How do you buy a restaurant? Do you think of purchasing an existing restaurant or joining the restaurant industry by opening your new restaurant
In this article, we will provide a step-by-step guide on how to buy a restaurant business. We will cover aspects worth considering, such as the restaurant’s location, financial situation, why the restaurant is for sale, signing the purchase agreement, and many more.
If you are considering starting a restaurant, you have two options: build your business from scratch or buy an existing restaurant.
Purchasing an existing business can offer time and cost savings. For instance, an established restaurant typically has the required operating permits and licenses (like food service and liquor licenses).
On the other hand, a restaurant may have bad reviews among customers or be in debt, and if you decide to purchase it, you must consider repaying the debt.
Buying an existing restaurant can have several advantages and disadvantages. Let’s have a closer look at them.
Pros and cons of buying a restaurant
Buying an existing restaurant can have several advantages and disadvantages. Let’s have a closer look at them.
Pros of buying an existing restaurant business
- Established brand: An existing restaurant likely has a loyal customer base and established brand recognition, saving you the time and effort of building it from scratch.
- Operational infrastructure and technology: The restaurant already has systems and equipment that streamline its operations. It has also implemented restaurant technology such as an online ordering system, restaurant management software, a kitchen display system, and a QR code menu.
- Revenue history: You can access the restaurant’s financial records, which give you insight into its revenue potential and profitability.
- Reduced risk: Buying an existing restaurant may involve less risk than starting a new one because you’re investing in a known entity with an existing customer base.
- Potential for immediate cash flow: If the restaurant is already profitable, you may start generating income from day one, unlike a new venture that may take time to become profitable.
Cons and red flags when buying a restaurant
- High initial cost: The purchase price of an existing restaurant can be significantly higher than starting a new one, especially if the business is successful and has a strong reputation.
- Hidden issues: The restaurant may have undisclosed problems, such as legal liabilities, outdated equipment, or a declining customer base, which could impact its profitability.
- Limited flexibility: You may inherit existing contracts, leases, and agreements that limit your ability to change or improve the business.
- Negative reputation: If the restaurant has a poor reputation or negative reviews and restaurant complaints, overcoming these perceptions and attracting new customers can be challenging.
- Cultural fit: You may need help integrating into the existing team and adapting to the restaurant’s culture, especially if longstanding employees or management are in place.
Whether buying an existing restaurant is the right choice depends on factors such as your budget, risk tolerance, and ability to mitigate potential challenges and capitalize on the advantages. Conducting thorough due diligence and seeking professional advice can help you make an informed decision.
How much does it cost to buy a restaurant?
The cost of buying a restaurant can vary significantly depending on various factors such as location, size, concept, condition, and reputation of the restaurant. Buying a restaurant business can range from tens of thousands to millions of dollars.
According to the Restaurant Pricing Annual Report by Restaurants For Sale, , the average price in 2023 was $395,500. When budgeting for the purchase of a restaurant, a future restaurant owner should consider additional costs such as legal fees, renovation expenses, inventory, and working capital.
Below, you’ll find a concise step-by-step guide outlining purchasing a restaurant. This guide will help you navigate each crucial acquisition stage smoothly and effectively.
Step 1. Define what you are looking for
When buying a restaurant, restaurant owners must first define what they seek. Consider the following questions to guide your decision-making process:
- What type of restaurant do you plan to open, and what is your desired cuisine style or concept? For inspiration, check out this guide on types of restaurants.
- What specific equipment will you need to serve your menu effectively?
- If you plan to serve alcohol, do you already have a liquor license? If not, what are the requirements for obtaining one?
- Do you want to buy an independent restaurant or a restaurant franchise?
- What is the level of foot traffic in the area surrounding the restaurant?
- Are direct competitors nearby, and if so, how will you differentiate your restaurant? (Remember that conducting market research is a part of creating a restaurant marketing plan).
- Will you need layout or design changes to align with your restaurant concept?
- Is parking available for customers, and if not, what alternative options exist?
- What are the current lease terms, and are there any restrictions or clauses that may impact your operation?
- How is the restaurant’s reputation and customer perception, and what improvements or changes may be necessary to enhance restaurant feedback?
