How to Buy a Restaurant: An Ultimate Guide

So you want to open a restaurant. Maybe it's to take your grandmothers' recipes to the masses. Maybe you want to share your love of tacos with the world. A place to call your own, perhaps?

There are generally two ways to go about opening a new restaurant: buying an existing one, or starting from scratch. Each has advantages and disadvantages. In this post, we're going to focus on the former.

Buying a restaurant is, in many cases, the budget-friendly option. You have the advantage of a built-out kitchen with equipment, bars and dining rooms, technology, parking lots, and more. Tack on obtaining permits and licenses, and you could be in for a pretty big check.

How Much Does It Cost to Buy a Restaurant?

The average price for selling a restaurant sits around half a million dollars, according to data from Restaurants for Sale. However, restaurant prices vary widely, based on region, location, and type.

According to Investopedia, a restaurant will generally look to sell for about 25 to 40% of its annual operating income. For example, a restaurant that does $1 million would look to sell from anywhere between $250,000 and $400,000, depending on the area and market

With restaurant startup costs as high as they are, there are clear benefits of buying an existing restaurant over starting from scratch. Once you're ready and funded, here are the steps to take to realize the dream of ownership.

11 Essential Steps on How to Buy a Restaurant

1. Buying a Restaurant Options

Buying an Independent Restaurant

The advantages of buying an independent restaurant include:

• You have complete control over the menu, decor, and other aspects of the business. You can change things whenever you want without having to get approval from anyone else.
• You can hire your own employees and set their pay at whatever level you want.
• You don't have to worry about pleasing any investors or stockholders because you're not selling shares of ownership in your company.
• There aren't any major investors or banks involved with your business, so you don't have to worry about them taking away control of your restaurant if they become unhappy with its performance or direction.

The downside is that there are a lot of hoops to jump through and fees to pay before you can open your restaurant. If you don't have enough money or don't have enough time, this could be too much of a burden on your business.

Another con is that if things go wrong with your business — let's say there's a health code violation or something like that — it won't just reflect poorly on you but also on the name of the company itself (the same goes for any company).

Buying a Restaurant Franchise

A franchise is a form of business ownership that allows you to open a new restaurant or food business with the backing of an existing brand. You'll pay an upfront fee and ongoing royalties, but in return you'll get both the training and support of the franchise organization as well as the marketing power of its brand.

The pros of options for this model include:

• Getting help with marketing, training, operations, and more.
• Having existing customers and suppliers that the franchisee can use to their advantage.
• Negotiating a lower royalty rate than they could if they were starting from scratch.

One major drawback to buying into a franchise is that the buyer generally has less control over the day-to-day operations of the business than he or she would in starting a new venture from scratch.

The buyer will likely have more authority over hiring and firing decisions than in other types of businesses but will not be able to make all of the decisions about pricing, menu items, and location. These will be dictated by the franchisor. Another drawback is that exiting from a franchise often requires paying substantial fees to terminate contracts with the franchisor.

Recommended Reading: The 7 Most Common Franchise Problems (And How to Solve Them)

2. Find Restaurants for Sale or to Franchise

Once you're ready to buy, the first real step is to decide where and start looking for properties. It's not just as simple as looking around town for “For Sale” or “For Lease” signs. You may have to do some digging. See what restaurants have been bought or sold in the past few years to get an idea of what the local market has to offer. The aptly named Restaurants For Sale Online is a good place to start. Other resources include the Restaurant Brokers Association, The Food Service Equipment & Supplies Dealers Association, The National Restaurant Association, and Restaurants on the Move.

“Many landlords would hate to see a site go vacant. If they are seeing that the current operator is seeking to sell they might be more than willing to renegotiate a lease with the new tenant. Things to consider with the new lease negotiation would be seeking a pause on rent increase, some tenant Improvement dollars from the landlord and if the building has parking you should ask for passes for your staff and management at no cost. This will all add up in the long run and pay off for you.” - Salar Sheik @Savory Hospitality

Local commercial real estate brokers, online classifieds, and hospitality associations are also great places to look. Commercial real estate listings are another alternative where people post their properties for sale at no cost (usually) in hopes of selling them quickly. This way, they don't have any expenses associated with maintaining the property until it sells (or rents).

