How to Open a Restaurant: Essential Elements

The Ultimate Guide: How To Buy a Restaurant

Management 14 minute read 5th October 2020

Buying a restaurant is no small feat, but it’s one that countless people have made a success of.

The good news is that it doesn’t require shed loads of investment or capital expenditure. There’s certainly a degree of that, sure (you can’t go into this with completely empty pockets, after all), but if you have the passion, desire and plan for a great customer experience, you can become a successful restaurant owner.

In this guide, we’re going to look at the top-level requirements for buying a restaurant. We’re not going to get too deep into the weeds, because that’ll inevitably put you off. This guide is simply designed to get you started on the groundwork needed when buying a restaurant.

Trust us: when you get going with this, you won’t want to stop.

Is now really a good time to buy?

is now good time to buy restaurant

At the time of writing, the world is slowly reopening following the COVID-19 lockdown, and confidence in the hospitality industry is, understandably, pretty low.

This may be forcing you to question your decision to buy a restaurant. After all, is buying a restaurant in the wake of a pandemic really the best idea?

However, the industry needs to get back on its feet - and it will (check out our recommended read on how resilient the restaurant industry is to recessions at the bottom of this post). Customers will return, both in person and as part of the huge online ordering movement.

Enter the market now with a fresh idea and positive mindset, and you’ll discover a hungry and thirsty customer base.

The following restaurant industry statistics from the National Restaurant Association should give you plenty of encouragement:

  • the restaurants industry’s sales for 2020 are projected to be $899 billion (that’s still possible!);
  • nine in ten restaurant managers started in entry-level positions;
  • the majority of restaurants (seven in ten) are single-unit operations;
  • 63% of customers would rather spend on an experience than an item; and
  • the number of middle earner jobs in the restaurant industry grew three times faster than in the overall economy between 2010 and 2018.

How to find the best opportunities

what to ask when buying restaurant business

There will probably be plenty of opportunities to buy great restaurant businesses in 2020 and 2021, but how do you find the best?

To avoid investing in a bad business, you need to ask the following six questions.

1. Can the lease be transferred?

Some restaurant landlords are hesitant to assign leases to new owners - particularly if you don’t have a huge amount of experience.

However, to retain that existing customer base and make the restaurant your own, the lease will need to be either renewed or assigned to you. Ask this question of the landlord before you do anything else.

2. What’s the cash flow situation?

The last thing you want to do is take on a restaurant with a poor cash flow situation - it could even extort the price you pay for it.

This is because restaurants usually sell for a multiple of cash flow (around two times cash flow for all transactions). Look for restaurants with a verifiable, positive cash flow situation.

3. Is the kit in good condition?

Investing in lots of new restaurant equipment will quickly empty you of funds, so look for restaurants that have a decent setup already.

Ask the current owner what equipment leases are in place, how old the most important stuff is and if there are any looming or overdue repairs.

4. Is the drinks license transferrable?

Depending on the country and location in which you’re buying the restaurant, you may need to transfer the drinks license from the previous owner.

This is an important question to ask. Is the license included in the sale? Never assume that it is; you’ll need that license if you want to maximise customer spend and draw as many people to the restaurant as possible.

5. Are there any liabilities?

Unpaid tax, health code liabilities and employee disputes are just some example of liabilities you’ll either want to avoid or at least be aware you’re taking on as part of the purchase.

6. What reputation does the restaurant have?

You may have already undertaken your own research on this one, but reputation is everything in the restaurant industry, and it’s vital you know plenty about the community’s opinion of the establishment before buying.

Do any of the negative comments on TripAdvisor hold water? Has there been any local disputes or complaints about the restaurant? What’s most important to the regulars?

Getting off on the right footing with business KPIs

If you read the headline stats about the restaurant industry, you’ll probably be aware that around 17% of restaurants fail during their first year.

For some, it’ll be incredible misfortune, or bad timing, but for many, it’ll be a lack of planning and focusing on the wrong key performance indicators (KPIs).

Before you buy a restaurant business, you need to be aware of the most important KPIs that will help you measure customer satisfaction, their loyalty and how engaged your employees are.

Here are a few to get you started:

restaurant business kpis

  • CSAT (overall customer satisfaction): check out this awesome guide by HubSpot
  • Online reviews: the headline ratings on sites like TripAdvisor will tell you lots even before you dig into individual reviews
  • TTT and TTR (Time per Table Turn and Table Turnover Rate): long waits will probably impact your CSAT, and slow turnover rates will reduce your ability to grow revenue:
    • TTT = Time When the Table Cashes out — Time When an Order Is First Inputted
    • TTR = (Number of Guests Served in Restaurant / Total Number of Tables)
  • Average transaction size: most POS systems will provide reports for this and the up-sell rate - two KPIs which indicate how much customers are willing to spend with you
  • Customer retention: how many regulars do you really have?
    • Customer Retention Rate (%) = (# of Customers at the End of the Period - # of Customers for That Period) / (# of Customers at the Beginning of the Period)
  • Employee turnover: one of the biggest concerns in the restaurant business and capable of impacting all of the other KPIs in this list
  • ESAT (employee satisfaction): it’s not just your customers you should be quizzing!

Things to consider during acquisition

We could write an entire guide on this section, but there are a few key things you need to take into consideration during the acquisition.

For instance, you’ll need to write and iterate your business plan as the acquisition evolves. The more you get your teeth into the business you’re buying, the more you can expand on your USP (unique selling proposition), customer base and overall cost structure.

You’ll need funding, too. Few people are lucky enough to have the entire purchase price in their bank account, so make sure you approach your bank or funder early on in the process and involve them in the due diligence of the acquisition.

Price negotiation. This takes time, and you’ll only be able to make a fair offer once you know the details of the acquisition and exactly what you’re taking on. Remember to factor in refit costs, lease fees, furniture, marketing budgets and the purchase of stock.

Most importantly - don’t go it alone. The acquisition process will be stressful and require lots of second opinions and analysis if it’s to be in your best interests. If you don’t have a business partner, enlist the services of a trusted friend, family member or colleague.

How to enhance your offering

how to enhance restaurant offering

There are some simple things you can do to ensure your restaurant hits the ground running when it comes to the diner experience.

Here are a few ideas for enhancing your offering - from the off:

  • invest in great WiFi - it’s a vital service for guests and presents lots of marketing opportunities for you;
  • take time when choosing decor - make sure it creates a “wow!” as soon as people enter the building;
  • plan to offer online ordering either from the start or in the near future;
  • design an appealing menu which caters for allergens;
  • ensure the bathrooms are immaculate and interesting (“have you seen the bathrooms here?” - a great way to build customer confidence);
  • take time to get the lighting and sound (music and ambiance) just right; and
  • create an awesome bar menu.

3 essential reads for your restaurateur journey

Hopefully, we’ve given you plenty of food for thought. Buying a restaurant is challenging, but ultimately rewarding. Just make sure you read the following guides, too!

1 - Settle any nerves you have about a recession: How the Restaurant Industry Always Bounces Back From a Recession

####2 - Wondering how much you can make as a restaurateur? The Handy Guide to Average Restaurant Profit Margins ####3 - Avoid this one at your peril: Opening a Restaurant: Don’t Forget These Essential Elements

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