If you’re like most, you have a few favorite restaurants you like to patronize with your family and friends. It might have crossed your mind at least once while you were at one of these establishments that owning a restaurant would be a fun — and perhaps lucrative — investment. Now you’re wondering how to buy a restaurant.
Before considering buying a restaurant, it’s critical to consider your desired level of involvement. Whether it’s been a lifelong dream or simply another investment to add to your portfolio, ensuring a successful restaurant investment may require a massive amount of hard work.
When you buy an existing restaurant, many of the initial investment hurdles and growing pains can be avoided. This benefit is especially true for corporate restaurant chains.
Because it’s been done so many times, buying a restaurant has been broken down into a fairly standardized process with a handful of steps. But before you start down the road of purchasing a restaurant, there are a couple of important factors to consider.
Is Buying a Restaurant a Good Investment?
The restaurant industry is projected to hit $898 billion in sales by the end of 2022. That’s $34 billion more than pre-pandemic 2019 earnings. That amount of capital can make investing in a restaurant very appealing. However, the industry still faces uncertainties from supply chain challenges, food shortages and consistently increasing food prices.
If you’re willing to take on those challenges and a significant amount of risk, buying a restaurant can be an excellent investment. A successful restaurant can see great returns, but choosing the right one requires a deep understanding of the industry. Just because a restaurant is for sale and seems profitable doesn’t mean it’s the one you should buy.
The fact that a restaurant is for sale typically indicates there could be underlying issues. If you’re considering purchasing a restaurant, you must be prepared to identify the problems and develop solutions. If you’ve got your sights on a specific restaurant, ruminate on these issues before pulling the trigger.
5 Factors to Consider Before Buying a Restaurant
If you’re a seasoned restaurateur, you probably wouldn’t need to be reading this article. You might need a professional to help you along the way. Don’t be afraid to hire a restaurant consultant to help guide you through the process. Below is a list of some critical factors to consider before purchasing a restaurant.
“Location, location, location” is a restaurant industry trope that, while very accurate, is about more than being on a busy street corner. Other factors, such as parking, signage, foot/street traffic and capacity, contribute to whether a restaurant is in a great location.
Other factors that play into location are market saturation and nearby complementary attractions. If there are already seven Italian restaurants within two square miles of the location in question, buying a particular restaurant and turning it into a fine Italian dining establishment will be risky. Competitive advantage is critical for a restaurant to be successful.
Also, be on the lookout for surrounding real estate that can draw in new customers who otherwise might not visit your restaurant. Being near sports stadiums/event arenas, public parks/gathering areas, heavy shopping districts or anchor tenants can significantly boost a restaurant in the location category.
Demographics of the surrounding area play a significant role in location as well. Understanding your surrounding target market’s average age, income and spending habits are critical for success. Unless your restaurant is serving Michelin star-level food (or something very unique), or you’re near something else that will draw in new customers, most people won’t travel far to dine at a restaurant.
A study by the CDC shows that the median distance people travel to eat at a sit-down restaurant is 1.6 miles. It’s imperative to offer cuisine people in the immediate area can afford and are likely to enjoy.
3. Licenses and Permits
Restaurant newbies often overlook fixed operating costs such as licenses and permits. A restaurant owner must obtain many licenses and permits to remain open for business.
While the licenses and permits needed vary depending on each city, their costs should be accounted for when drafting pro forma income statements. Otherwise, actual profit margins can be skewed, and owners can wind up scrambling to make up the difference. If you’re looking to update and add on to a restaurant, rezoning fees might be charged as well as fees for pulling standard building permits.
4. Local Talent Pool
Unless you’ve worked in the restaurant industry prior to buying a restaurant, it might be hard to understand how challenging finding and retaining a good team of employees can be. In fact, this challenge is a primary reason restaurants shut down.
Some questions to ask yourself are:
- Are there many successful restaurants in the city/town?
- Is the area renowned for outstanding dining/cuisine?
- Are there any culinary schools in the area?
If the answer to all these questions is yes, chances are there will be enough local talent to sustain a business. Fast food restaurants are one thing, but if you’re trying to open an original concept restaurant, you’ll need to be able to hire skilled back of house (BOH) and front of house (FOH) staff.
The restaurant industry has an extremely high employee turnover rate, regardless of how well a business is run. Larger cities with reputations for great restaurants have an easier time finding talent than small towns. It’s not to say that your five-star chef can’t mold inexperienced cooks into great future chefs, but the process is time-consuming and costly.
5. Planning on Rebranding?
A primary reason people buy existing restaurants is that they come fully equipped with trade fixtures. But, changing the concept over from the previous owner’s vision can be challenging. If the restaurant already has loyal customers, minor changes will likely be welcomed. However, going from a BBQ restaurant to Asian fusion might require an additional marketing effort to pull in new clientele.
If a full rebrand is a goal, make sure you devote some extra dollars to the marketing budget. For a restaurant that’s been vacant for some time, this effort might not be as necessary.
How Much Does It Cost to Buy a Restaurant?
The average cost to buy a restaurant, including the building, is $3,734 per seat, or about $425,000 for a 114 seat restaurant. You’ll need at least 10% of the total restaurant building cost for a down payment.
As with any parcel of commercial real estate, these figures can change wildly depending on location, restaurant size, the type of food service tenant you choose, and whether you can afford to pay cash upfront (called a cash-buy) or whether you’ll need financing.
