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How to Buy a Restaurant

Over 30,000 restaurants have closed as of April 19, according to a recent Yelp report. It’s no secret that the COVID-19 pandemic has been devastating for eat-in restaurants, but what many might not realize is that one closure can also be a fresh start.

If you’re an aspiring small business owner who has been seeking opportunity, the increase of dining establishments for sale, coupled with the lowered cost of these businesses, could be the door to following your dreams.

Tip: Operating restaurants put up for sale are called “turnkey” businesses because all you need to do to get started is to turn the key in the door and walk in. These establishments are already set up for operation and may even be currently operating while being sold.

Turnkey restaurants hold tremendous opportunities. You can save money early on by finding an establishment that’s already set up how you want or at least very close. With fire sales picking up due to the pandemic, you have a stronger negotiating stance, which could net you equipment, recipes, and customer contact lists as part of the purchase. It’s also an excellent opportunity to support your community by helping restaurant employees keep their jobs – giving you a skilled staff familiar with operations, saving you’re the effort of hiring and training.

How to Find the Right Restaurant to Buy

There are many resources available to help you find restaurants for sale in the area of your choice.

Business Brokers

Business brokers are like real estate agents but for business instead of property. Business brokers use databases of businesses to help match you with options that fit your criteria. Make sure whichever business broker you work with holds a Certified Business Intermediary (CBI) license, which ensures they meet high professional standards.

Suggested Business Brokers

Please note the businesses listed below are partners with Guidant Financial. We may collect a share of sales or other compensation from the links on this page.

To find a business broker near you, you can also visit the International Business Brokers Association or learn more about working with business brokers here.

Restaurant Buying Digital Resources

There are also many online resources for finding businesses for sale, including some that focus specifically on restaurants. These listings usually have key information to help you decide if you want to inquire further into the business. Some information helpful to look at as you search:

  • Sale price
  • Zoning description
  • Cash flow
  • Inventory and assets
  • Property build date
  • Building features and specifics

Suggested Business Listing Sites

Please note the businesses listed below are partners with Guidant Financial. We may collect a share of sales or other compensation from the links on this page.

Get Money to Buy Your Dream Restaurant

How to Decide on the Right Restaurant to Buy

When you have a few restaurants you’re interested in; it’s time to do deeper research to narrow down your options. There are important areas you can learn about on your own before even reaching out to potential restaurants.

Competitor Analysis

Check out other restaurants, bars, cafes, and foodservice establishments in the area where your prospective restaurant is located. Keep in mind the type of cuisine and service you’ll be offering. If the area is filled with other Italian restaurants, you’ll be looking at stiffer competition. But if there aren’t any bars in the area and your restaurant has or will have a liquor license, you’ll be filling a niche.

Websites like Yelp, Google My Business, and FourSquare can help you learn more about competition in the area.

Location Analysis

It’s essential to understand more than just the competition in a restaurant’s neighborhood. The location itself makes a huge difference in how customers can find you, get to you, and have a great experience at your restaurant. Look at the location’s parking – is there ample space for busy nights? Will your customers have to park blocks away or on the street? Consider the visibility of your location – will customers be able to discover it by driving by and find it easily? Also, think about foot traffic – are there other stores in the area that will drive walking traffic to your business? Is it easy to walk to?

Understanding the surrounding population and demographics is also a key element. Is your prospective location population-dense? What cultures surround your location? Is there a large potential customer base of parents or seniors? You can learn more about location data from your local library, government websites, or city hall, as well as on sites like U.S. Census, Urban Institute, and Neighborhood Scout.

Community Reputation

Many restaurants are facing tough times due to COVID-19, but there are also businesses that fail due to a negative reputation. While bad perception isn’t impossible to overcome, you should understand the problems your prospective restaurant faces before deciding if you want to move forward. Having a plan to overcome these problems will become an essential element of your new business.

Start with a simple Google search for the restaurant. Look for news articles, community discussions, and other items of interest to inform your understanding. Check the restaurant’s social media presence to see if customers are leaving complaints – and if and how the management has responded. Sites like Yelp, Facebook, Google My Business, TripAdvisor, and the Better Business Bureau are all places where you can see reviews.

