What to look for when deciding whether to buy a restaurant…
I want to buy my own restaurant? Is it a good time? In terms of finding the money, it is. A lot of people looking to buy their own business fund the purchase by selling their home. House prices have been rising steadily and demand for houses is fairly high, so you will have more to invest in the new business than you would have had in the past. Restaurant property prices have not increased at the same pace as private houses, so you'll be able to buy a better business for your money.
What’s the best sort of restaurant to buy? There are several different types of property you can buy, but the most common are freehold and leasehold sites.
Freehold - This is the most expensive choice. You are buying the property outright and are in total control of the business. This means you are free to take all the profits. However, good outlets are very costly and you also have to pay for the continued cost of repairs.
Leasehold - This is the lower-priced option. A lease is the right to use a property for a fixed period of time at a given price. The value of the lease is judged by the profit made by the business and how long is left to run on the lease. The main benefit of acquiring a leasehold is that all records of the business are available before taking over. But rents are high and, as with a freehold, there will be continuing repair costs.
What about taking on a franchise? Franchising is the permission given by one person (the franchisor) to another person (the franchisee) to use their trade name, trademarks and business system in return for an initial payment and further regular payments. McDonald’s is a good example.
A franchisee is the owner and operator of his own outlet, yet is also buying into a proven business format. It is not just the trade name he is buying, but the whole package of training, business support, bulk-purchase deals, product development, advertising and promotional campaigns, and many other add-ons.
But a franchisee still needs to make a considerable financial investment. And despite the back-up you get from the franchisor, there’s no guarantee that your business will make money. (See separate article on franchising.)
I’ve decided on the business I want. How do I know I’m paying the right price? Unfortunately, there are many factors to take into account when calculating a restaurant's worth that there isn't a quick and easy answer. Of course, the value is closely linked to the restaurant’s potential to make money and also to the financial interest the owner has in the land on which it stands – in other words, whether it is leasehold or freehold.
As restaurants are generally leasehold, you need to take into account how long is left on the lease, what rights you have under the lease, and even when your next rent review is due.
You should also find out the answers to questions such as: What is the minimum amount of money the restaurant needs to generate to meet your objectives? What rate of return do you want on your investment?
The sellers should provide you with a full financial record of the business. Check the last three years of sales, at least, to see if it's actually made money. Ideally there should be evidence of growth or at least stability. If there isn't, find out why.
Also ask why the owners are selling, check whether their accounts are up to date and whether there is any legal action pending against them or the business?
What else should I be looking for? Location is crucial - the better the location, the better the trade, the higher the profits and the higher the value of the business. You need a market where the sort of restaurant you have in mind will work. Local property agents should be able to provide you with sources of information on the local area such as population, average age, average wage and so on. Suppliers can also be a good source of information.
Check the site's visibility to passing traffic or pedestrians. Is there anywhere for customers to park their cars? Are there any nearby bus stops or train stations?
Research any possible future problems beyond your control such as road or building developments. Are the water and sewage systems sufficient? Are there any restrictions on what signs you can put up? Will it be difficult or expensive to get, or change, your alcohol licence?
The value of the business will also depend on how much of the custom is dependent on the current owner or host and how much is down to the property itself. If the reputation is attached to members of staff, will they be staying on after the sale?
Anything else? Get some professional advice from a licensed property agent, finance broker, bank or accountant to get the best overall picture of what you can afford, what your returns could be, and whether any site you have chosen is actually worth buying.
Produced by CatererSearch with the assistance of Christie & Co