A Complete Checklist for Buying a Restaurant
So you’ve been looking at restaurants for sale but don’t know where to begin. The Business Exchange created an extensive list of questions so you know what is involved in buying a restaurant for sale.
Maybe you are debating, should I buy a business in the restaurant industry or should I start one from scratch? What are the pros and cons of buying an existing restaurant anyway?
When you start your own restaurant, you will be spending a lot of time researching, planning, designing and developing your concept.
You will need to find a location, purchase equipment, set up vendors and get licenses and permits. But an existing restaurant already has this in place.
Pros of Buying a Restaurant
- Existing businesses take less time and effort than starting a new one
- You may have staff in place that are already trained
- Existing sales record and you can evaluate your growth
- A high volume customer base so you have less risk
- If the seller is burned out, you can usually buy for less
- You will have immediate cash flow
Cons of Buying a Restaurant
- You will need to find out why the seller is selling. This may be because of a bad lease, bad equipment, road work, incompetent staff, or inaccurate bookkeeping
- You will need to make sure all past tax obligations are up to date and in order
- There are no guarantees the business will continue to be profitable
- The business may have a bad reputation that may take years to overcome
Why is the Owner Selling their Business?
Consider this when buying a restaurant: Why is the restaurant owner selling?
There are many reasons as to why a restaurant owner may be selling their business. Some common reasons include: retirement, personal reasons, health issues or relocation.
Another reason may be because the restaurant business is not doing well financially. That is why it is important to ask key questions and always perform due diligence when assessing paperwork.
If the small business is doing well financially, this might be a good option to explore if you wish to keep the same menu and brand identity. For someone who is looking to start a completely new restaurant concept, purchasing an already established restaurant may not be the best option.
Just because a restaurant may not be doing well financially, it does not mean it should be disregarded. Consider that there is always potential opportunities, although changes may need to be made in order for your business venture to succeed.
Some questions you may want to ask the seller is:
- How long has the restaurant been operating under the current owner?
- How long has the business real estate been around?
- What makes this a great business for sale opportunity?
- What is the owner including/excluding in the sale?
- What equipment is offered with the restaurant?
- What is the history of the business?
- Is it a turn-key establishment?
The key motivation in starting a new business is the pursuit of money and high profits. When getting started with it is important to review all the necessary paperwork before diving right in. Make sure to do your due diligence by requesting financial documents from the past three to five years. Consider hiring a lawyer and accountant to help review and assess whether or not the restaurant business is financially stable and profitable.
Finding the right advisors will help ensure that the business is in great financial and legal shape before purchase. If the seller cannot provide the financial documents, request to have an accountant perform an audit of the business. It is always advised to have both legal and financial advisors when buying or selling a business.
Location, Leases and Landlords
The success of a restaurant often lies in the location. A high-traffic location with great exposure would be very beneficial for restaurant sales and profits. Location, leases and landlords play a vital role in the restaurant sale. Securing a great location depends on a lease and getting a lease agreement depends on the landlord.
When buying a restaurant, make sure to get a copy of the lease. Forward a copy of the lease to your lawyer to review and specifically look for any “assignment” language.
In many cases, leases are only transferable when the landlord approves. Depending on the landlord, many prefer the new owner to have prior restaurant experience too. If you cannot get the lease assigned, you will have to negotiate a new lease or find another restaurant for sale location.
The most desirable condition for lease agreements would be to have a long lease, with options to renew. If there is no lease agreement, then there is no tangible property to acutally purchase.
Here are some important questions to consider when negotiating with landlords and assessing leases:
- Does the lease need to be renegotiated before close?
- What is the duration of the lease, and is the lease transferable?
- What is the relationship between the restaurant and landlord?
- What are the terms of the lease, is there any option to renew or renegotiate?
- What is the yearly escalation rate of the lease agreement?
- What is included in the lease agreement? (i.e parking spaces, storage, etc.)
- What is the designated zoning in the area?
- Is there a major change in the local customer base?
- Is there any property or road construction that may affect business?
Does the restaurant you are looking to purchase have a liquor license? If so, will the liquor license also be included in the sale? If the restaurant currently sells liquor to increase profits, it is important to review the conditions of the liquor license because you will need to secure a license as well.
Check to see that the seller’s liquor license be transferred to you when you purchase the restaurant. Additionally, we recommend that you confirm with the liquor control board to make sure that the establishment is allowed to sell alcohol.
Depending on where you are operating, transferring liquor licenses can take some time and involve some paperwork, so this issue should be addressed at the beginning of your business negotiations.
Liabilities & Lawsuits
This can be a deal-breaker. You must inquire to see if there are any existing liabilities? Does the restaurant have any past, pending or potential lawsuits? The last thing you want to do is inherit a lawsuit that you had no idea about.
Are there unpaid overtime, unpaid sales taxes, health code violations or other liabilities that could threaten your ability to successfully operate the business? For protection, get the response in writing in case the owner is concealing any legal matters that could come to light later.
When you are purchasing a restaurant you are also assuming the debts of the company. This includes leases and other bills that are still being paid off. Less common, but maybe more importantly, you also need to look for unpaid taxes as well.
Here are some questions to consider:
- Has there been any tax audits in the past five years?
- Proof of Tax Payments such as sales and corporate taxes?