There are a number of websites that list businesses for sale:

• BizBuySell
• WeSellRestaurants.com
• BizQuest

Franchising Opportunities

The first thing you need to do is find out which restaurants are for sale. There are a number of websites that list franchise opportunities:

• Franchise.org - this site has the most comprehensive listing of franchises, including restaurant franchises. You can search by category and location. It offers a free service that allows you to send in your information and they will send back any information they have found on your target company.

• FranchiseHelp - this site is more focused on franchise opportunities in general (not just restaurants), but it does have a good amount of listings for restaurants across the country. The site also offers a free service where you can send in your information and they will send back any information they have found on your target company.

• Franchising.com - this site offers similar services as FranchiseHelp and FranchiseMentor (see below).

• FranchiseMentor - this is another website like FranchiseHelp or FranchiseHelp that will help you find local businesses for sale or companies looking for franchisees in certain areas of the country.

• Franchise Gator - this resource allows you to search for available franchises by keyword, location, and industry type. You can also use this site if you're interested in starting a new business but don't know which industry would work best for your needs.

3. See What Your Local Market Looks Like

The types of information that these listings will have include previous purchases and sales, square footage, zoning information, and information about the building itself such as year built. You'll also want to get an idea of what the competition in the surrounding area is like—is there a popular restaurant across the street that may be fierce competition? Or is it the only restaurant of its kind in the area?

You may want to take a look at the Google MyBusiness and Google Maps listing to get a sense of traffic and compare the number of reviews to other restaurants in the area.

Local demographics are vital to understand as well. Is it a walking neighborhood or a driving one? Is it a middle-class family neighborhood, a college student hub, or an affluent suburb? Understanding the role that restaurant plays in its part of town is essential.

“Understanding the new market we are entering is always a TOP priority. We use a free tool provided by the US Postal Office called Every Door Direct Mail® EDDM to assess the neighborhood residential density, the number of businesses and the household average income. Simply search the address of the location you are investigating up to a 5 mile radius. A simple Google Map search can also give you so much insight. Big warehouses and industrial parks are great for lunch sales, schools are a great opportunity for community involvement and spirit nights to bring awareness to your new restaurant.” - Hengam Stanfield, Co-founder @Mattenga's Pizzeria

4. Find out Why the Restaurant Is for Sale

There are many reasons that a restaurant owner may be putting their restaurant up for sale. Perhaps they've enjoyed a long and successful career and are looking to retire. They may be looking to move on to a new career. They could also be trying to get out of a bad situation—be it management, building, or market related. The restaurant may be good to go with a strong reputation, or in desperate need of a re-launched concept. A clear understanding of why the restaurant is for sale can give you an advantage in everything from negotiating contracts to how to position the reopening once you have the keys. The best way to find out why is simply to talk to the current owner. Come prepared with a list of questions that you'd like to know as a buyer.

5. Determine the Restaurant Valuation

A restaurant valuation is usually performed by a third-party appraiser who is not involved with the business. The appraiser will look at various factors including historical financial performance, future growth potential, market share, and brand strength.

The first step in determining your restaurant's value is to gather information about its assets, liabilities, and other relevant factors. This can include:

• Valuing equipment and fixtures
• Valuing real estate
• Valuing intangible assets like brand equity, customer loyalty, etc.

Source

6. Secure Financing and Funding

There's three fundamental ways in which you can secure financing to buy a restaurant:

Other Investors

If you're looking for a way to secure financing for opening a restaurant, you may want to consider tapping into the capital pool of other investors. The idea is that a group of people combine their funds and share in the profits. This can be done through a partnership or LLC.

Here are two things to consider before getting started:

• The size of the investment pool. The more money you have access to, the more potential investors there will be. You can also look for people who are interested in investing but don't have enough money on their own.
• The amount each investor contributes. Typically, each investor puts up half of what's needed for their share of ownership in the restaurant (usually 50 percent).

