What Not To Do When Buying a Restaurant
What Not To Do When Buying a Restaurant
A lot of people think it's a good
idea to buy a restaurant and make money by catering to one
of the most basic of human needs. And there are a number of success stories to
reinforce the idea that owning a restaurant equates with achievement in
business. That goes for the fast food restaurant owner in a
high-traffic location who can do enough business in a few hours to cover all
the day's expenses and make a profit, and for restaurateurs whose popular
dining houses help provide them with notoriety and prestige in their
communities.
But
there also are plenty of stories that don't have happy endings. They too should
be kept in mind when someone is deciding what kind of food service to buy and
how much to pay for it, as well as if this really is a good idea. Some of the
most important things "not" to do when looking for a restaurant to
buy are:
1. Not understanding the difference between a fast food
service and a dining establishment.
They
both sell prepared food, but they almost are like two separate kinds of
businesses. Business opportunities professionals often complain about
restaurant "buyers" who can't make the distinction, and so it's
difficult to give them good service in searching for an appropriate business to
buy. And of course, there are many hybrids, such as a pizza restaurant that has
a limited menu and fast meal turnaround - characteristics of a fast food
operation, but also accommodates the customers who aren't in a hurry to leave
and may remain at the table for more than an hour, which is a characteristic
more closely related to a dining establishment. Looking at the various options,
and without having a clear idea of what he or she is looking for, the buyer may
spend a lot of time examining completely unsuitable businesses and remain
confused about what to buy.
What may help a buyer understand the differences is to carefully examine the financial reports. Would you prefer to work with part time employees and typically high employee turnover in a business that makes dozens of sales per day and is profitable only if it has a high volume of customers? It appeals to customers who want to pay less money for a meal, often under ten dollars for dinner, and be able to leave quickly. If so, the fast food business might be the right choice.
The dining establishment owner, on the other hand, works to build a reputation for good service and high-quality food. There won't be as many customers coming through the door as in a fast food place, and the bill for each customer will be higher. While the fast food operator will probably generate gross profit of a dollar or two per meal, perhaps less, the dining establishment owner, with lower rate of customer turnover, will need to realize a higher markup on food and employee costs for each transaction in order to pay all the bills and show a profit.
What may help a buyer understand the differences is to carefully examine the financial reports. Would you prefer to work with part time employees and typically high employee turnover in a business that makes dozens of sales per day and is profitable only if it has a high volume of customers? It appeals to customers who want to pay less money for a meal, often under ten dollars for dinner, and be able to leave quickly. If so, the fast food business might be the right choice.
The dining establishment owner, on the other hand, works to build a reputation for good service and high-quality food. There won't be as many customers coming through the door as in a fast food place, and the bill for each customer will be higher. While the fast food operator will probably generate gross profit of a dollar or two per meal, perhaps less, the dining establishment owner, with lower rate of customer turnover, will need to realize a higher markup on food and employee costs for each transaction in order to pay all the bills and show a profit.
2. Not being prepared for the demands of the food service
industry.
Regardless of what a seller may say,
a restaurant - either fast-food or dining - is not easy to operate and may not
be suitable for a buyer who hasn't got experience in the business. The best
choice, if someone wants a business in this industry but doesn't know much
about it, might be to look at offerings from a franchisor, or a business owner
in a franchise system who wants to sell. Most of the highly successful owners
of dining establishments are chefs who actually spend part of their time
preparing meals.
Since less skill is required to prepare hot dogs and french fries, or scoop ice cream cones, the fast food establishment owner may find the most productive way to operate the business is to hire people to handle food prep while much of the owner's time is spent analyzing business patterns, working on marketing campaigns and dealing with vendors and employee issues. The individual with a business background will be most likely to succeed.
And buyers who see food service business owners spending time in what appears to be the leisurely interaction with customers and suppliers, should not get the impression that the work is not demanding or the hours brief. Many people in this industry, regardless of the type of restaurant they operate, put in at least eight hours a day, and many, if not most, need to be at their business at least one weekend day every week.
Since less skill is required to prepare hot dogs and french fries, or scoop ice cream cones, the fast food establishment owner may find the most productive way to operate the business is to hire people to handle food prep while much of the owner's time is spent analyzing business patterns, working on marketing campaigns and dealing with vendors and employee issues. The individual with a business background will be most likely to succeed.
