Taking over a restaurant is a quick way to get a new business up and running, but it can also be an arduous process.
There are certain complexities involved with taking over an already established restaurant, for example, if it has a bad reputation that you need to shift - so it’s important to tackle this task with a concrete plan.
And that’s why we’re giving you the information you need to get started. Once you’ve considered each of the points on our guide below, you’ll be better prepared for unforeseen eventualities and well on your way to launching your new venture.
Within our guide to buying an existing restaurant, we’ll explain how to:
- Check that the premises fit your plans
- Study your location and competition
- Get to know the restaurant's clientele
- Obtain the required licenses
- Assess the quality of equipment
- Analyse the restaurant’s existing menu
- Evaluate restaurant staff
- Study the restaurant’s marketing strategy
- Investigate the restaurant’s reputation
- Examine the financial performance of the restaurant
- Analyse the seller's motivations
- Understand the terms of the sale contract
1. Check that the premises fit your plans
In this first task, your main aim is to check that the acquired space is suitable for your project.
This is one of the most important points of a restaurant takeover: you may be able to make small adjustments to a space after buying it, but you cannot change it drastically. Therefore, it has to suit the vision you’ve set out.
The size of the premises
First, you need to check that the size of the restaurant space is sufficient.
It’s usually advisable to leave 21 to 32 sqft per seat, all spaces (such as the dining room, kitchen, and storeroom) included.
That being said, these dimensions are likely to be adjusted depending on the type of restaurant you’re taking over - as a fast-food restaurant might require less space than an upscale, fine dining establishment.
The "ideal size" also depends on the number of staff you’ve recruited, as well as the availability of additional space in the event that you find huge success and fancy expanding in the future.
The restaurant layout
You want a restaurant space that will allow for service to be carried out in the safest and most efficient way possible, so the layout is an important consideration.
You might, for example, want to opt for a restaurant where the kitchen and dining room are all on one level - to avoid laborious back and forth trips between both spaces and ensure waiters are more frequently present to tend to customer requests.
Compliance with safety standards
A restaurant is subject to the fire safety standards imposed by law. So it’s important to make sure that your chosen premises meet these requirements (in terms of the building design, alarm system, evacuation plan, etc).
If the space doesn’t comply with the current standards, you’ll have to plan out the amount of building work required to ensure that it does (and possibly reduce your offer accordingly).
Taking over the lease
The acquisition of a space intended for business implies that you will also be taking over the existing lease.
It’s imperative to study this document carefully. You’ll need to be vigilant about complying with the requirements of the lease when it comes to catering activity. A good idea would be to have a legal representative assist you when reading over the lease agreement.
2. Study the location and your competition
The restaurant’s location is another factor that you won’t be able to change. Therefore, it deserves your full attention.
First impressions are everything, which is why making sure your restaurant has an attractive exterior is essential.
If it’s not visible from the high street, for example if it's inside a courtyard, you’ll have to find innovative ways to make sure that it stands out.
The street where it is based and its daily footfall must be assessed. Being located on a high street places you at an advantage as the existence of other nearby restaurants guarantees a continuous flow of potential customers, as long as they offer different types of cuisine and therefore aren’t in direct competition with you.
On the other hand, choosing to set up shop in a residential neighborhood implies that you’ll be busiest during evenings and weekends.
In any case, familiarise yourself with the general activity of the street or neighbourhood. Ask yourself if it’s an attractive or trendy neighbourhood and check out how just how busy other businesses within the area are.
Easy accessibility to the restaurant and proximity to main roads and/or public transportation is also a massive asset. We advise you to get in touch with other local business owners to better understand the comings and goings of the area.
You should also look up whether there’s any upcoming industrial work due to impact the operation of the area. Building work can be detrimental to businesses, as it blocks off certain roads and areas. Noises such as drilling can also deter people from visiting certain places. Similarly, a change to road structure could also have a significant impact on the level of traffic on your road.
Finally, also check (especially if the restaurant is located in a residential area or has a terrace) that there have been no complaints about noise pollution. If there has, go to the town hall for more information; municipal by-laws to impose a reduction in activity are often extremely harmful to a restaurant. Also, don't hesitate to chat about it with other business owners on the street. Maybe you can rally together by coming up with a solution or starting a petition.
3. Get to know the restaurant's clientele
Taking over a restaurant also means getting to know its current customers, whether they be students, young couples, families or business clientele.
An analysis of the type of clientele will allow you to infer what the restaurant’s peak hours are or the average spend per head.