Buying a Restaurant: Due Diligence

When you’ve narrowed your options down, it’s helpful to coordinate with professionals to conduct due diligence. This will provide you with deeper insights into the business you’re interested in purchasing. A lawyer can help you reach out to the business owner to start investigating what you need to know, as well as drafting a letter of intent.

Tip: A letter of intent isn’t a buying agreement, it’s just a signal to the buyer (and any agents they’re working with) that you’re seriously interested in purchasing the business based on assessments as part of your due diligence and other potential terms of purchase.

One big question to ask is: why is the restaurant being sold? There are many reasons an owner might want to sell, like retirement, relocation, or cash flow. But the answer can also reveal important details you need to know. Don’t just take the seller’s word on it, research the answer during due diligence.

Key Areas for Due Diligence

Check out our in-depth due diligence checklist for buying a business for further details on due diligence.

Financial Records

Working with a lawyer and accountant, review of the restaurant’s financial records and documents. Analyze at least three years of balance sheets and income statements. Verify profitability, cash flow statements, and any other financial data. View projected financial statements to make sure they’re reasonable. Verify owner income and that taxes have been filed regularly (and accurately!).

Debt, Violations, and Fines

Depending on your state, you might be responsible for certain debts or legal actions. This could include taxes owed on the property. Your lawyer and accountant can help you research and understand any of these potential debts.

Health code violations can sour customers and have significant costs to fix, so be sure to review the restaurant’s history of health inspections. You can usually find this information from your local government website’s Department of Health as well as on FoodSafetyNews and HDScores.

Other potential violations commonly seen in the foodservice industry include unpaid overtime, unpaid sales tax, issues with tip distribution and taxes, and pest control. These are all topics to research during due diligence.

Determining Restaurant Profitability

Understanding a restaurant’s possibility for profitability is, of course, a major element of deciding if you should buy.

Tip: To start to determine profitability, you can compare the sale price to the business’s revenue and cash flow, which you should know from your financial analysis.

There’s more to determining profitability than these simple numbers, though. Take into consideration where you may need to make expenditures, especially in the sometimes-challenging period after just buying a business. This is even more important if your restaurant isn’t currently operating or won’t be operating during the transition period, and you aren’t bringing in money.

If possible, take some time to view the restaurant operate and put together a time to inspect the property, ideally with the current owner and manager. You’ll want to get an idea of:

  • The condition of existing equipment. Are you going to have to repair or replace expensive equipment like hoods, grills, or ovens? Is everything up to safety standards, or will items need servicing? Note equipment leases and warranties.
  • The condition and layout of the kitchen. Is the kitchen in need of a deep clean or major overhaul? Is it big enough for your needs? Consider what repairs or updates the kitchen needs. How long will the restaurant need to be closed for work?
  • The condition and layout of the dining room. Do you like the flow? Is it outdated or uncomfortable? Will you need to remodel? Look at items like furniture, carpets, and decorations. Do they match the style you want, or will you need to replace them? If you don’t think you’ll use them, you may be able to get a better purchase price by leaving them out of the deal.
  • Inventory. Is the inventory well-stocked, or will you need to restock in bulk? If you’re changing the type of cuisine the restaurant will serve, is the inventory useful for your new menu?
  • Staff. Foodservice employees, both in the front and the back of the house, are the lifeline of your business. If the establishment is operating, discuss the restaurant’s pros and cons with servers, cooks, and other staff. Observe how the staff interacts with customers and vice versa.
Tip: Keeping on experienced staff that already have ties to regular customers goes a long way to preserving community goodwill and saving time and effort on hiring and training.
  • Existing vendor contracts and relationships. Most restaurants have contracts with vendors for food shipments, drink vendors, cleaning and laundry services, and Point of Sale (POS) technology. Will these contracts endure through your purchase, or will you need to reengage old vendors or find new ones?
  • Other assets. Is the restaurant’s brand a valuable asset, or do you want to rebrand? Consider signage and marketing costs. Does the restaurant have a liquor license, and if so, will it be part of the purchase? Does the establishment rent or own the location? If it leases, will you need to renegotiate a lease, or will it be part of the sale? Will you be using the restaurant’s menu or designing a new one from scratch?

Having a broad understanding of all the business’s assets helps you form the best idea of how and when your new business will be profitable – which is crucial when you’re seeking financing.