- What is the restaurant’s current financial performance and profitability, and what projections do you have for future growth?
Step 2. Find a restaurant
Once you know what you are looking for, you can begin your journey to buying a restaurant by exploring available options.
You can use online platforms such as
to search for listings in your desired location and within your budget. Remember that the listing must include earnings for each store being reviewed within the description and details of each ad.
Moreover, you can narrow your search by industry type, such as
- quick-service restaurants,
- buffet restaurants,
- family style restaurants,
- food trucks,
- full-service restaurants,
- fast-casual restaurants, etc.
While narrowing your search, take into account the price range.
Additionally, consider enlisting the expertise of a restaurant broker like We Sell Restaurants, who can provide access to a wider range of opportunities and assist you throughout the purchasing process.
When working with a restaurant broker to purchase a restaurant, expect to sign a non-disclosure agreement to safeguard the business’s confidential information. Additionally, you may be required to qualify financially by providing proof of funds through bank statements or brokerage accounts.
Once these steps are completed, the broker will grant access to detailed earnings information, facilitating a more informed decision-making process.
Working with a business broker when seeking a restaurant to purchase offers several advantages:
- Specialized knowledge: Brokers possess in-depth knowledge of the local market and can identify suitable restaurant properties efficiently.
- Market insights: They provide valuable insights into market trends, property values, and negotiation strategies.
- Access to exclusive listings: Brokers can access exclusive listings and networks, potentially uncovering opportunities not found through other channels.
- Streamlined search process: Brokers streamline the search process, saving buyers time and effort.
- Legal and financial expertise: Brokers navigate the transaction’s complex legal and financial aspects, ensuring a smoother acquisition process.
Step 3. Engage a lawyer
When buying a restaurant, engaging a lawyer is essential to navigate the complex legal aspects of the transaction. Here’s why and how:
- Document review: A lawyer will thoroughly review all legal documents associated with the purchase, ensuring clarity and protecting your interests. Example documents include:
- A Letter of Intent (LOI): It outlines the preliminary agreement between the buyer and the seller regarding the proposed sale of a restaurant.
- Purchase Agreement: The official document governing the sale, detailing terms like purchase price and conditions.
- Lease Agreement: Assessing existing lease terms to identify any potential issues or concerns.
- Licensing and Permits: Ensuring compliance with state and local regulations, including liquor licenses and health permits.
- Expert guidance: A lawyer with experience in restaurant acquisitions can provide valuable insights and guidance throughout the process, helping you navigate potential pitfalls.
- Risk mitigation: By identifying and addressing legal risks early on, a lawyer helps minimize the likelihood of disputes or complications arising post-acquisition.
- Negotiation support: Your lawyer can negotiate on your behalf to ensure favorable terms and conditions.
Engaging a lawyer when buying a restaurant provides peace of mind and ensures a smoother, legally compliant acquisition process.
Step 4. Evaluate the business
Whether you search for listings on your own or use the help of a restaurant broker, the first question you should ask yourself is why the restaurant is for sale.
- Retirement: The owner may be retiring from the restaurant industry.
- Relocation: Personal or professional reasons may necessitate the owner’s relocation to another area.
- Health issues: Health concerns or medical conditions could impact the owner’s ability to continue managing the restaurant.
- Financial challenges: The restaurant may be experiencing declining revenue, high operating costs, or debt, prompting the owner to sell as a solution.
- Partnership disputes: Disagreements or conflicts between business partners could lead to the decision to sell the restaurant.
- Market conditions: Changes in the local market or shifts in consumer preferences may impact the restaurant’s viability and prompt the owner to sell.
- Personal reasons: Various personal factors, such as family obligations or career aspirations, could influence the owner’s decision to sell the restaurant.
Understanding the motive behind the restaurant sale is crucial, especially when inheriting existing leases. Financial struggles may necessitate rebranding or service model changes for improvement, while a retiring owner with strong financials could allow for maintaining the menu, name, and brand integrity.
Before buying a restaurant, visiting the establishment as a secret customer is beneficial for assessing various aspects firsthand.
- Evaluate atmosphere: Observe the ambiance, decor, lighting, and overall atmosphere of the restaurant.