The restaurant’s ambiance is also a crucial element to take into consideration. If you’re situated close to a university campus, for example, you’ll need to think about how you can entice students to eat at your place, by perhaps setting cheap prices or offering a fast service.
Also, try to identify a potential risk of depending on just one type of customer for the business. If a large part of your turnover comes from employees of a local company, for example, the opening of a cafe within its own building could have a grave impact on your restaurant’s profitability.
Knowing whether the restaurant has regular customers is another essential consideration, as an absence of this is often a bad sign. To assess this, contact certain customers to get their thoughts on the service and quality of the food - their opinions are valuable, considering they’re the people you need to impress.
4. Obtain the required licenses
If you’d like to convert the restaurant you have taken over into a bar-restaurant, be aware that you might need to operate with a different licence.
The best thing to do is to take over a restaurant that already holds the license adapted to the type of service you’d like to provide.
In the UK, there's no complete license that covers all the certifications required to open a restaurant, so be prepared to do some digging as to which specific licenses you'll need.
Such licenses include:
- Food business registration: if you're planning on preparing, storing, cooking, handling, distributing or selling food on your premises, then you must procure this license from your local authority at least 28 days before launching.
- Food premises approval: any restaurant that handles meat, fish, egg or dairy products must be inspected by their local council before being able to obtain this license.
- Premises license: this is required if you plan to sell alcohol. This license will also enable you to play live and recorded music and serve hot food and drinks after 11pm.
- Food hygiene certificate: although restaurants aren’t legally required to have a food hygiene certificate, educating your staff on how to safely handle food will reassure customers that your restaurant is a safe place to eat with their family and friends.
For more information on how to obtain the licenses above, you can visit the Gov.uk license finder.
In the US, you will be required to register for a business license. You can visit the SBA website for more details on how to obtain this.
You will also need a food service license, a food handler’s permit and a liquor license for serving alcohol. Each state has it's own Alcohol Beverage Control Board that regulates the serving of alcohol.
To obtain a liquor license, you must contact your state's ABC board. You can find a national directory of ABC boards here.
5. Assess the equipment's quality
When you take over a restaurant, you need to take stock of the equipment already on site so you can decipher exactly what budget (if any) you will need to allocate to the renovation of the premises and replacement of outdated equipment.
It’s at this part, in particular, that taking over a restaurant without previous experience in the industry can be risky... We advise you to make sure that the existing equipment is in good working order and to fix anything that needs updating.
Be especially wary of the physical condition of the building the restaurant is situated in, and that it adheres to the required safety standards. You’ll also have to pay particular attention to the condition of the kitchen, and factor in any costs needed to update cooking equipment.
6. Analyse the restaurant's existing menu
Whatever restaurant you choose to take over, we advise that you assess the current restaurant’s menu and prices.
The range of dishes on offer, the most popular dishes, and the portions served are all elements that will allow you to appreciate the overall operation of the establishment, its profitability, and its Working Capital (WC) requirements.
It will be essential to analyze the cost of the dishes and their gross margin to verify that these are sufficient enough to reach an adequate level of profitability.
You will also have to look at the number of ingredients used in the recipes. A large number of ingredients may require larger inventories of products in smaller quantities, which will increase your WC and profit margin.
Having fewer ingredients allows for a higher volume of purchases and therefore gives you greater bargaining power with suppliers, as well as limiting any losses on barely-used and perishable ingredients.
Check out which suppliers the existing restaurant works with. Ask yourself if the way they operate (frequency of delivery, product quality, commercial terms, etc.) is in line with how you want to operate your business.
7. Evaluate the restaurant staff
As you’re often legally required to retain the existing staff of the restaurant you’re taking over, It’s really important to build a strong relationship with the manager and the rest of the team.
The restaurant’s staff is integral to the success of the business, so you must review how the team operates in both serving customers in the dining room and preparing food in the kitchen.
The organisation and distribution of tasks amongst your staff members must be carefully thought out. Maintaining strong lines of communication between management and the dining and kitchen staff is essential to the smooth running of the restaurant, so let your staff know that your office is an open door when it comes to discussing issues and concerns.
8. Study the restaurant's marketing strategy
A marketing strategy consists in identifying the specific needs of your future potential customers so you can adequately meet them and ensure the success of your restaurant.
This is why it’s necessary to study the restaurant’s previous owners' strategy. If there is a lack thereof, then this provides a great opportunity for you to draw up a master plan on how you can attract more customers and fill the restaurant during off-peak times.
