[ctitle title=”How to Buy a Restaurant” uppercase=”no” color=”#666666″ background=”#ffffff” font_size=”30 – Default” font_weight=”normal” position=”center”]
- Initial Contact.
You make an initial email or phone call to Restaurant Realty Company inquiring about purchasing a restaurant, bar or club and describing your criteria for purchase.
- Background Information. You will provide Restaurant Realty Company with your personal background information including your financial history. Restaurant Realty Company will in turn provide you with information on various restaurants, bars and/or clubs that most closely meet your criteria.
- Initial Contact.
- Meeting. Restaurant Realty Company will set up an appointment for you to tour the business and talk to the owner. At this time you may ask the seller specific questions about the business. This appointment is generally scheduled during non-business hours so as not to interrupt or alert the employees or customers.
There are two basic methods for valuing a restaurant, bar or club which are as follows:
- Assets In Place Method. This method means that only the lease, leasehold improvements and fixtures and equipment are being sold. The name, menu, concept and goodwill are not included as part of the sale. With this method little or no emphasis is put on the financials of the business and the major factors in determining the value are the value of the lease, leasehold improvements and the fixtures and equipment. There is no standard formula in determining value using this method and valuation is somewhat subjective based on the brokers knowledge of the marketplace and comparable sales sold using this method.
- Going Concern Method. This method means that the lease, leasehold improvements, fixtures and equipment, name, menu, concept and goodwill are all included as part of the sale. The primary valuation method used for a going concern valuation is the yearly adjusted cash flow method. This means that the net profit on the tax return or on the year-to-date income and expense statement is adjusted by adding back the following items to the net income: one working owners salary and payroll taxes, any personal expenses the owner is charging the business (food for consumption at home, life, health and disability insurance premiums, auto expense, entertainment and vacation expense, etc.), depreciation, interest and amortization expense on any loans the buyer will not be assuming, net operating loss carry forward charges and any other expenses which are personal and will not be applicable to the buyer. Once the yearly adjusted cash flow is determined a multiple ranging from 1 1/2 to 3 is used to determine the value of the business. The multiple to be used is determined by several factors which include lease value (whether the lease is at market, below market or above market), the potential upside of the business (i.e. the current operation serves dinner only and has only a beer and wine license and there is potential for a strong lunch business and liquor sales), the quality and quantity of the leasehold improvements and fixtures and equipment, whether the operation is a franchise and whether the operation is a full service or self-service operation. For example, if the yearly adjusted cash flow of the business is $75,000 and the multiple to be used is 2 1/2, the value of the business would be as follows: $75,000 multiplied by 2 1/2 which equals $187,500 sales price.
- Writing the Offer. With our assistance using Restaurant Realty Company’s Purchase Agreement, you will submit an offer with a deposit to acquire the business. Your offer will be contingent upon your physical inspection of the business, your inspection of the financial records, the assignment of the premises lease or negotiation of a new lease and any other necessary contingencies (i.e. alcohol license transfer or other special licenses, financing, etc).
- Presentation. Restaurant Realty Company will present your offer to the seller. We give the seller background information on you, your previous experience, your perspective on how you arrived at your price, terms and conditions, etc. We also present your financial statement, credit report, resume and business plan.
- Response. The seller will either accept, reject or counter your offer. Restaurant Realty Company will notify you of the seller’s response. At this point you may either accept, reject or counter the seller’s response.
- Mutual Acceptance. When both parties agree to all of the terms and conditions of the sale and sign all amendments and counteroffers, the offer then becomes a purchase agreement signed both ways. At this time there may be contingencies or conditions that still need to be satisfied prior to closing.
- Advisors. Restaurant Realty Company encourages you to include your CPA and/or your attorney in reviewing the transaction should you feel the need to do so.
- Deposit. You deposit check (made payable to the escrow company) is deposited and this opens the escrow holding account. Restaurant Realty Company will provide the escrow officer with copies of all documents relating to the sale.
- Inspection. You will be given copies of the financial records of the business for your review.
- Contingency Removal. As your requirements are met existing contingencies in the purchase agreement are removed. Once all contingencies are removed the purchase agreement becomes a binding agreement and the deposit is increased and the escrow is opened.
- Closing Date. The closing date or the close of escrow is the date when title to the business and normally physical possession of the business is transferred to the buyer. The closing papers are signed in the title company’s office or through the mail prior to the closing date.
- Inventory. Arrangements are made for you and the seller and/or inventory service to take a physical inventory as it applies to the value of the salable items (food, beverages, etc.) and non-salable items (fixtures, equipment, etc.) usually one or two days prior to the close of escrow.
- The Closing. All parties meet at the escrow office to sign the closing papers or the closing papers are sent to the parties to be executed prior to the close of escrow.
- Fees. You will generally be responsible for your own accountants and attorney’s fees, half of the escrow fees, security deposit for the premises lease and sales tax on the value of the fixtures and equipment that you allocate as part of the purchase price.