Last year, the restaurant industry saw record high sales and brought in over $790 billion — a $30 billion increase compared to 2016. There is no question that the restaurant industry is trending upward thanks to consumer demand, and many hungry entrepreneurs are cashing in on the fact that going out to eat has become a staple of everyday American life.
We will let you in on a little secret: running a successful restaurant begins long before you fire up the fryers. Feed your entrepreneurial spirit, and keep these top considerations in mind when scouting out restaurants to buy.
Real Cash Flow
Financial records can be misleading and personal estimates can be outright wrong. One of the most important metrics of a restaurant’s profitability is real cash flow. Real cash flow is a figure adjusted for inflation and it better reflects the change in money value.
Real cash flow is a concrete metric of a restaurant’s profitability, and when it comes time to broker a deal, the sales price is usually a multiple of this figure. Be upfront, and ask for documentation that reflects all financial history — especially real cash flow — before reaching a deal with the owner.
Small business ownership is not far from high-school stereotypes: reputation is everything. You could grill up the best pan-seared foie gras in town, but that doesn’t amount to much if locals think you have a rude wait staff, or roaches. Before you go in full-bore, consult the court of public opinion and get a feel for the unofficial reputation of your restaurant prospect.
When you buy a restaurant you’re not just buying the brand, cooks and equipment, but you’re also taking over the property lease. This can cause some logistical issues. Each lease is different, so there are no hard-and-fast red flags to be aware of, but just know that there may provisions that could damper your deal.
For example, many leases require new property owners to start over and be re-approved for the property. To bypass the headache of landlord red tape, contact the property manager as soon as you begin sale negotiations so you can adequately plan for the hoops you will inevitably jump through.
While a non-compete agreement is not implicitly necessary when buying a restaurant, it certainly can’t hurt. There’s a misconception that a non-compete is somehow combative — as if the previous owner has to sign away their right to ever be a successful entrepreneur again. This is simply not the case. A non-compete is not meant to bury the previous owner, but it is actually designed to be an optional provision to protect buyers.
Non-competes are especially useful for small restaurant owners. Historically, mom-and-pop establishments gain notoriety through their recipes, wait staff, and atmosphere — valuable assets that can be easily mimicked. Without a non-compete in place, what is stopping a previous owner from creating a carbon copy across the street and putting you out of business?
This is not to say a deal cannot be signed without the inclusion of a non-compete, but buyer protection should certainly be part of the conversation. You’ll appreciate knowing that you’ve aptly protected your investment.
Not all assets of a restaurant purchase are going to be beneficial. When you close on a business deal you will inherit everything — as they say, “you get the bad with the good.”
When you buy a restaurant you can expect to take on its liabilities. These might include financial burdens such as debts and recurring fees. Also be aware that liabilities extend beyond mere financial obligations. Legal liabilities such as health code violations or labor code violations will also come along with the business. As you search for business prospects be aware of the baggage that might be attached to a purchase.
There are countless factors that play into buying a restaurant. Even the most keen businesspeople can encounter a lemon if the process is rushed. But, as long as you do your homework, stay persistent, and ask the right questions during the scouting process, you significantly increase your chances of cooking up success.