Loans or Grants

Often the first step in securing financing for your restaurant is to find a lender that understands the restaurant industry. If you have no experience with restaurants, you may have trouble finding a lender who will approve your loan.

After you have found a lender that understands the business, you need to come up with a solid business plan. The lender will use this plan to determine how much money they are willing to loan you. Next, you'll present your business plan and financial statements to potential investors. Investors are typically looking for high returns on their investments, so make sure that your projections show great profits and growth in sales over time.

Once you've secured financing from an investor or lender, you need to make sure that your loan payments are made on time each month as agreed upon in your contract with them.

Savings

If you want to try and secure financing through savings instead of relying on loans, make sure you have at least $50,000 saved up in savings before beginning any restaurant venture. This will cover all expenses from leasing space, buying equipment, legal fees and other costs associated with starting up a new business.

Calculate how much it will cost you to run your restaurant every month. These expenses include rent, utilities, food and supplies, labor costs, insurance, taxes, etc. Be sure not to forget about tax deductions when calculating these numbers - this makes things easier if you have already filed your tax returns for the year.

7. Negotiate and Establish a Contract

Negotiate on the Main Purchase Details

You've found the perfect location for your new restaurant. You've negotiated a great lease rate, and you're ready to move forward with buying it. But don't start celebrating just yet — there are still a few more steps before you can call it a done deal.

Among the most important things to negotiate before buying a restaurant:

1. Establishing an asking price: The asking price is often where negotiations begin, so having it set at least in your head before you start talking about it will help keep things moving along smoothly.
2. Negotiating terms: The terms of a sale will vary depending on whether you're buying an existing restaurant or one that hasn't been opened yet, but they'll always include some combination of purchase price, financing arrangements, and closing costs (such as legal fees).
3. The seller's guarantee: Some sellers will offer guarantees against any future liabilities that might arise after they sell their businesses. These can be worth thousands of dollars over time, but they can also be extremely expensive if something goes wrong and there is an expensive lawsuit brought against you by someone else involved with the business.

“When establishing and negotiating contracts, remember to pay close attention to the agreement. If possible, get an attorney.

Before signing any contracts, make sure to check if you're buying a restaurant from the landlord or the owner themselves. If you're buying from the landlord, make sure the owner is up to date with their lease payments. Be sure to identify which assets you'll be owning and which ones are being leased. If you're buying from a seller who leases their equipment, make sure to ask about the lease agreement and what are its terms. If some of the fixtures and equipment are not included in the sale, you may need to ask for approval before making any renovations.

Alternatively, if you're buying a restaurant from the owner, you may want to consider a non-compete provision in your purchase agreement. This type of agreement will prevent the previous owner from opening a similar restaurant within a certain proximity of the restaurant you're buying. Having this provision in the agreement will be beneficial, especially if the restaurant has a good reputation in the community. At the same time, you need to ensure copyright, trademark, and patent ownership are included in the agreement. Not knowing whether or not they have intellectual property rights is a common mistake among restaurant buyers. Having this clause in the contract will prevent you from encountering any legal issues with IP.” - Collen Clark, Lawyer and the Founder @Schmidt & Clark, LLP

Establish a Letter of Intent

This document outlines the key terms and conditions of the purchase, and ensures that both buyer and seller are on the same page.

The LOI should include information like the purchase price, any contingencies (such as financing), the timeline for the transaction, and who will be responsible for what costs. It's also important to specify what type of business entity you'll be using to buy the restaurant (e.g. LLC, partnership, sole proprietorship).

Having an LOI in place before starting due diligence can help avoid potential disagreements down the road, and make sure everyone is clear on what's being agreed to.

Example LOI from CFI

8. Do Your Due Diligence

Once you've determined that you're interested in purchasing a restaurant, and you're on board with why it's for sale, you're going to want to start doing your due diligence. A restaurant is a big purchase, and you want to ensure that you have a complete understanding of the ins-and-outs of what you're looking to buy. Your local hospitality association may also have resources for opening a restaurant in their region.

