8 Important Things to Know (And Ask) When Buying a Restaurant
Nothing comes close to the exciting buzz of opening a new business. However, the average startup costs for a new restaurant business are between $275,000 and $425,000. Buying an existing restaurant could be the perfect option if you want to avoid the turmoil (and startup costs) of starting one from scratch.
Before you jump into your new venture, there are some essential things to consider. Firstly, running a restaurant is not for the faint-hearted! It would help if you also researched the prospective restaurant thoroughly to avoid any nasty legal surprises.
This guide will walk you through what to know (and ask) before buying a restaurant.
1. Why is the Owner Selling the Restaurant?
Is the owner retiring or starting a new venture? Understanding why the owner is selling their restaurant can provide insight into how the business is performing. Speaking to the owner is also a great way to learn about the brand and story behind the company.
Working with a professional, knowledgeable business broker can help you gain access to helpful information and uncover the seller’s motivation for selling. A broker can use this information to negotiate a better price for the buyer.
If the owner struggles to generate profits, you may need to rebrand and make drastic changes. If the restaurant was successful, would they be selling it? Remember that you will inherit the good, the bad, and the ugly when you buy a restaurant from the previous owner.
2. Location, Location, Location
The best way to research a location is to visit as a customer. Check out the area and take notes on the competition. Your findings will give you an idea of whether the site is popular and how other businesses perform in the vicinity of the restaurant.
Learning about the location will also tell you if the rental rates are fair for your property. Crime rates and new developments can also have an impact on the performance of a restaurant.
3. What is the Restaurant’s Reputation?
You can ask the locals what they think of the restaurant as you research the local area. Do they dine in or take out? Do they enjoy the food?
Lots of restaurants have loyal customers who visit them regularly. Observing the restaurant from a customer’s perspective will allow you to identify whether your prospective restaurant has a loyal following that you will inherit.
Checking online reviews will give you an idea of the restaurant’s reputation within the local community and beyond. Pay attention to negative feedback and consider how you would address their issues when you take over the restaurant.
4. The Competition is Fierce
There were 660,936 restaurants in the US as of 2021. Your restaurant must have a unique selling point if you want to succeed in the restaurant industry. It’s a good idea to include a non-compete clause in your contract to prevent the seller from opening up a similar restaurant nearby.
Establish the restaurant’s unique selling point (USP) by conducting a competitive analysis and tracking industry trends.
5. Existing Employees
When you buy an existing restaurant, you also take on the staff. Identifying which employees are critical to the restaurant’s success should be part of your due diligence before you complete the purchase. Some employees may wish to terminate their employment if a new owner takes over the restaurant.
Your new employees are a direct connection between you and your new customer base. They can teach you everything there is to know about your new business and how to help it succeed. Taking their opinions on board will be crucial to your future business strategy.
6. Check the Licenses and Permits
You may need to apply for state-specific licenses and permits to run your restaurant. Your restaurant must have a liquor license if you sell alcoholic beverages. It is also worth checking if any violations or outstanding debts could jeopardize the restaurant’s success.
Does your restaurant use a dumpster for garbage disposal? You may need a dumpster placement permit. Licenses and permits vary depending on your location, so it is best to check with your local authority before you sign the contract.
Ask the seller about licenses and permits so that you are aware of which ones you need. You can check your local government website to view inspection results and any health code violations against the restaurant before you buy it.
7. Marketing is Crucial
Keeping customers interested in your new restaurant is vital for success. What is the current owner doing to advertise the restaurant? Consider your marketing strategy before you buy so you can figure out how you would cater to the demographic.
Take a look at the restaurant’s social media and website before you commit to the purchase. Do they have a solid online following with plenty of positive reviews? A paper-based marketing strategy may work better if the customer base is an older crowd.
8. Buying a Restaurant is an Adventure
Buying a restaurant is hard work. However, the rewards you’ll receive along the way will make it worthwhile. Running a restaurant is the perfect way to introduce people to your recipes and culture alongside great music and delicious beverages.
Owning a restaurant will also give you more opportunities to give back to your community. You can donate surplus food to charities and homeless shelters or sponsor a worthy cause.
Get Support With Buying a Restaurant
Buying a restaurant is the perfect way to enter the business world without taking substantial financial steps. An existing restaurant with an established customer base, trained staff, and permits will allow you to take over where the previous owner left off. It would be best to research whether the restaurant for sale is a risk or a path to success.
Are you ready to buy a restaurant? Take the first step and book a free consultation with Fusion to make your dream a reality.
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Defending Your Asking Price
When you’re putting your business on the market, one of the top considerations is your asking price. Once you have a fair price established, let’s take a closer look at how business brokers and M&A advisors work with their clients to back up that price with details concerning why it is justified.
