Across 96 different categories, sales of existing restaurants represent over 21% of all businesses sold over the last two years in Florida. I admit that often I encourage Corporate Refugees, Enterprising Veterans, and Visa Seekers to look at other types of businesses if they don’t have any restaurant experience. But requests for restaurants remain the most common request.
So, I am sharing this article to support anyone seeking to fulfill their restaurant ownership dream.
Almost everybody has eaten in a restaurant. Many of us have great ideas about how certain restaurants can make more money or be more effective. However, most business buyers realize that Americans hunger for satisfying dining experiences.
2020 drastically challenged most restaurant owners. Carry-out and pizza restaurants seemed to do well. But many traditional dining restaurants suffered miserably.
This was especially true in environments where it was tough to create outdoor seating or when the owners couldn’t develop innovative and creative ways to compensate for covid’s influence.
Quite often, restaurants have financial records that are difficult to decipher fully. Additionally, the 2020 year strangled many restaurants, and owners are eager to show that their restaurant is performing well again. Therefore, be cautious as you investigate buying a restaurant. Trust, but verify is the rule. Always seek legal and accounting advice whenever in doubt.
Here are a few tips to aid in your restaurant acquisition.
Trust, but verify is the rule. Always seek legal and accounting advice whenever in doubt. Get support from professionals who understand small businesses and restaurants.
Gross Revenues are king. Many operators minimize their taxes by applying write-offs that are not essential to the business operation. It is a lot easier to profit from a restaurant generating $1 million a year than one generating $250,000 a year in gross revenues. Carefully analyze the numbers and compare the business in question to industry averages. Confirm the standard margins for food, labor, utilities, etc.
Make sure the rent is in line with the gross revenues. While you might be able to adjust food costs or labor costs, rent usually will be the same month after month. So be cautious when rent is higher than 10% of the gross revenues.
Look for a restaurant with a stable staff that has been at the location for an extended period. Having a good workforce in place is a challenge for businesses like restaurants. Despite fewer people working in the post-Covid environment, having a set of key long-term employees reflects good restaurant leadership and management. Consider acquiring a business where you can learn from the owner and take over A loyal and well-trained staff.
Don’t reinvent the business all at once!!! This rule applies to almost every industry. Unless you own other restaurants and want to acquire second-generation restaurants to grow your brand, buy a restaurant you can live with for a while. It’s OK to make adjustments like cleaning up the business and getting new uniforms on the staff. But hold off on totally reinventing the menu or spending a lot of money on infrastructure until you fully understand the customers, the competition, and the marketplace. Run the business just like the other owner was running out for the first six months. Really know what you’re doing before you invest a dime. I’ve seen plenty of people lose their shirts by spending a lot of upfront money before fully understanding with the customers want. It’s not about your wants. It’s about the customers that will really count and get them back.
Consider used equipment. When you must replace equipment, consider using pre-owned equipment. There’s plenty of great stuff around. Go to a traditional, respected restaurant that specializes in used restaurant equipment. Hold onto your cash as much as possible.
Truly focus on what your customers want. Realize more people are looking for home-delivered food choices. There’s more talk about ghost kitchens solving the needs of communities. Fast-casual seems to be still growing in demand and value.
Get educated and connected. Subscribe to magazines like Nation’s Restaurant News (https://www.nrn.com).
Join your state Hospitality Association (i.e., https://frla.org). Attend their online and in-person trade shows.
Get to know some of the top restaurant owners in your community outside of your community. Ask them for some time, get their thoughts, and listen to their insights. Be willing to pay them accordingly.
Create a business plan. Even if the restaurant you are buying seems to be running perfectly well, chart your course and keep on track. You can find a great outline on the SCORE website (https://tinyurl.com/4cm4w5zd), but many other great tools exist.
Get a coach who specializes in restaurant operations. A good one will be worth investing in helping you for at least your first year. Whether you are new or experienced, having someone keep you accountable to your goals will be well worth the investment.
Compare several options. Do not get emotionally attached to an old favorite. If you want to buy a restaurant in Florida, this YouTube video will help.
Remember to at least be able to confirm top-line sales. Finally, realize plenty of great opportunities but remember, “not all that glitters is gold.”
If we can be of assistance, reach out. Visit us at BuyBizUSA.com.
Thanks, and good luck.
Brian Stephens – Legacy Venture Group the USA
I started working in restaurants at age 15 at the Hilton Inn in Naples, FL. I tended a bar in college near UF and eventually created Miguel’s El Sombrero y Cantina north of Atlanta, GA.
You have a vast array of transferable skills. Open your mind to consider many types of businesses you can run. Many who have not had restaurant management experience become quite successful. Time and time again I hear people come to us with incredible backgrounds who have narrowed down their options to a very limited number of businesses because they think that what they have done in the past is all they know.
One of our most wonderful clients came to us with exactly that type of thinking. He had years of experience in accounting, years but no real experience in food, liquor or customer service. But he had great transferable skills in terms of leadership, business analysis, and management. He has now run one of the most successful restaurants and bars on a little nearby Florida island. It turned out that he came to realize that he had a great set of skills that allowed him to be a great leader, a great business development person, and the great manager who took the business and significantly increased its profitability in the first year. He has done so well that he now keeps an eye out for his next acquisition.