And buyers who see food service business owners spending time in what appears to be the leisurely interaction with customers and suppliers, should not get the impression that the work is not demanding or the hours brief. Many people in this industry, regardless of the type of restaurant they operate, put in at least eight hours a day, and many, if not most, need to be at their business at least one weekend day every week.
3. Not being willing to pay a premium for a worthwhile
restaurant.
Yes,
that's right. It's smart to pay 2.3 to 2. 7 times seller's annual adjusted
earnings from a coffee shop or American food restaurant that shows a steady
level of business and some increase in revenues over the years as its menu
prices adjusted upward to stay current with increased operating costs. But it's
not smart to insist on paying a price arrived at by using a standard industry
multiple when the business is in a rapidly growing area, or has a long-term
under-market lease, or when the seller agrees to stay on to train and to cook
for six months at little or no cost to the owner.
Buyers
seeking all kinds of businesses, but particularly when looking at restaurants
sometimes encounter offerings worth more than the industry's average formulae;
and priced at what they're worth. The trick is to know when you've been shown a
business that is better than average, and to have the good sense, if you're
able, to "pay up" in order to buy it. I'm reminded of this
failure, the failure to meet a price for a great restaurant, every time I drive
by a business that I know was sold for a multiple of, say, three times owner's
annual adjusted earnings. Usually those businesses are doing very well. And
often I am reminded of restaurant buyers who are now kicking themselves because
they were too hung up on the standard formula, or paralyzed by the fear of over
paying, to take advantage of a good deal while they had the chance.
While
it's true that many people who buy a restaurant in California know what they
are doing and make smart choices, there also are many people interested in the
food service industry who are likely to fail to buy a sound restaurant - or any
business at all - because they don't understand the business, aren't prepared
to work successfully in the business or are unwilling to pay what a good
offering is worth.
4. Buying A Restaurant Without Checking Out The Competition
In order to buy a restaurant, savvy buyers should perform their
due diligence on everything from the financial aspects of the deal to a
restaurant's popularity and menu and everything in between, including the local
competition. When investigating the competition, most entrepreneurs looks for
competitor restaurants in the same price range, those that offer the same style
of food, have similar atmospheres, or cater to a similar demographic.
5. Getting Blindsided By This Competitor When You Buy A Restaurant
There are some competitors to a restaurant business that an entrepreneur might not see beforehand when they buy a restaurant. Not every competitor is another food service establishment down the road with a bright neon sign advertising the same food that you want to sell.
What would happen if, three months after you buy a restaurant,
the main road in front of your facility is shut down for long term
construction? Now your restaurant is inconvenient to find and get to, which
will severely hurt your business. Did the previous owner know that the road
work was scheduled and that is why they sold? That doesn't matter; what does
matter is that a little bit of research is required to prevent a catastrophe
like this from happening when you buy a restaurant.
Thankfully, you can check on this contingency before you buy a restaurant. Look up the local and state transportation agencies in the phone book or online. They will list upcoming road closings and construction online and via phone if you call. This is a vital step during due diligence when you want to buy a restaurant.
6. Not Signing a Non-Compete from The Previous Owner When You Buy A Restaurant
Thankfully, you can check on this contingency before you buy a restaurant. Look up the local and state transportation agencies in the phone book or online. They will list upcoming road closings and construction online and via phone if you call. This is a vital step during due diligence when you want to buy a restaurant.
6. Not Signing a Non-Compete from The Previous Owner When You Buy A Restaurant
That's right -- the seller that just sold you their business could end up being a potential competitor. Without a non-compete agreement, there is nothing stopping the previous owner from opening a new business and competing with you. Worse yet, they can entice former customers into the new restaurant and hire old staff to work in their new restaurant.
When creating a non-compete agreement, it is always best to consult with a legal representative. A non-compete agreement must be clearly written with discreet terms in order to be legally valid. Typical terms might include a restriction on the previous owner from opening a competing restaurant in the surrounding area for at least two years.
When it comes time to perform your due diligence and buy a restaurant, be careful of these 'hidden' competitors that can drain your business.
Article By: Globe St
  
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