Thinking of 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 having properly done their homework. Consequently many new restaurants fail and sell within their first year, often loosing money.
For anyone thinking of entering the restaurant market, it is important to understand that owning a leasehold restaurant can be like owning a second hand car. Replacing the engine on a car worth £2,000 does not increase the value above £2,000. Similarly spending £250,000 on refitting a restaurant does not necessarily increase the value by the same amount. However, and I am sure you will be pleased to hear, that owning a successful restaurant can provide a steady income, which with the aide of a good accountant can provide a "comfortable" living. The secret is to know your market and being prepared to sacrifice family life to work long and unsociable hours!
So now that you have read the public health warning, owning a restaurant is not for the faint hearted. Below are some useful tips to help you secure the right site for the best price and which hopefully, will enable you to approach your restaurant purchase with more confidence, 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, however after having read my fare share, it is imperative that you have answers to the following questions;
- Why are you wishing to buy a restaurant?
- What will be your unique selling point?
- Who will be your target market?
- How do you expect to achieve your forecast sales?
Once you have established your business model and plan, the next step is assessing your accommodation requirements and accordingly matters such as: number of covers, floor space for kitchen / storage, footfall, parking, cook line, staff accommodation, etc, will be important.
With leasehold properties, it cannot be assumed that you will be able to alter the premises to suite your purposes, as landlords consent may be required. Similarly with older Listed buildings, planning restrictions may prohibit alterations.
Funding will be essential to any purchase as well as getting your business started. It would be advisable 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 landlords consent, required for the assignment of the lease.
Finding the right site is the next step and is probably the most important part in 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 is unlikely to be fully realised.
Finding the site can be achieved through a number of means. Firstly you can register your interest with firms of chartered surveyors specialising in restaurant sales, either 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 normally on the agent successfully locating the site. Alternatively, you may consider a direct approach to an existing restaurateur, however such approaches 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 there are any new applications submitted to the local authority for new restaurants. Understand how the traffic (car and pedestrian) flow works and if alterations are proposed. Investigate future developments regarding; roads, pedestrianisation, car parking, etc, which may alter the attractiveness of the location to your customers.
Once you have done your homework then you need to understand what you are buying. When buying a leasehold restaurant, you are buying: the lease of the property, the fixtures and fittings, and the goodwill of the business; stock will normally be purchased in addition on completion. At this stage you have not needed to seek external advice and 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 will on inspecting the premises, tend to focus on the operational issues, don't forget that a quick look for the cracks in the walls, or for shared rights of access, or 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, it may disclose the key outgoings which can be incorporated in your business model. The level of sales may also provide you with useful support to your own 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, useful 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 5 years left which are renewable at the end of the term, i.e., "insider the Landlord and Tenant Act". Rent reviews will also normally be every 4 or 5 years. The date of the next review will be important as this will affect cash flow, if the rent is to increase considerably and 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 be made up of a combination of factors (below), but in essence is "key money" to enable you to trade from the premises. Whilst a value can be assigned to fixtures and fittings of a business, often the apportionment of the purchase price is on arbitrary basis.
- a) The opportunity cost of Being able to trade from the premises with the benefit of planning permission and licensing
- b) The fixtures and fittings which will be of value if they are to be reused
- c) Goodwill of the existing business
- d) Profit rent, i.e., the difference between the passing rent and the market rent, until the next rent review.
Now its time to negotiate the price with the vendor. At this point you may seek 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 guide, 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 services of the surveyor to help negotiate. The "best price" is not always the highest value, but factors such as ability to proceed quickly, proof of funding, a valid business plan, ability to fund up to a 6 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 may also wish to instruct a building surveyor to help with projected refurbishment and repair costs. Your choice of consultants is critical to the speed with which you can effect the purchase and not surprisingly, the appointment of professionals conversant with restaurant sales will be imperative to a successful purchase. Dealing with the purchase of a leasehold business is extremely 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, the 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.