January 4, 2023
Adam Hoeksema
If you’re looking to start a food service business and you think it’s better to modify a current one than start something from scratch, you might start wondering how to buy a restaurant. And if you are, you’d be in good company; the overhaul of the industry has led to such sales going up rapidly, but is this a good thing or a bad thing for someone looking to buy restaurants?
We’ll discuss all of that here, and go over some steps you can take when you find one that fits your needs. First, some industry insights.
The Restaurant Industry: An Overview
There’s a lot to take into account when discussing the restaurant industry as a whole. Bars, food vans, takeout shops, and various other hospitality companies could all be considered under the same umbrella, and this makes it a diverse and varied industry to track trends for.
In 2021, the global food service market size was well over USD 2300 billion, projected to increase at a CAGR of 10.76% up to 2029.
Many of these trends have been greatly affected by the 2020 and 2021 Covid pandemic, with the market price dropping by -31.5% in 2020 compared with 2019, and while there is a lot of bounce-back from this underway, there’s now the issue of the war in Ukraine that is affecting fuel and food prices everywhere and directly impacting food industries in the US.
Covid isn’t off the map entirely, either. 2022 has seen fluctuating outbreaks and there is a constant thread of new variants inspiring more restrictions at random. Labor shortages are also an issue, as are supply chain issues.
But these pressures have also created changes in demand that are likely to stick. Home kitchen subscription boxes have seen a huge boost in sales that looks to remain high, despite the return to eating out. This makes the market more competitive, and new restaurants are having to change up their approach to bring customers back.
The rising food costs are being well absorbed by consumers so far, suggesting that demand won’t be as much of an issue as supply in the coming months and that labor might be the key variable that restaurant owners can control in order to compete.
Automation is on the rise too, with new tech helping owners streamline ordering, preparation, and serving, as well as payment and overall customer experiences. Owners who pay attention to the preferences of their customers will have a lot less trouble finding their market in these changing times.
So, preferences are changing, supply is struggling to keep up, and expectations are high from the consumer side. But demand remains high and customers are showing their willingness to pay more for a good experience. This makes owning a restaurant still a potentially good investment as long as you pay attention to what people are looking for and put the prep work into the right business model.
Considerations Before You Buy Restaurants: Finding a Working Business Model
To get a feel for the costs you’re going to incur, you need to start with identifying the right model. This will ultimately be a product of your market research, but we can offer some industry insights here for reference.
The traditional restaurant has a popular location, plenty of seating, a strong focus on a specific type of food, and enough staff to provide visitors with a comfortable and speedy service. But with demands and preferences changing, many are moving away from the traditional model.
Healthy food is on the rise, as is international cuisine, and the mode of delivery is also changing. Quick Service Restaurants (QSR) are rising in popularity, with curbside, contactless, drive-thru, and takeout all looking like promising investments right now.
This shift in preferences has also presented restaurants with the challenge of supplying the right packaging materials. Plastic is unpopular, so biodegradable alternatives need to be considered. And it’s worth noting that takeout isn’t simply junk food anymore. Since dine-in was restricted, people are recognizing the value of fine dining from their own homes.
Then there’s the delivery model to consider. Relying on third-party providers gets expensive (Uber Eats takes around 30% or more per order) and can be unreliable too. Many restaurants are now factoring in delivery as part of their own model, and this adds a dimension of planning when starting or buying a new restaurant, and brings us back to the appeal of automation software to take the strain.
Some restaurants have gone all-in on the delivery model and operate exclusively as ghost kitchens. This has several useful benefits such as lower rental overheads, more efficient kitchens, no need for service staff, and so on. There may be a small pick-up area, but even this isn’t always necessary. A good ghost kitchen operates entirely online and provides fast and long-range delivery services to their customers all over town.
So, how much does buying a restaurant cost now? Investopedia suggests that on average, restaurants sell for around 25% to 40% of their yearly operating income, and this amounts to a median price of $150,000 (2020 figures). However, with all the factors we’ve mentioned, this doesn’t tell the full story, and the actual price will vary significantly based on multiple considerations.
You’re going to have to put in your research to find out the likely costs to buy restaurants that fit your desired model. If you're a first-time restaurant buyer, don't overlook the value of a QoE Report in understanding your potential investment's financial health.
