Owning a restaurant and bakery has always been a dream of mine. Especially as I've had food allergies and have learned first hand how FRUSTRATING it is to find the foods I love during the holidays. And many restaurants and bakeries sell the same options making it nice to have options but bad when I am craving something seasonal. I would love to share my creations with others beyond my website, but never am quite sure how to get it started.
Owning your own restaurant is a popular entrepreneurial dream, but before heading out and purchasing your own eatery, there’s a bevy of considerations to take into account. While this investment can be lucrative, it can also be rife with risk. Restaurants can be complicated investments, with surprise financing and legal issues being the standard, not the exception. If you’re serious about investing capital and time into a restaurant endeavor, consider the following tips and red flags.
1. Understand Your Competition
For every example of a successful restaurant, there are numerous examples that have failed. Should you decide to go into this industry, understand that you’ll be facing some stiff competition. To put it in numbers, consider that 60 percent of hospitality facilities fail within the first three years. You’ll need to have a clear idea of what will set your restaurant apart from the rest. What’s your selling point? What’s unique about the dining experience offered in your eatery? In order to be successful, you need to have understanding of your demographic, and be able to appeal to said audience through your food and atmosphere, while understanding what’s made your competition successful or unsuccessful.
2. Actual Cash Flow
Keep in mind that the income reported by the seller can vary from the actual income you’ll find on financial statements. Make sure you take steps to confirm the asking price for the business is based on verifiable cash flow—not the previous owner’s estimate.
3. Existing Leases
In order to purchase a restaurant business, you’ll be assigned to the existing lease. Many commercial leases include a provision that requires the landlord’s approval for a new assignment, and it can be tough to procure. To approve this change, many landlords may ask you to show proof of financial capability; they may also ask the selling restaurant owner to sign some type of guarantee for the new lease. Many landlords will straight out refuse to assign a lease to a new restaurant business buyer if they don’t have prior experience in the field, and they may insist that you provide a significant rent advance into escrow. Always speak with the restaurant seller about their lease agreement, and get in contact with the property owner to ensure there are no hidden barriers that may arise after you’ve signed your contract. As a general rule, it’s best to look for agreements that allow for five-year leases.
4. Existing Liabilities
Before signing anything, check with the previous owner about existing liabilities. This could include health code violations or labor code violations that have come about because of not paying overtime. To avoid this, purchase the restaurant’s assets instead of its liabilities. The purchased assets include location, equipment, inventory, and name. Form an LLC and purchase the restaurant’s assets; this allows business owners to terminate all employees
on the last day of the old business’s entity, and hire them all back the next day under the new LLC.
5. Liquor License Transfer
If you intend on selling alcohol in the restaurant, you’ll need to apply for a liquor license or hope the previous owner has a license that can be easily transferred. If they don’t, you’ll likely be forced to procure a permit from a pre-existing pool of sellers who can easily mark up the prices. Why? Depending on state and county, competition can be fierce, and the amount of liquor licenses issued in an area is limited. Finding a liquor license in populous cities like San Diego or Los Angeles can mean spending hundreds of thousands of dollars. If you do need a liquor license, apply as soon as possible—it can take months to complete the transfer process.
6. Advertisement Methods
Unfortunately, word of mouth just doesn’t cut it for most restaurants. Your food and décor may be excellent, but if new patrons don’t know about your establishment, they’ll never make it inside to discover that. Consider the ways in which you’ll advertise; will you hire a professional restaurant marketing group? Perhaps you’ll utilize social media and stick to traditional flyers. Depending on your target audience and location, it could be beneficial to use a combination of various methods.