Buying a restaurant
Provided by Business Partners Ltd, South Africa's leading investor in SMEs
You may have decided that you want to get into the restaurant industry and rather than starting from scratch, you have found a small family restaurant you would like to buy. There is a lot of research that needs to be done before you take the leap, so let’s take a look at some of the questions that need to be answered first.
Are you cut out for the restaurant industry?
If you are a chef opening a restaurant, you have a better chance at success by putting your knowledge of food, menus and the systems needed to run a restaurant into action. If you have worked in the industry and managed a restaurant for some years, you will also stand a better chance of succeeding.
(If neither of these is true, perhaps it would be better for you to buy into a restaurant franchise. A certain amount of training will be provided and you will follow the systems and processes according to the franchisor’s requirements.)
Other than the usual character traits and skills needed to run any business, a restaurateur also needs to:
- Have extensive knowledge of and passion for food, food safety and service
- Ensure that the front of house area, the dining area, bar and kitchen work together smoothly at all times
- Be a jack-of-all-trades (At times you will have to be the accountant, administrator, HR person, marketer, office manager)
- Understand the roles of the waiter, bartender, host, sous chefs and so on. This will allow you to meet demands as they arise and understand each employee’s role in making the restaurant a success
- A restaurateur is faced with many challenges every day. You must be decisive and think quickly
- Have the organisational skills and know-how to plan a menu by using various ingredients in multiple recipes to simplify ordering and inventory
- Understand how point-of-sale systems can be used to handle inventory, payroll and other management tasks
Other important factors:
- You will have to deal with customers and employees all day. Can you handle customer requests, issues with vendors and employee problems patiently and calmly?
- Do you work well under the constant pressure and can you motivate your team to do the same?
- Are you flexible enough to make changes according to what the customer needs and wants?
- Are you creative and innovative enough to stay ahead of the competition?
If you meet the above criteria, then maybe this is the right industry for you.
The advantages of buying
- There is an existing base from which to grow the business, especially if the restaurant has been open for a long time.
- Clientele already exists so the business has cash flow from the first day of takeover.
- The business already employs staff with the relevant skills and training.
- Equipment, infrastructure and premises already exist.
However, deeper research is necessary to uncover any worrying reasons for the sale of the business.
Reasons for selling
Is the owner retiring the real reason for selling or are they deserting a sinking ship? You must establish how the restaurant is performing and whether it is making money. An accountant must review the restaurant’s financial statements, bearing in mind that books can be skewed to look good.
Official statements like tax returns and bank statements, not just a profit and loss, must be reviewed thoroughly. If the owner is reluctant to produce the books, don’t go any further. If they are serious about selling, they should be ready to give a clear picture of the financial health of the business.
You should also look at customer relations, staff relations and supplier relations, which has a direct influence on the continued success of the business.
The business’ viability
While the past performance of the business is important, its future prospects are what really matters. Despite having a good track record, something could have happened to the area that makes the location less desirable. For example, a long-established shopping centre losing traffic to a new competitor down the road.
One wouldn’t want to invest in the business, only to find that trained staff members are leaving, customers were more loyal to the owner than the brand, the lease expires shortly, or the equipment breaks down and stock is unsalable.
Visit the restaurant at different times of the day and on different days to see how busy it is. And does the place have a good reputation? If not, you run the risk of taking a long time or never being able to shrug off a bad reputation.
You may have some creative ideas for how you will improve on certain aspects, expand on the menu and try new things. This can be good if researched and planned carefully, if it fits in with the current cuisine and doesn’t alienate the existing customer base.
You must be very clear on the conditions of the lease in place, when it expires, whether the existing lease will be transferred to you or whether you have to negotiate a new lease with the landlord. When it comes to signing a lease, it’s best that you have a legal expert, with experience in this field, go over the documents with you and explain all the clauses.
Here are some financial implications of buying a restaurant:
- If it is trading profitably, the seller will expect to make a capital profit
- Are the projections provided by the owner realistic when compared to historical financial statements?
- How much revamping/renovation is required?
- What is the purchase price made up of? (goodwill, stock, existing equipment, etc.)
- How was the goodwill valuation calculated?
- Has the equipment been valued accurately and how much of it needs repair or replacement?
- Do you need to pay a lease deposit to the landlord?
If you want to make some changes, the cost of revamping the menu or changing the layout of the dining area – for example - must be factored in. Remember, a little change is good in order to bring in new customers. But too much change can become quite costly and may chase away existing customers.
How should the value be calculated?
You must make sure that you are not overpaying for the restaurant. Once you have done a due diligence and market research, an accountant must check the financial projections and value calculations, not forgetting to take the accrued costs into account (e.g. leave pay/bonuses).
As a general guideline, the value calculation for an independent full service restaurant is one month net profit multiplied by 24 months.
Depending on the final price, buying a restaurant can be far less expensive than starting a new one from scratch.
Can I buy just the space?
Instead of buying a restaurant (with the name, branding, etc.), one can buy or rent an existing space. This means the current restaurant closes and a new one opens in the same space, but with a different name, menu or concept.
You can then buy any equipment left behind and use the existing infrastructure. Obviously, questions must be asked as to why the old restaurant closed down or moved.
This is just a brief overview of some of the things you need to look at before you buy a restaurant. Do as much research as you can and enlist the help of other restaurant owners or industry professionals wherever you can.
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