subject: Conduct Due Diligence When Buying A Restaurant [print this page] Everybody needs to eat to live, and over time we have turned this requirement into a social activity. Currently, a restaurant is - by far, one of the most popular businesses, and one which could be an even more desirable buying proposition if you happen to have a taste for a specific kind of food!
Always perform thorough due diligence when purchasing a restaurant business, even though "the numbers" or even your "gut," may be telling you that this is definitely the right business opportunity for you. This industry is extremely competitive and there are an array of factors which you should consider. Designate a set span of time, most experts say not less than four weeks, to get a feel for the daily operations of the restaurant your considering. This should allow you to develop a solid understanding of the "real" situation and help you to smooth out any uncertainties before you come to a decision on whether or not to buy.
You have several key areas to investigate including the premises, the financials, the equipment, lease, the operations and the employees. Do not be afraid to bring in experts, including an accountant experienced in the food business to help you, but as you go through your observation period, use your general business sense and a good portion of common sense to observe how everything works, especially from a client point of view.
For your paper and number crunching chores, expect to review the tax returns, profit and loss statements, cash flow worksheets, inventory records, employee records, equipment agreements, maintenance schedules, all necessary licenses, health inspections certificates and a history and copy of the lease.
When it comes to the financials, you have to understand that most restaurants do a large amount of cash business. A surprising number of these business owners elect to siphon some of this off, not reporting it to avoid taxes. Generally, in the long run this activity isn't a good idea, as all the siphoned money could have been applied toward a marketing budget, and when it comes time to buy additional business assets, it can be almost impossible to prove income, or actual worth.
When you actually begin inspecting the property, remember to look at it from an overall point of view, and check into the details too. Can the restaurant be clearly seen from the nearby main roads, is signage the right size, clean and properly positioned? Is there any real competition in the area, and if so, are they overbearing? What was your initial impression when you drove into the parking lot? Check out the external dumpsters and trash removal areas to see if they're well-maintained, and if they're fairly out of sight from the coming and going customers.
Moving inside, what is your first impression of the decor. Is the waiting area pleasant and contributory to the overall ambience? Is there adequate signage for bathrooms, emergency exits? Pay close attention to the bathrooms. They should be in perfect working order, comfortable and impeccably clean and well-maintained. In a restaurant, everything, repeat everything should be clean, presentable and in full working order.
Most of the equipment contained in a restaurant and specifically within its kitchen is subject to certification, inspection and permitting. Check to see that this is all up-to-date and timely. While every element of the equipment should be operated according to the letter of the law, you must also ensure that regular maintenance and cleaning schedules are top-notch. For major items and appliances, see whether contractor warranties are available and can be transferred to you.
Very often a lease can be a potential stumbling block when looking at a restaurant for sale. The landlord will want to ensure that the business is being operated as efficiently as possible and may be wary of transferring or issuing a new lease to someone who does not have much experience. Look for terminology within the lease stating that transfers will "not be unreasonably withheld," and aim to ensure that you get at least as favorable terms during your tenancy. This would be a good time to assess the overall viability of the environment within which the business operates. If in a strip mall of some kind, are the anchor stores in good shape and do the majority of other businesses also appear sound? You do not want to see an anchor store disappear and the overall visitor level to the area decline.
When you analyze the operations of the business, you want to learn how the current owner operates and whether there are any immediate issues or challenges that you will have to take into account. Look closely at any "special arrangements" or unique selling points that involve a particular individual, a style or presentation of food. You want to be sure that these elements are transferable or will be present when you take over.
A restaurant will likely rise and fall on the strength of its employees. While you can expect a high turnover in any kind of restaurant, if you see some loyal staff and a good "team spirit" this can be a definite plus. Check to see how people are hired, the terms and conditions offered to them and exactly how they are paid.
While you should insist on an observation period, before you are involved in formal discussions with the seller why not kill two birds with one stone and visit the restaurant for a few nice dinners or lunches with other companions? You don't have to show your hand at this stage and can get a really good feeling by observing how the staff come and go, the operation within the kitchen ideally and in general get an opinion of whether everything is orderly and well-structured during the busiest times.
by: Richard K Parker
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