How to Buy an Existing Restaurant [Checklist]

If owning a restaurant has always been your dream, or it’s a very recent inspiration, you may be ready to join the ranks of successful restaurateurs across the country. With the current median sales price of a restaurant up to $249,000 as of 2022, however, this is clearly a big commitment you don’t want to rush into blindly. 

That’s why we’ve created this checklist – to help you understand the process. It’s crucial to know what you’re getting yourself into, and you should certainly make a detailed plan and conduct thorough due diligence to ensure a smooth and successful transition.

There are many steps involved in buying any business, and a restaurant has its own unique challenges. For an existing restaurant, you’ll need to define your goals and expectations for ownership. To figure out if you should buy a restaurant, you should conduct market research, create financial and operational plans, and review legal agreements and contracts, all to ensure your business will be viable. 

You have an exciting venture ahead of you, so let’s make sure things get done right!

In this article, we’ll cover:

• preliminary buying considerations 

• financial and operational due diligence

• legal requirements to consider 

Preliminary Considerations 

Define Your Goals and Expectations:

The very first item on your buying an existing restaurant checklist should be to clarify your vision for the restaurant and your long-term goals. What do you want to get out of owning such a business? You can then determine what type of restaurant you want to buy, considering factors such as cuisine, location, and target market. You can also think about how viable it is to convert an existing restaurant into your dream business by considering what kinds of current restaurants have the facilities, décor, and equipment that could be easily converted to your concept. 

Conduct Market Research:

It’s critically important to evaluate the local market to understand customer preferences and competition. This market research is usually done to assess the financial potential and growth prospects of the restaurant's location.

Market research can be complicated and time-consuming. You might find that you need to hire a consultant to help you, and that can represent a major cost. However, leveraging their expertise to perform research thoroughly can give you a much clearer picture of the market you’re getting into and save you money and heartache in the future.

Establish Financing Options:

Once you have your restaurant concept mapped out and you’ve found an appropriate market that can provide you with a chance at success, it’s time to turn to the financial side of your planning. You’ll need to determine the budget you’ll need for purchasing and opening the restaurant and how much of that budget you have available.

The rest will need to come from outside sources. Explore financing options such as loans, investors, or partnerships to see if you can actually raise the capital needed to buy the business and get it running.

Financial Due Diligence 

Evaluate Financial Records:

Asking prices for restaurants are high these days, but a high price doesn’t guarantee a great quality purchase. While the seller wants to make a reasonable profit, you have to do your own valuation to investigate whether their selling price is fair. 

To do this, it’s well within your rights to ask to review the restaurant's financial statements, including profit and loss statements, balance sheets, and tax returns. You can also analyze cash flow, expenses, and profitability trends to assess the financial health of the business.

Verify Assets and Liabilities:

It’s not just cash flow that determines a business’s value. You also need to look at the assets you’ll receive by buying the existing restaurant and the liabilities you’ll be assuming as the new owner. Consider assessing the value and condition of equipment, furniture, and fixtures, and identify any outstanding loans, leases, or legal liabilities associated with the restaurant.

This may all be difficult to assess independently. In this case, you can hire an independent assessor to help provide you with a clear picture of what the business is worth.

Assess Vendor and Supplier Relationships:

Restaurants’ relationships with their suppliers can have enormous value. Great contracts with excellent vendors can be a hidden driver behind profitability, while poorly negotiated contracts can tie up finances in wasted expenses.

To see what you have on your hands before buying a restaurant, review its contracts with food and beverage suppliers, ensuring favorable terms and pricing. You’ll also have to determine the transferability of existing contracts or the need to negotiate new agreements.

Operational Due Diligence 

Understand the Restaurant's Concept and Brand:

Is the restaurant you’re thinking of buying well-established and full of customers daily? Or is it struggling in a saturated market? 

Evaluate the uniqueness and reputation of the restaurant's concept and brand to see if it’s something you should stick with or if big changes will need to take place. This will help you to assess the potential for growth, market saturation, and competitive advantages.

Examine Licensing and Permits:

Any operating restaurant should have all its permits up to date. However, a business that has been closed for a period of time will most likely have let some or many of its important permits lapse. Ensure that the restaurant has obtained all the necessary licenses and permits it needs to operate legally such as health permits, alcohol licenses, and zoning permits.

You’ll also need to find out the status of these licenses and permits and whether or not they’re transferable to new ownership as legalities vary widely across different jurisdictions.

Evaluate Staffing and Human Resources:

People are the biggest resource in any restaurant, so it’s crucial to figure out who does what in the current business. You’ll first have to assess the current staff and their qualifications, roles, and responsibilities. Then comes the really hard part – determining if existing employees will be retained or if new hiring will be necessary. It all depends on their skills and talents, efficiency, and whether they fit the new concept you’re going to build.

Analyze Inventory and Supply Chain:

When you’re feeling confident that you will, indeed, take over an existing restaurant, you need to understand its operations completely. This includes learning everything you can about the inventory needed to run the business and where all supplies and materials come from. You should verify the accuracy of inventory records and assess inventory turnover.

It’s also important to evaluate existing supplier relationships and the efficiency of the supply chain. You might find ways to streamline operations to make supply more efficient and save money.

Legal and Contractual Considerations

Engage Professional Advisors:

You can go it alone if you have enough restaurant experience. However, with the complex and often confusing legal considerations surrounding running a restaurant business, it’s probably best to work with professional advisors. 

For example, you certainly want to consult with a lawyer experienced in restaurant transactions to guide you through all the legal matters and obligations entailed in owning the restaurant. To keep the books balanced and transparent, it’s best to engage an accountant to conduct a thorough financial review and help with tax implications.

Review Contracts and Leases:

Protect your interests and learn more about your obligations as a business owner by carefully examining all existing contracts the business is a party to, including lease agreements, service contracts, and franchise agreements if these are applicable. You’ll need to ensure there are no unfavorable terms or restrictions that may hinder future business operations. 

Conduct Due Diligence on the Seller:

When you’ve done your financial and operational due diligence and found that your business concept will work and the price is right, you may be tempted to rush to close the deal. But before you do, don’t forget to conduct due diligence on the seller as well. Verify the seller's credibility and reputation within the industry. You may also want to investigate any potential legal issues or conflicts of interest.

Buying an Existing Restaurant Checklist Summary 

Congratulations! If you’ve come this far through the process, you’re ready to become a restaurant owner. You’ve organized your goals and expectations for the business, conducted market research to make sure the idea is viable and solidified your financial resources. You’ve done the hard but necessary work of conducting financial, operational, and legal due diligence so that you know in detail how the restaurant works and what your obligations are as a new owner. You’ve also checked out the deal and found it’s solid.

The next and final step is buying the restaurant and turning it into the business that you’ve always wanted.