How to Buy a Restaurant: Planning Steps
Now we’re starting to get into our step-by-step guide on how to buy a restaurant. We’ve broken the process into eight steps, three of which are planning and five are actionable. Let’s take a look:
1. Buying a Restaurant: Finding the Right One
This is an obvious one. Once you know what you’re looking for, you’re going to have to go out and see what’s on offer that matches your preference. Restaurant sales are on the rise, and this could be a good thing or a bad thing, as many owners locked into an outdated model are trying to jump ship before the situation gets worse. On the other hand, it means there are lots of options for new owners who are ready to make the necessary changes and turn the business around.
So, check the market and see what’s about in your area. A restaurant broker might be able to help with this, but whether you get support or not in this step, your research here will form the early stages of your business plan which we’ll discuss shortly.
If you have no experience analyzing the market in this way, it could save you a lot of time and money to hire third-party help or advice. Regardless, you’ll want to be looking at:
- Competitors – What are people already doing that serves your future customers at this location? How are they missing their mark? How much are they charging?
- Location – Make sure to do a location analysis to figure out potential traffic, or, if you’re not having sit-in traffic, to figure out if you’ll be paying extra for a location you don’t need to be in.
- Finances – When you find a potential restaurant to buy you’ll need to delve into its cash flow and profitability prospects. Some of this might be made publicly available, or you may need to set up meetings.
- Reasons for selling – This will give you a hint as to whether the restaurant is struggling or the owner just wants to leave the business.
Once you’ve found a good candidate or a shortlist of potential purchases, it’s time to run some numbers.
2. Balance Sales, Prices, and Costs
Now that you have access to the financial figures, you have to figure out if the current state (or the state you’ll be running it in after making the needed changes) is going to be profitable. This is all critically important to both your company’s success and your chances of getting money to fund the venture in the first place, which we will talk about in the next section.
In the simplest terms, you should be comparing the business sale price to the revenue and cash flow, but there’s going to be a lot more to factor into the calculations to see how soon you’ll get a return on your investment, and whether this return is sustainable.
From all of this, you should be able to get leverage on the price of the business, too. This is the stage at which you’re going to be formulating your financial documents and projections.
If you are looking to acquire a restaurant, ProjectionHub has a financial projection template that is designed specifically for creating projections for an acquisition. This template can be customized to fit your specific needs, whether you choose to do it yourself or seek assistance. The template can provide you with a professional-looking document to present to lenders or investors, as well as help you make informed decisions by showing you the most profitable options.
They’ll form one of the most significant portions of your business plan, but before you go out there, you’ll need to fill in the rest of it too.
3. Finish Your Business Plan
This document makes up not only a collection of your hard work but a foundation for the roadmap to your success as a new company. You’ll likely be looking for funding to make this purchase, so having a completed business plan is a key part of that, but even if you were planning to cover the cost of the whole thing, filling out your business plan will be an exercise in designing your success, and should always be done first.
There are seven major components in a restaurant business plan:
- Executive Summary – This is the first page of the document, summarizing to readers what’s inside.
- Company Description – Here, you’ll describe who you are and what you plan to do
- Products and Services – This will offer more specific detail about what you’re selling and to whom, as well as how much you’re selling it for.
- Market analysis – This can all be backed up by your market research from the first step.
- Strategy and Implementation – Here, your market analysis can be followed up with the sales and marketing approaches that will allow you to achieve your goals.
- Organization and Management Team – List how your company will be structured, who will be running the show, and why they’re critical to your team
- Financial plan and projections – Finally, show off your projections here, making sure they’re accurate and based on thorough market analyses and strategy.
Once all this is in order, you’re about ready to go out and get some things done. The first thing you’ll need (if you don’t have it already) is money.
How to Buy a Restaurant: Action Steps
These next steps will be the ones where you’re starting to take risks. Until now, everything you’ve done has been imaginary and you’ve invested nothing but time into the process. However, once you’ve completed the next steps, you’re involved, and you’re on the hook for what happens next! This is why the preparatory stage is so important.