- Any serious outstanding payroll liabilities?
Training & Operations
Purchasing a restaurant for sale is a great business opportunity. There is lots of income that can be made from dine-in and take-out services. The day-to-day operations of a restaurant can be daunting at first. However, if you have the proper training or experience, the transition to restaurant ownership will be much easier. Depending on how much restaurant experience you have, you may require either a lot of training or very little.
If you do require training for operating a restaurant business, you should include the previous owner in the sales and purchase agreement. In this case, the conditions of the sale would be that they previous owner helps the transition to the new business owner by providing training on operational and day-to-day management.
Here are some questions to consider about training and operations:
- Is the current owner willing to stay on to train you?
- How long will they stay? With or without pay?
- What training is available and at what cost?
- How well documented are the procedures of the restaurant?
- Are there manuals on company policies and procedures, HR, etc?
With online reviews and social media being such an integral part of growing your customer base, many restaurants have an online presence. The sale of the business should include a website, online ordering, email accounts, Facebook, Instagram, Yelp or other online accounts. Access to these accounts should be transferred to you as part of the sale.
Marketing assets and procedures should be included in the transfer of sale. Some marketing questions to consider when purchasing a restaurant are:
- Do they conduct online or print advertising?
- What channels of communication do they use?
- Are there any special deals, promotions or offers that are effective/in use?
- How is the website maintained and designed?
- What are the social media accounts that need to be transferred?
- Is there a database of clients/customers and how is that maintained or used?
Suppliers & Contracts
If you have ever run a family business or have previous restaurant experience you may already have a relationship with the suppliers. If you do not have contacts you will need
the seller to introduce you to existing suppliers.
Ask the seller to provide you a copy of the contract that they have with the current suppliers. This way you will be able to negotiate similar terms or know the market rates for ingredients and equipment, should you decide to go with another supplier.
You should request the following:
- List of vendors with their contact information
- All contracts in place with the vendors
- Are there balances owing to each vendor?
- Do any vendors have a personal guarantee?
- Does the business depend on a key vendor?
- Will the owner finance the transactions?
Food and Safety Certificates
All restaurants require a food safety certificate in order to open their doors. For instance, you will be able to have the certificate transferred to you, in others you will need to obtain your own and the rules for this will vary based on where you are located. Be sure to not overlook this step. Contact your local food and safety office once you acquire the restaurant business.
Intellectual property is a term to describe one having rights to something and may apply for a patent, copyright, trademark, etc. Be sure to include specifically what intellectual property will be included in the sale and gain sole ownership over it. This is extremely important if you plan on using the restaurant’s name, menu and overall brand.
Items that should be included are:
- Trade names
- Trademarks Logos
Is the current owner willing to sign a non-compete clause?
A non-compete clause protects you from the current owner opening in close proximity to the location where you are purchasing. Independent restaurants are frequently personality-driven businesses that are built on the owner’s recipes, cuisine, and culinary style.
If the seller isn’t willing to sign a non-compete clause, consider why they are not willing to sign, and ask them what their motivations are for not signing. If they are looking to sell their restaurant, only to open a similar restaurant close by, then perhaps find another location.
Competing with a previous owner for market share can result in many things such as: slower traffic, mixed business relations, competition with securing suppliers and potential poaching of trained staff.
In any sense, it is good practice to include a non-compete clause in the purchase agreement. This ensures that you will be able to start your restaurant business without any disruptions or competition from the previous owner.
The Final Steps
Finalize The Price
After conducting the necessary steps, make sure you find a restaurant for sale that is suitable for your needs. After assessing paperwork and the restaurant as a whole, it is finally time to put a price on your offer. Your offer should be fair and reasonable based on the conditions of the restaurant. Prepare for negotiation and be aware of terms and conditions.
Draft The Agreement
Contract your lawyer to review/draft the sales agreement for you. The sales agreement is a legal contract that documents you and the previous owner’s legal rights and responsibilities in the sales transaction. Usually, the agreement will contain the price, the closing date, warranties, terms, conditions, etc.
Set the Closing Date
The closing date designates when both parties sign the agreement and complete the sale transaction. Both parties will be required to do their due diligence, prepare for the necessary paperwork and meet on a specfic date to sign papers.
Sign The Contract
Once the contract has been drafted, send it to the seller and have it signed. The contract will only be valid once every party signs it. In addition to the purchase and the sales agreement, you need to ask the seller to sign a non-compete clause dictating that they will not open a restaurant that’s similar to yours close by.
On the closing date after signing the sales agreement, you will transfer the money to the previous owner, and the seller will officially transfer the restaurant to you. Any clauses regarding post-sale involvement such as transition periods or training will still need to be fulfilled.
In conclusion, there are a lot of pertinent questions you must ask before you sign on the dotted line. Even if you found a highly profitable and desirable restaurant for sale, you will need to spend hours researching, planning, talking to the right people, asking the right questions. After all the due diligence and hard work, you will be ready to operate your new restaurant business!
About The Business Exchange
Established since 1998, The Business Exchange specializes in lead generation for a variety of businesses, franchises and commercial real estate for sale. We generate leads through print and online advertising and marketing. We have hundreds of Restaurants for Sale listings available online at The Business Exchange. Call us today at 1-877-337-1188 to find out more information about business listings or ask us how to list your restaurant for sale online!