For example, quick-service restaurants (QSRs) like McDonald’s, Starbucks and Taco Bell are the top revenue-producing restaurants in the U.S. To open a McDonald’s restaurant franchise, you need at least $500,000 in liquid assets. To open a Taco Bell, you’re looking at $750,000. Wendy’s? $2 million.
But you should know that you don’t have to open a franchise or start a restaurant business to invest in restaurant real estate. Instead, you can buy only the building, or contribute to a real estate company that buys it. In this case, you’d be a limited partner, which is truly passive income.
QSRs tend to be located on outparcels and busy corners. With a national tenant like McDonald’s and common long-term single-tenant triple net (NNN) leases for QSRs (10 to 20 years), you won’t have to worry about losing money due to the restaurant going out of business.
There are some critical factors to consider when it comes to the cost of a restaurant.
First, while you might be able to find a restaurant at the average price of $425,000 the odds of it being in a profitable area are low. It’s likely a major fixer-upper.
Second, if you’re looking to buy ownership rights of an existing restaurant, it must have excellent cash flow records for it to be a worthwhile investment. Check out the below listings of restaurants in the New York area to get an idea of how critical location is to a restaurant’s success.
A very attractive investment opportunity, this freestanding QSR has a brand new 20-year lease with KFC. Better yet, the owners already negotiated 7% rent escalations each year into the lease. A truly passive investment, you’ll need about $1,892,000 to buy it, or invest with a group.
This regional chain still has 3.5 years left on its lease. For a starting bid of $200,000, this restaurant likely needs work, and possibly a new tenant in a few years. However, it is a great opportunity for creative and well-connected restaurant investors to get in for cheap and revamp the property when the time comes.
This mixed-use infill development hosts luxury condos on the upper floors and a bar and restaurant on the ground level. Located in one of the most expensive zip codes in the U.S., this establishment boasts heavy foot traffic close to several municipal buildings. And for all this, you can expect to pay $3,250,000.
As you can see, your restaurant investing options are as varied as they are exciting. But don’t get analysis paralysis. Here’s how to buy a restaurant in just a few steps.
How to Buy a Restaurant: Step by Step
There’s a lot that goes into buying a restaurant. Like a busy Saturday night at a popular dining spot, things happen, and sometimes you have to think on the fly. But, in general, here are five basic steps of buying a restaurant.
Step 1: Acquire Funding and Create a Budget
Whether you’re planning on a solo business or seeking a joint venture agreement, you’ll need to have your financials to secure capital. That means a lot of reporting on income forecasting, competitive analysis, cash flow projections, etc.
If you’re looking to do a cash-buy, you’ll need to have your own funding for the full purchase price. Investment sales brokers can help you find the right property.
If you can’t or don’t want to do a cash buy, find a seasoned commercial real estate debt brokerage that can get you in touch with a lender who specializes in restaurant real estate.
Once you get the green light on funding, make sure you create an annual budget for all your expenses.
Also, be sure to save a good chunk of capital for a “rainy day.” The restaurant industry is very fickle, with many high and low points. A prudent owner will have some money stored away to get through any bumps in the road.
Step 2: Perform Due Diligence
The number one rule in CRE investing is to check everything off your due diligence checklist. With a restaurant, there can be a few extra action items (like mentioned above), but overall a CRE due diligence checklist remains the same.
Whether you’re buying a multifamily tenement or a restaurant, you’ll need to ensure all your legal documents are in order. There are many due diligence action items to keep track of, from property appraisals to inspections and zoning permits. Having an excellent real estate lawyer on your team is crucial.
Step 3: Create a Transition Plan/Timeline
Acquisitions can be tough on employees, despite the industry. If you’re planning on purchasing a currently operating restaurant, you’ll need a transition plan. Depending on the level of change, transitioning ownership in a restaurant can involve extensive employee retraining and rehiring. Be sure to plan for this to be able to open at the desired time.
Step 4: Have a Soft Open
Everyone knows about grand openings, but any restaurant professional knows soft openings are essential to working out the kinks of a new operation. A few weeks to a month before you plan to fully open to the public, schedule one or two soft openings for a select group of customers.
Soft openings allow your staff to practice a grand re-opening and make mistakes without the same level of repercussions. Poor service and food quality on a grand opening can get a lot of bad press and be detrimental to the business. With soft openings, because you can control who is in attendance, you can mitigate damages associated with restaurant growing pains.
Step 5: Have a Grand Re-Opening (or not)
There are times when having a grand re-opening makes sense. If the restaurant you buy changes concepts or the previous owner did a poor job, then having a grand re-opening is beneficial. If you’re buying a restaurant and keeping everything the same, there’s no real need to have one, and doing so could hurt business. A grand-re-opening means you want to attract new customers and spotlight new changes.
Thanks to the internet, grand openings (and re-openings) aren’t used like they were many years ago. If you take the proper steps to make your restaurant digitally visible, you can avoid the grand opening theatrics. However, grand re-openings can benefit restaurants in big cities with heavy market saturation and high foot traffic.
Is Buying a Restaurant the Right Choice?
If you understand all the challenges owning a restaurant offers and are ready to take them head-on, buying an existing restaurant has its advantages. They can come equipped with trade fixtures, employees and even a consistent revenue stream. Performing all of your CRE due diligence will help you understand if you’re making the right choice. In the process, you might find that starting from scratch in a specific area might be better, especially if you’re considering buying and entirely overhauling a restaurant.