Buying a Restaurant? – Prior Due-Diligence Will Facilitate the Deal
May 27, 2005
Purchasing an existing restaurant is an exciting undertaking. However, with failure rates for independent restaurants as high as 26% in the first year of operation and 59% after three years, it is critical that restaurateurs treat the time leading up to the purchase as carefully as day-to-day operations. This article highlights major events and obstacles in the purchase of an existing restaurant although much of its content is universally applicable.
Initial Due Diligence
Once a target for acquisition is located, it is important to obtain and review the restaurant’s financial documents. In most instances these documents are provided by the owner or by the broker listing the restaurant. At minimum, financial statements, tax returns and profit and loss statements for the past several year’s operations should be reviewed. Purchasers should be skeptical when it is intimated that financial documents do not represent the “actual” cash flow or profitability of the restaurant. Financial information should also be reviewed by an accounting or business acquisition professional, who, after review should be able to discuss the financial viability of the restaurant, especially as it relates to the asking price.
Prospective restaurateurs should also review the target’s inventory and ordering records, food and labor cost logs, recipe manuals, non-confidential employee records, equipment leases; as well as sales, management and maintenance logs. The presence and completeness, or the lack of, these control mechanisms provides insight into management and operational efficiencies and can be used to double check the veracity of financial documents.
In addition to completing a thorough paper review, purchasers must visit the restaurant on several occasions, at different times of day. During these site visits, pay particular attention to staff/guest and staff/staff interaction, the number of turns, and the general manner in which business is conducted. If possible, speak with guests and employees, as they are likely to remain once the purchase is completed.
Asset or “Entity” Sale
Many restaurants are owned and operated by entities, such as corporations or limited liability companies. If the target restaurant is a corporate entity, the decision will have to be made…
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by: Mark A. Tanner, Esq.
May 16, 2005