Minimizes the Risk of Purchasing a Business
Purchasing a going-concern (a business that is profitable) business is less risky than buying an assets in- place business when the buyer changes the name, menu and concept. When a buyer starts a new concept, he does not have an existing customer base because there is a strong possibility that the customer may not like the new concept, whereas the new operator in a going-concern business has an existing customer base and a positive cash flow. Don’t make changes until after you’ve run the business for a reasonable time period. It is prudent when a buyer takes over a going-concern operation that he runs the business as it was run before the change of ownership. He should so this for a period of time until he learns all the details of the operation. The buyer is paying a good price for a going concern business, and any changes made prematurely to the operation may have a negative impact on the business’s customer base. Remember that the customer is king, and the reason the customer is frequenting this business is his satisfaction with the existing operation. Décor, menu or service changes need to be made gradually so the buyer doesn’t alienate any of the existing customers.
Keep the existing employees, and then weed out the undesirable employees. To help further maintain the continuity of the business, it is important to keep the existing employees in place, as they are largely responsible for drawing customers into the business. They are one of the most important assets of the business. Before closing escrow on the business, review all of the strengths and weaknesses of each employee with the seller to determine how best to capitalize on the employees’ strengths in improving the business. If the seller indicates certain employees are marginal and are a detriment to the business, it is best to terminate them as soon as possible after taking possession of the business. It is much easier to terminate marginal employees in the early stages, rather than condoning their inferior performance, which may create difficulties in terminating them in the future.
Continue using the same vendors
In a going-concern purchase, it is prudent to not risk making changes with vendors until you’ve operated the business for at least thirty days to maintain an orderly transition of the business. Usually you have better leverage in negotiating prices with vendors if you’ve had a pre-existing relationship. So once you’ve run the business for a period of time, you’ll develop relationships with vendors, putting you in a stronger position to negotiate prices.
Usually it is cost effective for the operator to maintain the seller’s existing food, beverage, cleaning and paper supply vendors. Additionally the operator should maintain the seller’s other vendors exterminators,
window cleaners, landscaping, duct cleaning, security, and insurance services, etc. because these vendors are familiar with the business’s past needs. However, if the vendor’s quality and price level are not competitive, they should be eliminated and replaced.
In purchasing liability and workman’s compensation insurance, it is usually beneficial for the buyer to keep the existing insurance companies in place, assuming the seller had a good history of minimal insurance claims with these companies. If this is the case, these insurance companies
can offer more competitive insurance premiums than starting with new companies that are not familiar with your business.
Other methods to improve an existing business
In purchasing a going-concern business, it is wise, as stated earlier, to not make changes to the business until you have operated it for several months so you can develop a good understanding of the customers’ likes and dislikes, which you can do from the following activities:
a. Directly interact with customers by working the floor, seating and greeting them, and going from table to table and asking the customers how they like their meal. Also ask about other aspects of the business,
and what items they would like changed.
b. Distribute customer comment cards and evaluate the customer feedback.
c. Talk to food servers and get feedback from them regarding the customers’ likes and dislikes.
I sold a very successful going-concern business that had been established for close to twenty years in
Marin County, California. The business was known for its unique pizzas, Mediterranean entrées, full bar, and live jazz format. I cautioned the buyers that it was best not to make major changes to the business until they operated it for several months, and thoroughly understood all the nuances of the business. The owners decided within the first three months to add Thai food, as they were from Thailand—and consequently, sales dropped over 60% from the level the business at the time they purchased it The reason for this dramatic sales drop? Customers became confused, not knowing whether the restaurant was a Thai restaurant or the former well-known Mediterranean restaurant.
When you start mixing up menu concepts, many customers feel the quality of the original concepts becomes diluted. Thai restaurants serve Thai food, and not Mediterranean food, and as soon as the former operation’s customers learned that, they stopped coming. As a result of this mistake in owner judgment, we ended up selling the business in less than a year for close to $100,000 less than they paid for it.
We sold another restaurant which had the reputation of being one of the most popular breakfast and lunch restaurants in San Francisco. Within six months after buying the restaurant, the buyers spent over
$25,000 adding equipment, doing marketing, and hiring additional personnel in order to add dinner. Within six months, they removed dinner service as it did not develop to an adequate level to cover the
additional operating expenses. This is an example of a concept that had a strong preconceived image in the customer’s minds of being a great breakfast lunch operation—and no more than that.
Although the customer may feel comfortable in the business’s existing environment, it is prudent to periodically freshen up the environment to make sure all the major surfaces, such as the floors, walls and ceiling, are clean and in good condition. The restrooms, in particular, should be kept well maintained, since the condition of the restrooms determines the customers’ impressions regarding the operation’s cleanliness. Again, all the floors, walls, and ceiling surfaces should be in good condition, as well as the toilets and sinks. In a well-run business, an employee will police the restrooms hourly to make sure they are clean, and the various dispensers—paper towel, toilet paper, toilet seat cover, and soap dispensers, always are filled. They will also check for paper towels on the floor, excess water around the sink, and see that the toilets are flushed clean.