it.

Prospective restaurant buyers 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 may find a great deal. But, if the buyer wants to change the restaurant's concept, there are several potential pitfalls.

When the buyer intends to close down the restaurant for 2, 3, 4 months while gutting the interior and redesigning the kitchen and dining room, changing the cuisine and the ambience, rebranding the name, and then hiring new staff, commencing marketing from scratch, and hoping for new customers to arrive, perhaps hundreds of thousands of dollars they spent for the intangible goodwill of the business may be totally wasted. The buyer may have been much better off leasing a vacant built-out restaurant. Or, even a vacant retail space they would build into a restaurant from scratch.

Simply, if the buyer is not going to actually use the tangible and intangible assets that he buys, then he must be particularly careful to determine that the location and the existing infrastucture are worth the price premium paid.

Prospective restaurant buyers 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 may find a great deal. But, if the buyer wants to change the restaurant's concept, there are several potential pitfalls.

When the buyer intends to close down the restaurant for 2, 3, 4 months while gutting the interior and redesigning the kitchen and dining room, changing the cuisine and the ambience, rebranding the name, and then hiring new staff, commencing marketing from scratch, and hoping for new customers to arrive, perhaps hundreds of thousands of dollars they spent for the intangible goodwill of the business may be totally wasted. The buyer may have been much better off leasing a vacant built-out restaurant. Or, even a vacant retail space they would build into a restaurant from scratch.

Simply, if the buyer is not going to actually use the tangible and intangible assets that he buys, then he must be particularly careful to determine that the location and the existing infrastucture are worth the price premium paid.

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