Should I Buy an Existing Restaurant?

The prospective restaurant owner faces three options, which will play a critical role in the success or failure of the new business. The purchase of an established, profitable restaurant with a proven concept, a recognized trade name and a solid customer base offers the least amount of financial risk. Sales, expenses and profits can be verified during a “due-diligence” or inspection period. Proven cash flows are usually sufficient to service normal debt and provide a reasonable managerial fee for the new owner. The acquisition of a successful ongoing restaurant operation usually requires the least capital outlay and operating capital, the fastest return of investment and the smallest chance of failure.
Many creative restaurateurs have their own concept, menus, recipes and decors in mind, and want to open a new facility. But recent changes in building, traffic and health codes have resulted in skyrocketing site planning and approval costs. In addition to those, the owner usually experiences an upfitting expense of $75 to $100 per square foot for basic upfitting costs such as heating and air, plumbing, décor, signage and electrical systems in addition to the high cost of furniture, fixtures and equipment. The least expensive option to a new start-up operation would be the purchase of an established restaurant, which could be converted to the new owner’s concept and menu. Most marginal operations suffer from weak management and poor concepts; many successful restaurateurs know that there is no such thing as a bad location, just “bad concepts” and poor management!
Consider the following issues before deciding whether to open a new restaurant or purchase a pre-existing one:
Location: Will the demographics traffic patterns and traffic generators support the clientele that the proposed new concept will require? What is the availability of desirable commercial space in the area?
Leasehold improvements: Can I minimize my capital requirements by purchasing a pre-existing restaurant with minimum cosmetic changes? Is the current signage adequate for the new name? Are the mechanical systems in good working order?
Furniture, fixtures and equipment: Is the current equipment in good working order? Does it pass all inspections necessary to continue to operate, and will the package meet your needs with a minimum cash outlay for new equipment?
Governing authorities’ approval: In most cases, the purchase of an existing operation survives “grandfather” clauses and new requirements for parking, zoning, traffic and health codes.
Leases: Many leases in place are below current market rates and offer considerable operating savings for the new operator.
Time: A start-up operation often requires four to 12 months of planning, obtaining necessary permits, construction inspections and approvals. The time and dollar expense is greatly reduced when purchasing an existing restaurant operation.
Cash flow: The cash register rings much faster when you buy an existing restaurant and the customer base if often retained, again reducing your operating capital requirements.
Recently, a client purchased an on-going operation, which had a great location and facility but was suffering from lackluster sales. The new owner bought the assets of the business with a small and reasonable down payment and the seller financed the balance of the purchase price at very attractive terms. The new owner continued to operate the restaurant as he made changes in concept, décor and the menu on weekends and off-hours. In less than 60 days, sales increased from $20,000 monthly to more than $80,000!
Before opening a restaurant from scratch, investigate your options and minimize your risk factor, then give the public an affordable, enjoyable dining experience and your journey should be pleasant and profitable. For more information visit our website at www.restaurantstore.com