A common "first business" for many people is the purchase and operation of a restaurant. There are thousands of such businesses in the average city, the variety of service and pricing is immense, and it lends itself well to the entire family becoming active in the business.
As any veteran of the business will tell you, however, it is an extremely difficult business to operate, requiring very long hours and a calm and careful review of the market and the likely future of the restaurant before significant money is invested. To start from scratch is even more difficult, requiring the purchase of the thousands of tools and items needed for a successful restaurant (from silverware to cooking utensils, from napkins to tablecloths, etc.) For that reason, most people buy an existing restaurant rather than begin their own, though they often alter the methods and look of the operation.
But the most important rule to remember in buying a business is this; WHILE YOU ARE BUYING IT, SOMEONE ELSE IS SELLING IT AND THERE MUST BE A REASON WHY THEY WANT TO SELL: YOU MUST FIND OUT THAT REASON AND CONFIRM IT SO YOU CAN DETERMINE IF IT STILL MAKES SENSE FOR YOU TO OWN IT OR YOU ARE SIMPLY BUYING WHATEVER PROBLEM THEY HAVE THAT IS MAKING THEM WANT TO SELL
The investigation of whether a restaurant is worth buying is a vital part of your beginning your own business and should not be hurried or glossed over no matter how attractive the restaurant looks at first glance or how much pressure the seller is putting on you to "buy right now." You must carefully and professionally review the history, financial records, and operations of the business BEFORE you make the offer, as discussed in detail below, and then you must review their records to make sure the facts given to you are true.
Most restaurants fail within three years of starting up. That is true in almost every market. It is a high risk business and before you take that risk, you owe it to yourself to carefully investigate the market.
You also are going to need advice from competent professionals such as attorneys and CPAs to check the figures and make sure the purchase contract protects you. DO NOT RELY ON THE STANDARD BUSINESS BROKER CONTRACT which too often only protects the broker and his or her fees rather than the parties.
And to save money, obtain the following information about the business BEFORE going to the professionals since, if they are experienced and good, they will need to know the following information about any restaurant business before they can advise you as to the purchase:
BASIC FACTS OF THE BUSINESS YOU INTEND TO BUY:
You should know the following facts BEFORE you make your offer: these are the questions you must have answered by the Seller.
- Ownership Structure of the business (Corporate? Partnership? Who owns it and who used to own it?)
- Lease Arrangements and options (Get a copy of the lease.)
- Title to Fixtures and Documentation of same; warranties
- Insurance Policies
- Outstanding litigation
- Vendor Information
- Employee Information
- Contractor Information (any people working with them who are not employees - what is the arrangement.)
- Zoning or Use Restriction information
- Key competitors in area; past competitors; future competitors
- Key personnel staying or leaving
- How accounting information is handled. (Get copy of past three years tax returns and financial statements.)
- Name of lawyer and CPA.
- Workers Comp. Claims and problems
- Trends in Business and rationale for their leaving.
- Past litigation.
- Past owners; past employees
- Health department relationship; inspections.
- Union issues, if any
- Why selling; willing to train?
- Parking issues? Storage issues? Hazardous waste disposal?
- Vandalism or crime in neighborhood?
- Changes in neighborhood?
- Zoning changes? Construction issues? Road changes?
- Neighboring business relationships? Complaints?
- Any local government issues at all in last three years? Neighborhood issues or complaints (smells, etc?)
- Complaints with EEOC or any other agencies?
- Any tax audits in last five years?
- Any branch stores closed or opened and history of same?
- Any change in local customer base (e.g. factory closed, mall closed, etc.)
- Any employee leave and start own business near by, etc?
- Any take out business? Percentage? How handled?
- Advertising? Where, when, how? Special deals offered to get business? Describe.
- Past offers received? Pending? Status and what happened to them?
- Web sites? E mail?
- Trade names; trade marks; logos?
- Recipes? Copyrights? Logos? Signage cost? Depreciation on same?
ECONOMICS YOU MUST KNOW AND INQUIRE INTO:
- Validity of books; CPA sign off. Will they warrant level of business in the future?
- Gross and Net analysis; Expense analysis.
- Payroll analysis.
- Three years tax returns; five years better
- Tips and how handled.
- Sales tax and excise tax returns if appropriate.
- Trends of sales; trends of net. Trends of expenses.
- Vendor history of payment (timely?) (Get a credit report on them.)
- Fringes, both on the books and off
- Depreciation schedule and value of fixtures.
- What stays with landlord, what is removable (fixed?)
- What training available and at what cost?
- What personal guarantees have been given to what Vendors?
- Proof of payment of taxes of all kinds for business.
- Name of CPA and bookkeeper for business. Payroll service?
- Liquor license? Ever applied for? Beer and Wine sales?
- Depreciation schedule in past;
OTHER COMMENTS and QUESTIONS:
Quite often the buyer intends to radically alter the nature of the business and figures that all they care about are the hard assets (fixtures, signage, etc.) and do not need to know about past history. DO NOT MAKE THAT MISTAKE. Most of the issues that confronted the old business will still apply to your new restaurant and they made their decisions on what business to do (and not do) predicated on the very information you should be deriving from your investigation.
It is a good idea to check out our article on Business Plans for the type of analysis that you should probably undertake. If you do your job of careful planning and investigation now, you may not find yourself in the position of the Sellers in a year or two - trying to get out of a business that is not successful by selling it!