Things to Consider Are:

• Local Sentiment
• Finances
• Equipment
• Taxes or Violations
• Licenses and Permits

What Is the Local Sentiment Towards the Restaurant?

In the restaurant business, reputation is everything. One bad meal can lead to one less recommendation and a loss of business. On the flip side, one stellar meal can provide immeasurable new business to your dining room. To get a clearer picture of a restaurant's local sentiment, head online. Spend some time looking through the restaurant's reviews on sites like:

• GoogleMyBusiness,
• Yelp,
• Nextdoor,
• TripAdvisor,
• Facebook,
• and local business associations.

Both positive and negative sentiment can have pros and cons. A beloved local institution may garner harsh and quick criticism from existing guests. A less-than-stellar restaurant may turn off new guests. Both situations can also offer tremendous opportunity—but knowing what you're buying will set you up for success.

Find out the True Costs

Understanding their food and labor costs, monthly overhead, and a clear picture of the business cash flow. A complete picture of both fixed and variable costs include labor, food and beverage, utilities, linens, equipment, supplies, technology, and even things like music licensing. The restaurant seller should be able to provide you with a look at the restaurant's books. For the full picture, here are some additional questions worth asking:

Questions to Ask: Find out the True Costs

• What vendors does the restaurant purchase from and have they been paid on time?
• Do any contracts exist with vendors?
• What are the last 3-5 five years of financial statements? Has the business improved or declined?
• What percentage of the total costs is food?
• What is the cost of goods sold (CoGS)?
• What is the labor cost percentage?
• Is the restaurant turning a profit?

Recommended Reading: The Ultimate Guide to Restaurant Costs

Taxes and Violations

Taxes. They're inevitable in life and in business. When buying a restaurant, you're going to want to make sure that someone else's taxes don't become your problem. You may be on the hook for any taxes owed or debts held by the previous owners, so knowing where your potential purchase stands is essential.

Other violations you may encounter are health code, building code, and pest violations. A history of any of them can impact your ability to run a successful business at that location. If the owner is not forthcoming with that information, you can find history via local government websites and health departments.

Questions to ask: Taxes and Violations

• Are all taxes up to date and paid? This includes but is not limited to sales tax, payroll tax, property tax, and corporate tax.
• Have there been any tax audits in the past three to five years?
• Have there been any health or fire code violations in the past five years?
• What have health code ratings been for the past three to five years?

Equipment Costs and Conditions

More than likely, you'll be purchasing all of that equipment when you buy a restaurant. Just like buying a used car, you're going to need all the information you can get about the restaurant's equipment and furnishings. Get service records, purchase information, and warranty information from the owner. You'll also want to bring in your own experts to check in on the plumbing, electrical, heating, ventilation, and air conditioning to ensure the building itself is running in top shape. If anything isn't up to snuff, work with the current owner to have it repaired or replaced so you don't end up fronting the cost once you get the keys.

Questions to Ask: Equipment Costs and Condition

• When was the last time the walk-in cooler or range hood was serviced?
• Have there been any major equipment repairs in the last six months to a year?
• Has there ever been any major water, fire, or earthquake damage?
• Which piece of equipment breaks down the most?

Licenses and Permits

The restaurant business is full of different types of licenses and permits that allow them to do business. Here are some you'll come across:

• Liquor Licenses
• Food Service Permits
• Certificate of Occupancy
• Sign Permits
• Health-related Permits

Here's a full list of permits that you may encounter in the restaurant business

Questions to Ask: Licenses and Permits

• Are all permits and certificates required up to date?
• Is the liquor license included in the sale?
• Were there any issues in obtaining permits or licenses?

These are just some of the items that should be included on your due diligence checklist. It is imperative that you spend a considerable amount of time and energy on this stage. The more you know about what you're buying, the more chances you have at running a successful operation.

Negotiating Contracts

Once you've gotten to know your future restaurant inside-out and sideways, it's time to get serious about the legal process. The easiest way to go through this is to hire an experienced restaurant attorney to guide you through. Reach out to local restaurants and hospitality associations to steer you in the right direction. You want someone on your side who knows the business, can help explain and negotiate contracts and make the process as smooth as buying a restaurant can be.