Telling the Story
A key aspect of defending your asking price is telling the story of your business. Your brokerage professional will help you go over the details of the story so it is properly conveyed to prospective buyers. Buyers, of course, will want to understand the story behind the business so that they can understand its history and why it is for sale. You will want to feel prepared to interact with prospective buyers and how to discuss details concerning its value.
Your business broker or M&A advisor will put together written materials about your business. These also help buyers gain clarity on the story of your business and its sales message.
Seeing Your Buyer’s Perspective
It goes without saying that a big part of coming up with your decision of the asking price is that you want something that sounds not only reasonable but also attractive to buyers. We recommend trying to view the entire transaction from the buyer’s perspective. The buyer must be able to see how they will successfully own and potentially operate the business, as this is essential for fostering a completed deal.
Another consideration is, how will they pay for the business? In many cases, it can tremendously benefit a transaction to offer assistance in the way of seller financing. Seller financing can speed up the process, as you will not be so reliant waiting for the bank loan process, which can drag out for months.
The Complexities of Your Asking Price
The process of establishing and then justifying your asking price is not always simple. It is a symphony of moving parts, and it’s important to feel educated and involved in the process. Ultimately justifying the asking price is the launching point of the process, but it is also just the beginning of the journey towards the completion of a successful deal.
Copyright: Business Brokerage Press, Inc.
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Common Legal Mistakes That Sellers Make
Nothing strikes fear in the heart of a business owner like a legal mistake. The best way to ensure that you will avoid serious legal issues is to work with a trusted and experienced team. Otherwise, it’s easy to accidentally miss necessary steps.
When you’re selling a business, there are a lot of moving pieces, and that means that there are ample opportunities for things to go wrong. It’s always best to be prepared. When mistakes are made, it can not only mean a significant expenditure of your time, but also your money. These kinds of issues can also bring your sales process to a total halt and perhaps derail your deal completely.
There are more than a few sellers who overlooked the importance of working with an attorney. When you are selling a business, it should come as no surprise that there is a great deal of paperwork. Your attorney will guide you to make sure that all necessary preparations have been made from a legal perspective. When your prospective buyer sees that your legal “ducks are in a row,” he or she will feel more confident in your organization and level of professionalism.
One document that often is skipped is the Letter of Intent (LOI). Sellers assume that things will move along more quickly if they forego this document. Keep in mind that the LOI truly has its place in almost any deal. After all, it not only outlines both parties’ expectations in writing, it also works to protect your best interests. Once projective buyers have signed this document, it proves they are serious about the deal. That means it is not so easy for them to walk away without consequences.
What if your deal falls through completely? Will your buyer then reveal to the public that your business was for sale and even the potential terms that were on the table? This could indeed occur if you were not backed up by an NDA. Don’t skip this very important document either. Your business broker or M&A advisor will be very well acquainted with NDAs and guide you in the best way possible.
Warding off these kinds of issues is one great reason to be equipped with a small team of professionals to turn to for advice. This team should include your business broker or M&A advisor, accountant, and attorney.
Copyright: Business Brokerage Press, Inc.
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What Does the Road Ahead Look Like?
Each quarter, the Market Pulse Report issues a report revealing information about market conditions The report is supported by M&A Source and the International Business Brokers Association. The data that is analyzed is based on a comprehensive survey of business brokers and M&A advisors. The report focuses on Main Street businesses (with values up to $2MM) and the lower middle market (values between $2MM and $50MM.)
The research is conducted and then the report is published each quarter to reflect the state of the industry. In this article, we will look at some of the key takeaways of the report and what it reveals about the path ahead for buyers and sellers.
Tracking the Labor Shortage
For the second quarter, the report revealed a variety of interesting information. One massive data point from the report is that the labor shortage continues to be a significant variable for business owners. A staggering 92% of report respondents state that the labor shortage has negatively impacted their business with 54% stating that the shortage has had a “very negative impact” and 35% stating that the impact is “somewhat negative.”
Closing Times
The report further indicated that it is taking about seven months for a business to close. They noted that it takes about six months to a year to sell a well-priced business or a well benchmarked business. The report noted that approximately 60-120 days are spent in the due diligence or execution stage, once the letter of intent has been signed.
The Strongest Industries
In terms of what kinds of businesses are selling, the report points to restaurants making a solid comeback. It is interesting to note that restaurants valued from less than $500K to $1 million are enjoying a particularly strong rebound. Business services, personal services, construction and manufacturing remain steady.