Restaurant Financing

After you’ve performed due diligence with professionals, you should have enough information to decide if purchasing the restaurant is the right choice for you. You should also have a good idea of how much money you’ll need – from the sale price to update costs to first month’s operating capital. Your next step is to secure that money.

See Your Restaurant Financing Options Now

How to Finance Your Restaurant

Most of us don’t have the liquid cash to buy a business outright. But even if you do, is that your best option? Thoroughly understanding your financing options can help you make the best choice for the long run, not just the first few months.

Rollovers for Business Startups (ROBS) aka 401(k) Business Financing

You might be sitting on a treasure trove of funding and not even realize it: your retirement funds. Rollovers for Business Startups (ROBS), also known as 401(k) Business Financing, lets you invest your retirement funds into a small business tax and penalty-free.

ROBS works by changing the investment funds in your retirement account from shares in public companies, like Apple, Amazon, and Microsoft, to shares in your own private company. ROBS is different than taking a loan or an early distribution from your retirement account. With a 401(k) loan, you have interest payments to make or risking having to claim that money as income. With an early distribution, you typically pay an early withdrawal penalty on top of having to pay income tax on the funds. But with ROBS, you’re simply rolling over your retirement funds into a new retirement account. This transaction isn’t a loan, so it doesn’t need to be repaid. Using your retirement account through ROBS also ensures you won’t be hit with early withdrawal penalties.

Learn more about Rollovers for Business Startups with our Complete Guide to 401(k) Business Financing: ROBS.

SBA Loans

Small Business Administration (SBA) loans are one of the most common forms of small business financing. That’s because you can get up to $5 million in financing, which can be used for almost any business purpose, including start-up, acquisition, and expansion costs. The SBA doesn’t provide the loan directly to you but instead backs up the loan through a bank or other qualified lender. The SBA encourages banks to lend to small businesses, and in exchange, it guarantees 75 – 85 percent of the loan.

ROBS + SBA = A Quicker Path to Profitability

ROBS and SBA loans work well together to help you become a more qualified and confident borrower. Not only can the retirement funds rolled over with ROBS to cover the cash deposit on an SBA loan, but combining these two financing methods can help you preserve personal savings.

Accessing retirement funds for business financing also usually means you can make a larger down payment. Larger down payments can make monthly payments more manageable, and even net you better loan terms.

Tip: Your ability to pay a larger down payment means more buying power and increased flexibility when launching a business.

In fact, Guidant’s State of Small Business Survey showed that when entrepreneurs are able to access their retirement funds for business financing, they have more access to capital. Respondents who used ROBS as funding were most likely to use between $100,000 and $175,000 to fund their business, which is significantly more than the $50,000 that almost half of all other business owners reported using.

For a more in-depth look at funding options for small businesses, check out our Complete Guide to Small Business Funding Options.

Opening Your Restaurant

After you’ve found, financed, and purchased your new restaurant, you’re ready to focus on the fun part of your small business journey: opening your doors and serving your customers.

In a world during and after the COVID-19 pandemic, it’s important to consider additional steps to keep your customers and employees safe, as well as use unique methods of marketing.

Understand that coronavirus restrictions may last for some time, including occupancy restrictions, social distancing, and the usage of face masks. Structure your launch around these restrictions. Now is a great time to be innovative and take advantage of new methods of serving customers. Consider investing in decorations and accouterments to make a lovely outdoor seating area. Leverage delivery services, curbside pickup, and takeout or to-go.

It’s a good idea to work with a cleaning and janitorial company to do regular deep-cleans of all areas of your restaurant. It can be helpful to be transparent with customers and employees about the methods you’re taking to ensure their safety and the cleanliness of your space.

As communities reopen from shelter-in-place restrictions and quarantines, you can leverage that enthusiasm and momentum with marketing. You can make a big splash with visible signage, social media posts, newspaper ads, and even TV or radio commercials.

Fresh Growth from Forest Fires

Motivational speaker and author Zig Ziglar said, “Failure is a detour; not a dead-end street.” Understanding that fresh opportunities arise from challenging situations is the key to seizing the day – and taking control of your career through small business ownership.

If you’re ready to seize the day, we can help. Call us at 888-472-4455 or contact us online to get started now.

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Want to Use ROBS to Start a Business?

Our step-by-step Guide to Rollovers for Business Startups is a complete handbook of everything you need to know about using ROBS to start or buy a small business or franchise.

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