Buying a Restaurant? 7 Questions to Ask Before Signing on the Dotted Line

Interested in learning how to buy a restaurant, rather than starting a restaurant from scratch?

One Google search for “restaurants for sale” would show that you’re not alone. In fact, a whopping 18,100 people are searching for available restaurants for sale every month.

Part of the reason many restaurateurs look into buying an existing restaurant is the cost; startup costs can be significantly less when you don’t have to worry about renovation fees, licenses, and permits.

How much does it cost to buy a restaurant? Restaurants for Sale offers listings for restaurants, bars, and nightclubs for sale across the U.S., and every year they produce a report on the average and median asking price for restaurants. In 2018, the median asking price was $229,000 and the average asking price was $469,500, increasing ~5% from 2017. In each U.S. region, the numbers break down as follows:

• Midwest: $197,000 median, $439,000 average

• Northeast: $350,000 median, $644,000 average

• South: $250,000 median, $489,000 average

• West: $200,000 median, $435,000 average

With kitchen equipment, tables, furniture, signage, and more included, the advantages to buying a restaurant are clear. Plus, the brand is likely known in the community, relationships with vendors are established, and permits and licenses have been acquired.

However, it’s important to do your due diligence before signing the restaurant lease. Here are questions to ask before you sign on the dotted line.

1. Why is the restaurant for sale?

This question should be the first one you ask, always. Is the owner retiring, or do they want to leave the restaurant industry? Are they having problems maintaining profitability? Are there legal problems and existing liabilities making it hard to keep doors open?

When you sign a lease, you will inherit everything — the bad with the good — so it’s important to know the reasoning behind the sale. If the owner is having trouble making ends meet, that may signal that you may want to rebrand or introduce new service models to improve table turn time. If the owner is simply retiring after a long stint in the restaurant industry, and the financials look good, then you may be able to keep the menu, name, and brand in tact.  

2. Is the restaurant equipment in good shape — and will you own it?

Restaurant equipment is one of the most costly restaurant expenses. When purchasing a restaurant, you’re also purchasing all of the furnishings, fixtures, and equipment, or FF&E.

Hire experts to inspect the physical building, plumbing, heating and air conditioning, and kitchen equipment. What is the age of the equipment? When was it last serviced? Does the equipment meet current safety standards? Does anything need to be repaired or replaced? If the equipment is faulty, require that the seller fix it before proceeding; otherwise, you may have to pay for repairs on your own.

Also, pay close attention to the wording in the lease. If you’re buying from the landlord, instead of the owner because the owner defaulted on the lease and left the space owing several months’ rent, the landlord may own FF&E. In that case, you may require approval from the landlord to make tenant improvements, like a bar or other built-in improvements.

Independent restaurant owners may want to consider signing a non-compete agreement with the previous owner, preventing them from opening a similar restaurant down the street and putting you out of business. 

Especially if you’ll be taking over the restaurant’s brand and recipes, it’s important to consider buyer protection as part of the investment. Consider the geographic radius as well as the length of time the non-compete covers, and work with a lawyer to finalize the agreement.

4.  Are there any violations against the restaurant?

Restaurant violations can sink a business. In some states, if you purchase an existing business, you’re on the hook for any taxes owed on the property, including any debts or legal action pending against the prior owners, so it’s important to understand the restaurant’s standing.

Ask the owner if there is unpaid overtime, unpaid sales tax, health code, or pest violations that could jeopardize your ability to successfully operate the restaurant. You can also search for the restaurant on apps like What the Health, HD Scores, and of course, your local government website, like The New York City Department of Health and Mental Hygiene, to see up-to-date restaurant inspection results.

5.  What is the restaurant’s reputation in the community?

The restaurant’s reputation in the community is critical. If the restaurant is failing because of bad reviews online, it may be time for a rebrand.

To understand the restaurant’s reputation, first search for the restaurant’s name on Google. Go past the first page, and dig into news articles covering the restaurant.

Search review sites like Yelp, Google My Business, Facebook, TripAdvisor, YellowPages, FourSquare, and even the Better Business Bureau for negative complaints, and make note of how you, as a new owner, would address them.

Also pay attention to the demographics of the community you’ll be joining. Will there be foot traffic or driving traffic? Will your guests be millennials with kids or baby boomers with cash to spare? What's the crime rate in the area? Visit the restaurant for an entire day and observe the way the community interacts with the restaurant. Plus, visit other restaurants in the area to perform a competitive analysis.

6. What contracts already exist with vendors?

Don’t forget to inquire about the restaurant’s food shipments and any existing contracts with food and drink vendors like US Foods.

Restaurant technology contracts are also important to consider. When buying a restaurant, you might inherit the point of sale system as well; compare the costs of implementing a new system with the costs of sticking with the contract by using a pos system ROI calculator. For many legacy POS systems, annual contracts do not include technical support; when buying a new restaurant, it may be time to evaluate options that do.

7. What is the value of the restaurant?

The valuation of a restaurant depends on real cash flow, not just the owner’s personal estimate. Ask to see a detailed profit and loss statement, tax returns, bank records, as well as historical financial growth (or loss) over the years.

When valuing a restaurant business, there are a number of factors to take into consideration, and a lawyer or appraiser can help. Using the asset-based method, you will add up every asset the restaurant owns or leases (real estate, chairs, tables, inventory, equipment, cash) and come up with a purchase price. With the cash flow multiple method, you will sum up the owner’s salary, perks, net income, and expenses, and then attach a specific multiplier to get your purchase price — 2 or 3 for full service restaurants and 1 or 2 for quick-service restaurants.

Next: Hire a Lawyer and Negotiate a Contract

Buying a restaurant can be an arduous process, so hire an experienced restaurant business attorney who understands this process thoroughly to help you make decisions, negotiate a contract, and ensure a smooth closing.

Make your first offer realistic and attractive to secure a deal as quickly as possible, and show that you have a strong restaurant business plan and proof of capital.  

Once your offer is accepted — hooray! — it’s time to think about your transition plan, including how you'll introduce new staff policies, what you will renovate or replace, and how you’ll change the menu, if at all.

A restaurant acquisition can be an excellent alternative to starting a new restaurant from scratch, with trained staff on hand, legal permits and licenses obtained, and an established customer base hungry to dive in.