Question: I want to get into the restaurant business, and there’s a place for sale in an up-and-coming neighbourhood. What do I need to know?
Answer: “Restaurant for sale.” Those are irresistible words to a lot of people.
Irresistible—and scary.
According to Restaurant Start-Up and Growth magazine, 27% of restaurant startups fail in their first year, 50% fail within three years and 70% fail within a decade of opening. Daunting numbers for hopeful restaurateurs, to say the least (although maybe not as dire as the much-trumpeted 90% failure rate thrown about by some chefs).
While BizEnergy concentrates mostly on restaurant energy efficiency, we know that many of our readers have a lot of questions about starting a restaurant business—so here are our recommendations. (After all, it’s hard to talk about energy efficiency if there aren’t any restaurants in the first place!)
But remember: buying a restaurant is a big, big investment. Don’t take it on as a DIY project—you need professional help to guide you through what could potentially be a legal and financial minefield. These are simply preliminary thinking points to get you started.
If you’re going to buy an existing restaurant, there are several questions you need to ask before you make any big decisions.
Why is the owner selling? If the current owner couldn’t make the business work, find out why. Find out whether the neighbourhood demographics are changing, whether there’s a lawsuit pending against the restaurant, whether a new, competitive business has moved into the area, whether there are traffic developments—anything that will help you decide whether the location is right for you.
What kind of financial shape is the restaurant currently in? You need to get as realistic a picture as possible of the restaurant’s current and projected financial situation. This means looking at financial statements, ensuring that income is reported accurately (with a largely cash-cased business, this isn’t always the case), and taking a look at past bank statements to get an idea of seasonal cash flow.
What are my payroll costs going to be? Don’t depend on financial statements alone to give you a picture of potential payroll costs. If the owner currently employs six members of her family who all work for free, or if she has several workers paid under the table, you’re going to need to spend more on payroll.
What’s the reputation of the restaurant in the neighbourhood? Location is vitally important to the success of a restaurant, but so is the establishment’s reputation among the people in that location. Walk around the neighbourhood and ask people what they think.
What equipment is included? What equipment needs to be replaced or repaired? If the restaurant’s equipment is older, it may be a serious drain on your energy costs, and you may find it’s worth replacing older products with energy-efficient ones. (See our post on buying used restaurant equipment for more info on deciding between new and used.) Get the equipment inspected so you can avoid any nasty surprises—no one wants to come into work in the morning and find a month’s worth of frozen inventory spoiled because of a faulty freezer. Also, check and see whether you’re eligible for energy rebates or incentives—you may shave some of the costs of purchasing and installing energy efficient technology.
Will the current owner sign a non-compete agreement? Ideally, the current owner will agree not to open a competing restaurant in your area for a certain period of time.
Will the landlord lease to me? Because restaurants can be risky businesses, some landlords will refuse to lease to someone with no restaurant experience. If you’re set on running a restaurant and you haven’t been in the business before, find someone who will help you manage the place. This may help assuage a landlord’s doubts about your ability to run a successful establishment. Generally, having a partner—one who’s as dedicated to the project as you are, someone who you can work effectively with, even after an argument—is a good idea anyway, because running a restaurant shouldn’t be a solo undertaking.
Do you have stories about opening your own restaurant? Advice for hopeful restaurant owners? Leave a comment.
Image credit: Fortyseven