- Assess food quality: Order a meal and sample the food to assess its quality, taste, presentation, and consistency. Consider factors such as freshness, flavor, portion sizes, and adherence to menu descriptions.
- Check cleanliness: Pay close attention to cleanliness and hygiene standards throughout the restaurant, including dining areas, restrooms, kitchen, and food preparation areas.
- Interact with staff: Take note of the staff members’ professionalism, friendliness, and attentiveness.
- Observe customer experience: Pay attention to the overall customer experience, including wait times, service efficiency, and customer interactions.
- Review menu offerings: Examine the menu options, pricing, variety, and appeal to the target demographic. Consider the restaurant’s ability to cater to different dietary preferences, special dietary needs, or trending food preferences.
- Analyze beverage selection: Assess the beverage menu, including alcoholic and non-alcoholic options, wine list, specialty cocktails, and beverage presentation.
Another important aspect of evaluating a business is a restaurant’s financial condition. Check the financial documents of a restaurant, including balance sheets, cash flow statements, tax returns, credit history, and any available financial records from previous owners.
Assessing the restaurant’s cash flow history is crucial to understanding its profitability and sustainability. Look for positive cash flow trends and ensure the restaurant’s financial performance aligns with your investment goals. Additionally, consider potential opportunities to generate more money and improve the restaurant’s financial outlook under your ownership.
Evaluating a restaurant’s financial condition is a part of restaurant valuation. Typically, a third-party appraiser, impartial to the business, performs this assessment. The appraiser considers multiple factors, including
- historical financial performance,
- future growth potential,
- market share,
- brand strength.
To proceed, remember to gather information about the restaurant’s assets, liabilities, and other relevant factors. This includes valuing
- equipment,
- fixtures,
- real estate,
- intangible assets such as brand equity and customer loyalty.
- What is the quality of the restaurant’s equipment? Assess the age, maintenance history, and compliance with safety standards, and ensure the seller addresses any necessary repairs or replacements to avoid additional expenses.
- Have any violations been reported against the restaurant? Consult local health department records or online databases, where inspection reports are often available. Review these reports to identify any instances of non-compliance with health and safety regulations, ensuring thorough due diligence before finalizing the purchase.
- What existing contracts or agreements does the restaurant have with vendors? Request documentation from the current owner detailing all vendor contracts, including suppliers for food, beverages, equipment, and other goods or services. Review these contracts carefully to understand their terms, pricing, renewal dates, and obligations or commitments.
Step 5. Secure financing
Securing funding is crucial when buying a restaurant, and various financing sources are available to prospective buyers. Here are some potential options:
- Bank lending: Explore traditional bank loans tailored to restaurant acquisitions. These loans typically require a solid restaurant business plan, a good credit history, and collateral. They can cover a significant portion of the purchase price, helping buyers finance the acquisition.
- Small Business Administration (SBA) Loans: Consider SBA loans, which are partially guaranteed by the SBA, making them more accessible to restaurant buyers. A small business loan often offers favorable terms and lowers down payment requirements than conventional bank loans.
- Private investors: Seek investment from private investors or venture capitalists interested in the restaurant industry. Investors may provide funding in exchange for equity in the restaurant or a share of future profits.
- Personal savings and retirement funds: Consider using personal savings or retirement funds, such as 401(k) rollovers or individual retirement accounts (IRAs), to finance the restaurant acquisition. This option allows buyers to invest their own funds without relying on external financing. More information can be found on IRS.
For more ideas on where to get restaurant funding, check out our article on how to open a restaurant with no money.
Step 6. Proceed with contract negotiation
The next step in buying a restaurant is negotiating a contract with the seller, which involves several crucial aspects.
Firstly, establishing an asking price sets the tone for negotiations and ensures clarity in the transaction. Secondly, negotiating terms, including purchase price, financing arrangements, and closing costs, is essential for reaching a mutually beneficial agreement.
Additionally, discussing the seller’s guarantee against future liabilities provides financial security but requires careful consideration of potential risks.
Successful negotiation requires a thorough understanding of all terms and a diligent contract review to protect both parties’ interests.