4. Funding Sources to Buy a Restaurant
If you don’t already know it, find out your credit score. This will affect how likely you are to be able to receive money from the bank. Then, check out the different loans, grants, and investment opportunities available to you.
Loans will come with a lot of hoops to jump through, but if you’ve done the proper preparation and your figures are accurate, you should be able to get a significant injection of capital from a lender without having to sacrifice any of your company equity. On the other hand, you’ll be liable for paying it back even if your business doesn’t make it. With an SBA loan and a seller note you may be able to secure 95% of the cost to buy the business which means you only need to come up with 5% of the purchase price out of your own savings.
Investors come in various shapes and sizes too, and depending on the scale of your business, the amount you need, and what your experience is, you’ll be looking to different people for help here. Preferably, if this is your first purchase, you’ll want someone who offers their industry experience as well as their capital, if you’re lucky enough to find one.
Either way, they’ll expect a share in your company, so, while you won’t be on the hook for paying back the money, you will have to appease them as a shareholder, and this might mean you offer over some of the control in the direction of the company.
Once this process is complete, you’ll have the financial backing to get moving.
5. The Purchase
By this point it might feel like the end of this process is in sight, but unfortunately, there’s still a lot that will need a detailed focus on it to make sure you get things right. Start working towards negotiations here, and come with legal backing.
Before handing over your money, you’ll want to find out precisely what you’re paying for and what state it will be in when you get it. Consider all the assets and liabilities and make sure everything is recorded into the sale offer.
By now you’ll know whether you’re taking over the restaurant as it is or revamping the whole thing, but whatever your plans with the premises, you’ll need to identify all the equipment, staff, licenses, maintenance records, and land titles (among many others) that are going to come with it.
It’s a good idea to take this information away with you before you make a decision, so you’ll get a feel for whether the deal is worth it or not.
6. Due Diligence
This process can be done by way of a checklist that covers all the key elements of the new business. The checklist itself will help you ask for the right information to make an informed decision and should cover factors of the company such as the legal, operation, and financial information, as well as other things that might be relevant to your specific desires with the business.
This check should confirm the health of the business as a whole and illuminate any blind spots or oversights that could affect your chances of running a successful project.
If you’re satisfied that everything is in order, it’s time to part with your money and plan the transition.
7. The Transition
To begin with, you’ll want to devise a transition plan for both the new business and the people involved in it. This will help you figure out a timeline for making the appropriate changes and give you a plan for how to assimilate among your staff, in the case where you’re now taking on a new team.
It’s a good idea to work with staff from all levels of the chain in person at the beginning, to help inspire trust and gather important information about the way things are run. The bigger the changes, the more strain on the workforce, so it’s important to design your transition plan with this in mind and work with the information you get from the people you’ll be working with.
For the business itself, you’ll need to set a timeline for new equipment, decorations, or any other significant changes you’re going to be making. At this stage, it’s a good idea to start putting the word out to the public that your changes are coming and you’re bringing something new to the market.
8. Marketing your Restaurant
One thing that boosts engagement and promotes enthusiasm for your opening day is to have your followers involved in the progress. If you’re hosting renovations on-site, put up pictures of the progress you’re making and keep people excited for opening day.
Social media and your website are great places for this, and keeping people involved will spread the word that something new and exciting is coming, at the same time as it will let others know that you exist in the first place. Consider hiring someone to manage your social media for this, as it can take up a lot of time and needs to be done with marketing in mind.
Your market research should have given you insights into the discounts and promotional offers that are suitable as you start up, so keep those in mind when promoting the opening of your restaurant. Remember, you’ll have access to the previous owner’s customers, so it’s very important you keep them enthusiastic!
Learn more: 14 Ways to Get More Customers for your Restaurant.
Conclusion
Restaurant sales are increasing, and while this means there are more options available for people looking to buy, it’s also a sign that a lot of owners want to get out of the industry amid radical shifts in consumer demands.
However, buying now may well be the right decision if you’re willing to put the work in and keep up with these demands. The trick will be finding the right business model to be profitable and doing the due diligence to find a place with no hidden leaks. If you have any questions about buying a restaurant or creating projections for a restaurant acquisition, don't hesitate to reach out to our team at support@projectionhub.com.