It's also important that you take the time to read and understand any contracts or legal paperwork yourself. It'll help the next time you buy, and ensure that nothing goes unexplained.

Make sure you come to the negotiating table with a solid offer to speed up the process. Once your offer and the terms of the deal have been accepted, it's time to think about getting the restaurant running your way.

9. Finalize the Purchase Agreement & Transition

Finalize Last Small Details

After the due diligence process is complete and the potential restaurant buyers are cleared, there are a few small details that still need to be finalized. T

These include things like the transfer of licenses and permits, finalizing the lease or purchase agreement, and making sure that all of the equipment is in good working order. Once these details are taken care of, the sale can officially be completed and everyone can move on to their new ventures.

Draft and Sign a Purchase Agreement

The purchase agreement is the legal document that outlines the terms of the sale of any business. It is important to have a purchase agreement in place before any due diligence is started by potential buyers. This document will protect both the buyer and the seller in case something goes wrong during the transaction.

The purchase agreement should be signed by both parties and should include all relevant information such as:

• The name and address of the seller
• The name and address of the buyer
• A description of the restaurant business being sold
• The purchase price
• The method of payment (cash, loan, etc.)
• Any contingencies that must be met before the sale is final (due diligence, financing, etc.)
• Signatures of both parties

Develop a Transition Plan for the Previous Owners

The first step in developing a transition plan for the previous owners after due diligence is cleared from the potential restaurant buyers is to establish what needs to be accomplished during the transition period. This will involve an assessment of the current state of the business, including any outstanding issues that need to be addressed. Once this has been established, a plan can be put in place to ensure that all of the necessary tasks are completed before the new owners take over.

One of the most important aspects of the transition process is communication. The previous owners should keep the new owners informed of any progress made on outstanding issues and should provide them with any relevant information or documents. It's also worth keeping employees informed of the changes taking place so that they can be prepared for the transition to new ownership.

10. Make a Reopening Plan

You've got the keys and you're a restaurant owner! It's unlikely that the restaurant will remain operational as the owner transitions out, so you'll need to come up with a reopening plan. Here are some of the questions you'll need to ask.

If you're planning on keeping the restaurant name and concept:

• What staff changes need to be made?
• Will the menu change at all?
• Will the branding remain, or will there be updated logos, signage, etc.

If you're planning on changing the restaurant name and concept:

• What will the new concept look like?
• What staff will remain and who needs to be hired?
• What is the new name and design of the restaurant?
• What needs to be renovated, replaced, or removed?

Recommended Reading: How to Make Your Grand Opening a Grand Success

11. Open Your Restaurant

The long process of searching, due diligence, contract negotiations, and planning is over: the big day is finally upon us. Before you cut the red tape, let the public know about it!

Restaurant marketing is more important than ever before. Make sure you have access to all of the restaurant's social media and internet accounts to promote the opening. If you don't already have a marketing plan, it's time to create one.

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Frequently Asked Questions

Can you open a restaurant with little money?

Yes, you can open a restaurant with little money. However, it will be very difficult to do so and you will likely not be successful without a significant amount of planning and preparation.

Without enough capital, you will not be able to purchase the necessary equipment or ingredients, hire adequate staff, or promote your business effectively.

What are some red flags when buying a restaurant?

One big red flag is if the current owner is not willing to show you the financials of the business. This could mean that they are hiding something, such as not making as much money as they claim or carry a higher debt load than they are letting on.

Other red flags include an outdated or run-down-looking facility, lack of a consistent customer base, and high employee turnover. While not all of these things are deal breakers, they should be taken into consideration before making an offer on a restaurant.

Closing Thoughts: How to Buy a Restaurant

The dream of restaurant ownership is alive in many. Buying an existing restaurant is an easier and more cost-effective way to get into the business.

By making sure you do as much research and due diligence as possible, you can be assured that you're making the right purchase. We hope this guide will give you the tools and ideas you need to make that decision.