After completing negotiations, the final step in contract negotiation when buying a restaurant often involves signing a Letter of Intent (LOI). This document formalizes the agreed-upon terms and outlines the basic framework of the sale.
The LOI serves as a precursor to the formal purchase agreement, providing a roadmap for the transaction. It typically includes key details such as
- the purchase price,
- payment terms,
- due diligence period,
- any contingencies or conditions that must be met before finalizing the sale.
While the LOI is not legally binding, it signifies the parties’ commitment to proceeding with the sale and serves as a guide for drafting the final purchase agreement.
Step 7. Do your due diligence
The next step in buying a restaurant is conducting due diligence, a comprehensive process similar to performance metrics analysis but more complex.
Due diligence delves into the business’s legal, structural, and operational aspects. It involves reviewing
- financial records,
- legal documents,
- operational procedures,
- market analysis
to assess the restaurant’s viability, uncover potential risks or issues, and get a clear picture before deciding on the purchase.
Step 8. Complete the restaurant purchasing
After completing due diligence and ensuring all necessary arrangements are in place, the next step in buying a restaurant is to complete the purchase. This involves finalizing the transaction and officially taking ownership of the restaurant.
The purchase agreement is a crucial document to finalize. This agreement should include several key elements to ensure clarity and protection for both parties.
- Name and address of
- Seller
- Buyer
- Purchase price
- Payment terms (including the amount of the down payment, financing arrangements, and any installment payments).
- Specify the assets included in the sale, such as
- equipment,
- inventory,
- furnishings,
- licenses,
- permits
- Clearly define any liabilities or debts excluded from the sale
- The closing date for the transaction, outlining when ownership of the restaurant will officially transfer to the buyer.
- Point out contingencies that must be met before the sale can proceed (e.g., obtaining financing, completing inspections, or obtaining necessary licenses).
- Include representations and warranties from the buyer and seller regarding the restaurant’s condition, assets, and legal or financial matters.
- Signatures of both the buyer and seller.
Step 9. Develop a plan for reopening a restaurant
The next crucial step after purchasing a restaurant is to develop a comprehensive plan for reopening. Start by assessing the current state of the restaurant’s operations, including
- staffing,
- inventory,
- equipment,
- facilities
Identify any necessary renovations or repairs to ensure the restaurant is ready to reopen to the public. Develop a restaurant marketing plan and brainstorm restaurant promotions ideas to generate buzz and attract customers to the restaurant’s reopening.
Consider offering special promotions, events, or menu items to entice diners and create excitement. Restaurant marketing tools can help you attract new customers to your dining establishment.
Train staff on new procedures, menu items, and customer service protocols to ensure a smooth reopening experience. Finally, establish a timeline for reopening and communicate updates to staff, suppliers, and customers to build excitement for the restaurant’s relaunch.
Step 10. Open your restaurant
Having prepared the restaurant reopening plan and followed all the steps outlined above, you are ready to open your restaurant. Get inspired with this list of grand opening ideas for restaurants to organize an unforgettable event.
- Decide between existing or new restaurant
- Define criteria
- Research restaurants for sale listings
- Consider hiring a restaurant broker
- Engage a lawyer
- Explore funding options and secure financing
- Negotiate contract
- Do your due diligence
- Finalize purchase
- Prepare a restaurant reopening plan
- Open a restaurant
Key Takeaways
- Develop a comprehensive plan for transitioning into restaurant ownership.
- Work with experienced professionals to ensure legal protection throughout the buying process.
- Remember to secure financing for the new restaurant.
- Thoroughly research and investigate all aspects of the restaurant to assess its viability and uncover potential risks.
- Effective negotiation skills are essential for reaching a mutually beneficial agreement with the seller, covering purchase price, terms, and contingencies.
Frequently Asked Questions (FAQ)
Is it profitable to buy a restaurant?
Is $ 10,000 enough to open a restaurant?
In most cases, more than $10,000 may be required to cover all startup costs, including equipment purchases, lease or rental deposits, licensing and permits, renovations, staffing, inventory, marketing, and working capital. Conducting a comprehensive budget analysis and considering alternative funding sources or financing options is essential to ensure adequate funding for launching and sustaining a successful restaurant venture.