If you are willing to learn and work hard, at least at first, you may find yourself in a similar position. Look at the backgrounds of people like Ray Kroc (McDonald’s) or Howard Schultz (Starbucks). If you desire it, then learn it, prepare, for it, and then do it.
To start with, yes! We have had clients do exactly that.
When buying an existing business, if the records are good, your credit is reasonable, and you can show that you are likely to be a good leader of the business you wish to acquire, you may be able to get an SBA loan. That means you can buy an existing business for 20% down, and sometimes as low as 15% or 10% down depending on the bank and the circumstances.
Small business loans allow individuals to attain Legacy Investment Parity (LIP). LIP allows you to invest a certain amount such as $100,000 and, after paying all expenses, including the banknote the business will provide at least that initial investment amount, which in this example means you can take home $100,000, an annual DE. Seller’s Discretionary Earnings (DE) or Adjusted Net generally refers to the amount of money a single owner who actively manages the business full-time could take home yearly.
NOTE: We stated ‘one working owner,’ not earnings from multiple family members working.
While only a very small amount of businesses (less than 7.5% on our last survey) that are on the marketplace can provide this type of return, they are certainly worth taking a closer look at.
Visit SBA.gov for details or visit your local bank.
Welcome to RestaurantMaker.com
Not all of existing restaurants have terrific records. And not all are truly profitable. To begin with, one must have a common understanding of what is meant by profitability. Owner benefit, seller’s Discretionary Earnings (DE) or Adjusted Net generally refers to the amount of money that a single owner who actively manages the business on a full time basis could take home yearly.
While accountants arrange tax returns so that business owners can show a small bottom line allowing the owner to pay the minimum taxes legally, determining owner benefit or DE often requires adding back optional deductions that are used to minimize net profit of the business. It is important to do this consistently when comparing different businesses so that you can make a fair and accurate decision on the quantitative aspects of the business.
A copy of the formula that we use to determine sellers discretionary earnings or DE, can be found on our website, BuyBizUSA.com. However your accountant is probably also well aware of calculating this factor.
But now imagine two similar restaurants making about the same amount of money. Would there be other factors that you would consider
Besides the quantitative aspects of the restaurant, scrutinize the qualitative aspects of the restaurants you are considering.
- Have the sales been going up or down over the last few years?
- How likely will the business run without a hiccup if a new owner takes over?
- Is new competition coming into the marketplace?
- Does any one particular customer make up a significant portion of the profitability of the business?
- Will the seller sign and abide by a good non-compete clause?
- Does one have a more stable and established team of employees?
- Are there changing neighbor or competitor factors occurring near one of restaurants you are considering?
- How long does the lease run?
- Is there training and support?
- Is this restaurant is a good fit for your skill set and passion points.
See table below for an example of how answers to some of the above questions can influence you decision.
Imagine two nearly identical businesses that have both been around about 15 years, grosses $1MM and provided $150 in benefit to the owner last year. They sound similar but what if:
- Sales increased $100 per year over last five years
- Owners take 4 weeks vacation each year
- Sales tied to the brand, not the owner
- No one customer represents more that 2% of sales
- Sales decreased $100 per year over last five years
- Owner’s first vacation in 15 years was to recover from a heart attack last year
- Owner is close friends with all the customers
- Brother-in-law connected the company with a of a large local manufacturer that buys 30% of the products and services
Here is a note on restaurants from one of our favorite resources – The Business Reference Guide.
“Restaurant industry sales are expected to reach $783 billion in 2016. Although this will represent the seventh consecutive year of real growth in restaurant sales, the rate of growth remains moderate. The restaurant industry will remain the nation’s second-largest private sector employer with a workforce of 14.4 million.”
See tons of great restaurants, bars and pubs for sale – click here
he restaurant industry can be a challenging industry to enter but if you have the passion, fire and the drive you can find success. Find a business that you can truly be passionate about. It’s easier to turn an average business into a great one if you can be passionate about it, than it is to maintain profitability of a business that you really do not enjoy.
Do your research! Consider your skill set. Seek the advice of friends and advisers. Open your mind to different options. Conduct a detailed and professional due diligence on any investment that you are considering. Find a business you can be truly passionate about.
Once you have found a great business and are ready to make an offer, keep this Legacy Tip in mind. “Buy based on potential, pay based on performance.”
Buy a restaurant you believe you can improve and grow. But never overpay for that opportunity. Don’t try to beat the Seller down either. When you find something you like, move forward. Offer a fair price. Spend your energy on getting ready to take it to the next level.
Opportunities are relative to the buyer. Just because someone you know thinks a particular business is a winner or a loser, you need to decide for yourself in the end. What might be a terrible investment for one person, can be a great opportunity for another. You are buying an existing operation but you are getting an opportunity to take the restaurant to the next level. When you find something you can be passionate about, go for it. Good luck on your venture to great business ownership.