In Summary
The latest Market Pulse Report is pointing in several directions. Currently, three factors are impacting business owners, namely, the labor shortage, inflation, and supply chain issues. Many businesses have had no choice but to give large raises to employees, and others have been able to pass the costs on to consumers and buyers.
Copyright: Business Brokerage Press, Inc.
The post What Does the Road Ahead Look Like? appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
6 Things to Do Before Selling Your Business
No matter what type of brand you own, selling a business can be both exciting and paralyzing. Along with the validation of selling something you’ve spent so long working to establish, the stress of the sale process can grow overwhelming fast.
That’s where early preparation comes in. Organizing your business in advance allows you to to streamline the sale process and improve your company for greater profitability. If you’re considering selling your brand, here are a few steps to consider on the front end.
1. Be Sure You’re Ready to Sell
Before you start the selling process, be sure you’re mentally and emotionally prepared to sell. Consider the current shape of your company, talk with your support network, and seek advice from business owners who have gone through the process before you.
In addition, lay out a plan for what you’ll want to do in the first six months after your business sells. If you’re hoping to retire, in particular, you’ll want to ensure that you understand how much money the sale will contribute to your retirement plans.
2. Consider the Timing
It’s better to sell your company when it’s in its prime based on its recent profits, though this isn’t always practical for every business. In addition, consider the state of the industry as you go into the sale.
When possible, give yourself plenty of time—at least a year—to prepare for the sale in advance. This allows you to organize and improve your financial documentation and expand your customer base. These improvements can not only ease the transition, but they can also make your sale more profitable.
3. Get Your Paperwork and Finances in Order
Having clean, organized financial reports isn’t just good business. It can also be a helpful way of preparing to send information to potential buyers, and it shows wary investors they can trust you. The last thing you want is for a chaotic back office that gives would-be buyers concerns about how you’ve run the business in the past.
Make sure your signature shows up on the appropriate contracts, get your meeting minutes all in one place, and write and tidy up your documentation around key processes. Review any important assets, draw up an equipment list, and make sure any undocumented or verbal deals get put on paper.
You’ll also want to gather all of your financial documents going back at least three years. If needed, review these with your accountant. Make copies of significant documents to show prospective buyers.
This is also a great time to start preparing your due diligence documents. Buyers will have a checklist of documents they want to see, and preparing these standard due diligence documents in advance can save you time down the line. Work with your business broker to understand what to expect.
4. Deal With Anything That Might Raise Concerns
Buyers considering your business won’t want to see anything that looks like a loose end or a sign of mismanagement, especially if these things could raise their financial risk.
Before you sell, take care of any existing lawsuits, investigations, or other forms of litigation, no matter how minor. Risk-averse buyers will flee at the idea of purchasing a brand with ongoing issues.
At this time, you’ll also want to take care of any financial complexity from your accounts, such as mingling personal and business expenses. This can raise legal issues, and it can also complicate your business valuation and a buyer’s attempts to get financing.
5. Get a Business Valuation
Before you go into a sale, get a business valuation. Knowing your overall business value can help you understand whether or not you’re starting out with a reasonable asking price.
You can reach out to a financial professional for help with this, but most small business owners can do this evaluation on their own. You’ll need to use some of the financial information you’ve organized above, including your business assets and liabilities as well as your net worth. In addition, you’ll want to do some research into how much similar businesses have sold for in the past.
6. Assemble Your Team
Unless you have extensive legal, tax, and business sale experience, you’ll want to reach out to a few experts to help you. Having the right advice can ensure that you’re making a great deal, and it can also protect you if the sale becomes messy and complicated.
If you don’t already work with either a tax attorney or a CPA, it’s time to find one. Working with these experts can help you get your finances in order long before the sale. These professionals can also help you understand your financial requirements both during and after the transition.
The expertise of a business lawyer can also be invaluable if you’re striving to get favorable terms, and a lawyer can also help you with the burden of gathering and organizing the necessary paperwork. As you meet and negotiate with prospective buyers—who will likely have their own team of lawyers on hand—a business attorney can defend your interests.
Last, working with a business broker is often a smart move if you need to free up time to deal with things that matter—such as running and growing your business. Brokers can also help you increase your brand’s value, identify fair offers, and even get a higher price for your business.
Prepare Before Selling Your Business
Selling your business can be a monumental event, and it often takes much more preparation than the average entrepreneur expects. From managing your finances to finding the right team, you’ll need to have a few plans in place before you make the leap.
If you’re looking for expert assistance with the sale of your brand, we’re here to help. As a full-service, confidential business broker you can trust, we’re happy to answer questions about everything from exit strategies to valuations. To learn more, contact us today or reach out for a buyer consultation.
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