Complete Guide: Restaurants For Sale
Restaurants for Sale: List of Questions to Ask
So you’ve been thinking about buying a restaurant but don’t know where to begin. The Business Exchange created an extensive list of questions so you know what is involved in owning and running a restaurant.
Maybe you are debating, should I buy a restaurant 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. An existing restaurant already has this in place. We have listed some pros and cons for each below.
Pros of Buying a Restaurant:
- Buying an existing business takes less time and effort than starting one
- You may have staff in place and already trained
- An existing sales record and you can evaluate your growth
- A 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 in order and current
- There are no guarantees the business will continue to be profitable
- The business may have a bad reputation that may take a year or more to overcome
Why is the Restaurant Owner Selling?
What is the reason for selling the restaurant?
There are good reasons and bad reasons why a business owner may wish to sell their establishment. Some good reasons may include that the owner may wish to retire, is going through a divorce, they may have health issues or have to relocate. A bad reason may be because the restaurant is not doing well financially.
If the small business is doing well financially, this may be a good option to explore if you wish to keep the same menu, name and brand identity. For someone who is looking at changing the name, type of food it serves this may not be the best option. Just because a restaurant is not doing well financially, it does it mean you should rule it out. But it does mean you will need to make changes if you want it to succeed.
Some questions you may want to ask the seller is:
- How long has the business been around?
- How long has the family restaurant been operating under the current owner?
- What is the history of the business?
- Is it a turn-key establishment?
- What is the owner actually selling? (ie contracts, customer list, location, equipment, etc)Which part of the business do you want to sell?
- What makes this a great business for sale opportunity?
Let’s face it. We all get into business because we want to make money. So we must do our due diligence and we should start by requesting the past three to five years of tax returns and financial statements.
- Is the company a profitable business?
- What do the last 3 – 5 years of financials show?
- Are they in line with what restaurants should be doing? What is the cost of goods sold?
- What percentage are food costs and labor?
- Request copies of the company’s sales tax returns. Are the sales trending up or down?
- Are expenses trending up or down?
- Does the company pay its vendors on time? To be thorough, be sure to pull the company’s credit report.
- Can their CPA sign off on the validity of the books?
- If the seller has unrecorded income, how can they prove it in writing?
Be sure to send off the returns and financial statements to your accountant and lawyer to review to ensure all taxes have been paid and that the business is profitable. If the seller cannot provide the statements ask them to have a CPA do an audit. Do not rely on the seller’s word alone.
The Lease– Location – Landlord
Often, restaurants’ success and failure often rely on the location of the business and therefore the lease is an integral part of the sale. Be sure to get a copy of the lease.
Here are some questions to consider before moving forward:
- What is the length of the lease? – A long one or one with options to renew are desirable. If there is no lease then you have nothing to purchase.
- Is the lease transferable?
- Does it need to be renegotiated before you close?
- What is your relationship with the landlord?
- What are the terms of the lease?
- How many years remain on the lease?
- Are there options to renew?
- What is the escalation rate?
- Is there a personal guarantee required on the lease?
- Parking issues? Storage issues? Hazardous waste disposal?
- Vandalism or crime in the neighborhood?
- Changes in the neighborhood?
- Zoning changes? Construction issues? Road changes?
- Neighboring business relationships? Complaints?
- Any local government issues at all in the last three years? Neighborhood issues or complaints (smells, etc?)
- Any branch stores closed or opened and history of the same?
- Any change in local customer base (e.g. factory closed, the mall closed, etc.)
Be sure to forward a copy of the lease to your lawyer to review and specifically look for “assignment” language. In many cases, leases are only transferable with the approval of the landlord. Depending on the landlord, many prefer the new owner to have prior restaurant experience.
If you cannot get the lease assigned, you will have to negotiate a new lease or find another location. If that is the case, what are you really buying? A restaurant without a great location.
Is the restaurant you are looking to purchase have a liquor license and if so, will the liquor license be included in the sale? This is important if the restaurant is selling alcohol as its sales often increase profits. Make sure the seller’s license can and will be transferred to you when you are purchasing the restaurant. Additionally, we recommend that you ask the liquor control board in your jurisdiction if this is allowed.
Depending on where you are operating, transferring such licenses can take some time and involve some paperwork, so this issue should be addressed at the beginning of 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 you should ask:
- Have there been any tax audits in the past five years?
- Proof that all kinds of taxes have been paid including but not limited to sales tax, corporate taxes, payroll taxes. Copies of the previous 3-year tax returns
- If you find any serious liabilities, you should cancel the purchase or have the current owner clear them up before you transfer the business.
Depending on whether the restaurant for sale is a great opportunity, or if you would like to keep the restaurant the same and how much restaurant experience you have, you may require a lot of training or little to no training. If you do require training from the previous owner this should be included in the purchase and sale agreement. Some things to consider:
- Is the current owner willing to stay on to train you?
- How long will they stay? With or without pay?
- What training available and at what cost?
- How well documented are the procedures of the restaurant?
- Are their 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. Be sure to ask for the following:
- Do they or have they done any advertising?
- If so, where, when, how?
- What special deals offered to get business?
- Describe. Past offers received? Pending?
- Status and what happened to them?
- Websites? E-mail? Social Media Account?
Suppliers & Contracts
If you have ever run a family business or have previous restaurant experience you may have a relationship with suppliers already. If you do not have contacts you most likely 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 should you wish to go to another supplier. You should request the following:
- List of vendors with their contact information
- All contract in place with the vendors
- Are their balances owing to each vendor?
- Do any vendors have a personal guarantee?
- Does the business depend on a key vendor?
Food and Safety Certificates
All restaurants require a food safety certificate in order to open their doors. In case of instances, you will be able to have the certificate be transferred to the new owner, 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.
Intellectual property is a work or invention to which one has rights and for which one 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
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 that 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, you should be asking why not.
About the Business Exchange
Established in 1998, The Business Exchange specializes in lead generation in the franchise opportunities industry, in print and online. We have over 100s of Franchises for Sale listings, particularly in the restaurant franchise industry. Call us today at 1-877-337-1188 or ask us how to place your restaurant franchise listings. Check out our other blogs on how to run a restaurant and the benefits of buying a restaurant!