Buying a Restaurant
"It is hard work and is not as easy as I thought it would be" is often the answer I receive to "why are you selling your restaurant?". Many purchasers of restaurants buy for investment purposes without adequately doing their homework. Consequently, many new restaurants fail and sell within their first year, often losing money.
Anyone considering entering the restaurant market must understand that owning a leasehold restaurant can be like owning a second-hand car. Replacing the engine on a vehicle worth ￡2,000 does not increase the value above ￡2,000. Similarly, spending ￡250,000 on refitting a restaurant does not necessarily increase the deal by the same amount. However, I am sure you will be pleased to hear that owning a successful restaurant can provide a steady income, which, with the aid of a good accountant, can give a "comfortable" living. The secret is knowing your market and being prepared to sacrifice family life to work long, unsociable hours!
So now that you have read the public health warning, owning a restaurant is not for the faint-hearted. Below are some valuable tips to help you secure the right site for the best price, enabling you to approach your restaurant purchase more confidently being aware of some of the pitfalls and obstacles.
The first step to a successful purchase is the business plan, and as a Chartered Surveyor, I am probably not the best person to advise on how to prepare a plan; after having read my fare share, it is imperative that you have answers to the following questions;
Once you have established your business model and plan, the next step is assessing your accommodation requirements and matters such as the number of covers, floor space for kitchen/storage, footfall, parking, cook line, staff accommodation, etc. It will be significant.
With leasehold properties, it cannot be assumed that you can alter the premises to suit your purposes, as landlord consent may be required. Similarly, with older Listed buildings, planning restrictions may prohibit alterations.
Funding will be essential to any purchase and getting your business started. It would be best to approach your bank or lender to explain your business plan. A letter from your lender providing an in-principle proof of funding will demonstrate your seriousness when making an offer for premises and help speed up the purchase process, particularly when obtaining the landlord's consent required for the lease assignment.
Finding the right site is the next step. It is probably the most essential part of the process, and as with all property, "location, location, location" will be the dominant factor affecting value now and when you come to sell. Never compromise on location because whilst a secondary location for your business model may secure a cheaper rent, your sales forecast and restaurant potential are unlikely to be fully realised.
Finding the site can be achieved through several means. Firstly, you can register your interest with firms of chartered surveyors specialising in restaurant sales, locally or nationally, or even by appointing a specialist firm to help find your site; the latter may result in you paying a fee, but generally on the agent successfully locating the place. Alternatively, you may consider a direct approach to an existing restaurateur. However, such systems rarely result in a sale unless you are prepared to pay "over the odds" to entice the owner to sell.
Once you have found your site, do your homework, understand and visit the existing and future competition. Check if any new applications are submitted to the local authority for new restaurants. Understand how the traffic (car and pedestrian) flows and if alterations are proposed. Investigate future developments regarding roads, pedestrianisation, car parking, etc, which may alter the location's attractiveness to your customers.
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Once you do your homework, you must understand what you buy. When buying a leasehold restaurant, you accept the lease of the property, the fixtures and fittings, and the business's goodwill; stock will usually be purchased in addition to completion. At this stage, you do not need to seek external advice. If you have a basic knowledge of the general terms, the employment of specialists can be postponed until you have a better grasp of the restaurant for sale and whether the price sought by the seller is affordable to you.
Where an agent has been appointed to handle the sale, a formal inspection should be permissible, and this is the opportunity to see behind-the-scenes and back-of-house areas. Whilst a budding restaurateur inspecting the premises tends to focus on the operational issues, don't forget that a quick look for the cracks in the walls, shared access rights, extraction overhanging the neighbouring property, or no secondary means of escape can alert you to potential issues ahead.
Similarly, where a property is being openly marketed, details of accounts and the lease may also be available, and whilst accounts (audited or management) do not always show the complete picture of the existing business, they may disclose the essential outgoings which can be incorporated in your business model. The level of sales may also provide helpful support for your projection of business sales. However, it may be appropriate at this stage to solicit the help of an accountant for a better interpretation of the figures.
Whilst you will not be expected to understand the lease and associated documents, helpful information such as the length of the lease (unexpired), rent passing, frequency of rent reviews, permitted use and whether the lease is protected (renewable) should be available from the selling agent. Typically, restaurateurs are looking for leases with more than five years left, renewable at the end of the term, i.e., "inside the Landlord and Tenant Act". Rent reviews will also usually be every 4 or 5 years. The date of the following review will be important as this will affect cash flow if the rent is to increase considerably. Accordingly, valuation advice should be sought if you are to progress further.
Now, down to the price. The purchase price, or "premium", for a leasehold restaurant will ultimately depend on the value to you to trade from the premises and, as a general guide, will be a multiple of the "adjusted net profit" (after rent but before depreciation, interest and taxation).
The premium will comprise a combination of factors (below), which is "key money" to enable you to trade from the premises. Whilst a value can be assigned to a business's fixtures and fittings, the apportionment of the purchase price is often arbitrary.
Now, its time to negotiate the price with the vendor. At this point, you may be looking for valuation advice. Your lender will require a valuation by an independent firm of chartered surveyors, but ultimately, the value of the lease and contents will be the true worth to you as the restaurateur. The guide price quoted by the selling agent is exactly what it says: a guide and whether the restaurant's value exceeds or falls short of the compass will depend on timing, interest from other parties and whether the agent has marketed the property to prospective purchasers. This is where your negotiating skills come into play, and again, it could be worth you utilising the surveyor's services to help negotiate. The "best price" is not always the highest value, but factors such as the ability to proceed quickly, proof of funding, a valid business plan, and the ability to fund up to a six months rent deposit will all add weight to your bid.
Once terms are agreed, subject to contract, it will be appropriate to instruct a solicitor. You can also order a building surveyor to help with projected refurbishment and repair costs. Your choice of consultants is critical to the speed with which you can make the purchase. Unsurprisingly, appointing professionals with restaurant sales will be essential to a successful purchase. Dealing with the purchase of a leasehold business is hugely different to dealing with the purchase of residential property and involves matters such as staff, which will transfer to the buyer and therefore, matters such as employment contracts, holidays, pensions, troncs, etc will arise. Similarly, licensing, goodwill, and day-to-day business, the latter involving bookings, contract arrangements, promotions, suppliers, etc, will need to be addressed.
Once you are on your way to buying your restaurant, your team of professionals should be able to guide you through the legal process. Only if something "unforeseen and unusual" emerges during the "due diligence process" should a re-negotiation in the price occur.