The net profit of the restaurant can be very difficult to determine. Restaurants tend to be notorious for being run by owners was second books for people that are hiding some of the cash profit. Tax returns are not always a reliable source of profitability. Business owners prefer not to pay a lot of tax.
Conduct a thorough due diligence. Don’t try to do this on your own. Recruit a good attorney, accountant, and industry expert put on your team for determining the right location for you. You may have to look at a lot of different resources such as register tapes, bank deposits, purchase receipts of food and paper, and many other resources.
If you can determine the gross annual sales and got a large part of the hard work done. There are some things you can verify easily such as rent. Remember many people pay a base rent plus common area maintenance fees so confirm the total amount of rent being charged. As a general rule of thumb, rent should be less than 10% of the gross annual sales. Some say that the rent should be no more than 8%.
Here are some other percentages to consider. They come from the 2016 business reference guide. They are only general numbers. Every restaurant has the unique set of numbers. But you can still use these figures to determine if something is out of whack with the financials. Again recruit professional support wherever you are not 100% comfortable with analyzing the business that you’re requiring.
Now, here are the numbers from Business Reference Guide:
Prime Cost (food cost and labor cost combined)
Alcoholic Beverage Costs
Nonalcoholic Beverage Costs
Hourly Employee Gross Payroll
Sales per Square Foot
Rent and Occupancy
Source: Information provided by Jim Laube, founder of www.RestaurantOwner.com