We previously recommended that you get in touch with some of the restaurant's customers and ask them what they thought about their experience. This will allow you to identify the most promising acquisition channel.
Below are some examples of acquisition channels for you to consider:
In the digital age, it’s vital that a restaurant has some kind of online presence:
- by featuring on a certain number of platforms (such as TripAdvisor or online city guides),
- by having a website,
- or by being present on social media networks such as Facebook, Instagram, and Twitter.
You will have to keep track of the quality of your social media profiles and website design, as well as the cost and the volume of business brought by each of these channels.
It’s also important to investigate whether the former owner has a customer database. This is useful as it stores contact information from your previous customers so you can keep in contact with them regarding future promotions and updates as to the restaurant’s quality and any awards it might obtain.
If such a database does exist, make sure it complies with data privacy regulations.
Other actions you can take
Many channels of communication exist, so it’s important to take stock of them and evaluate which is best suited for your restaurant. It may be effective, for example, to distribute flyers or make partnerships with hotels.
If you notice that the restaurant struggles to fill up at certain times, start introducing promotions such as a 2 for 1 deal on certain menu items. You can also buy an advertising slot in the local press to publicise such promotions. In the long term, this will certainly pay off.
Of course, "hyper-communication" is not an obligation. If your concept is more geared towards being a small, sleek and understated establishment, then keeping advertising to a minimum could help your restaurant excel under the elusive halo of secrecy.
9. Investigate the restaurant's reputation
Today, very few restaurants have no online footprint. Before taking over a restaurant, it’s important to google it and check out reviews given by previous customers.
If the restaurant has an extremely bad reputation, it will be difficult, or at least very expensive, to revitalise its image. You may then want to consider changing the name of the establishment, which will require additional marketing expenses. In any case, you’ll need to take this into account when considering the price you offer for the acquisition.
Also, check that the restaurant has not been at the heart of a scandal (whether it be over food or service). Don't limit your search to the web, also think about flicking through local magazines, newspapers, and city guides.
10. Examine the financial performance of the restaurant
One of the first things you need to investigate before taking over a restaurant is its previous financial performance. Doing so will allow you to evaluate its profitability and cash generation capacity to help you create your business plan.
Let's take a closer look at some important indicators. For each of them, you will need to look at their evolution (especially over the last 3 years), and above all, to anticipate how they’ll look in the future.
If you are taking over a restaurant without previous experience, you can enlist professional help in the form of an accountant to obtain a better understanding of the company’s financials.
Assessing turnover is the starting point for your financial analysis of the restaurant and should give you a good indication of the trajectory of the company being taken over.
Here you will need to look at its evolution in volume: does the restaurant sell more a la carte deals thanks to a better occupancy rate, or is attendance declining?
Also take a look at the restaurant's occupancy rate: a restaurant with a good occupancy rate, especially at peak hours, is a promising sign. On the other hand, a restaurant with a low occupancy rate may present a growth opportunity for you as a restaurant owner.
When assessing the evolution of the company’s sales, you’ll want to ask yourself how the prices have changed over the last three years.
You should also investigate customers eating preferences - whether they are increasingly buying more expensive menu items or if there’s been a shift towards less expensive dishes.
Gross margin plays a major role in the profitability of the restaurant, as it needs to sufficiently cover the restaurant’s overheads, including rent, furniture, and employee wages.
Here you’ll need to analyse the recipe of each dish to understand:
- How much they cost to produce
- Whether or not they are profitable
- If we can improve profitability by reducing the size of the portions or substituting ingredients.
Payroll can quickly become a significant part of a restaurant's costs. The main thing here is to understand its evolution and make sure it is under control.
You should also look at turnover and salary raises given to staff (or not) in recent years to anticipate possible retention problems.
EBITDA can be used as a proxy to assess the restaurant's cash flow from operations. It must, of course, be positive and generate sufficient profit to:
- Maintain the restaurant's equipment and allow you to develop the business
- Honour your financial obligations (to lenders, as well as your banks if you choose to request a loan for the restaurant takeover)
In addition to its increase in value, it is interesting to look at the development of the EBITDA margin as a percentage of sales. This will allow you to understand how the profitability of the restaurant has evolved.
Working capital requirements
Working capital requirement is one of the most important indicators in the context of a restaurant takeover since it corresponds to the amount of cash tied up by differences in cash flow timing.
In concrete terms, your customers pay you cash, but before you can sell them your dishes, you need to stock the ingredients needed to prepare them.
This results in a cash requirement, the amount of which depends on your procurement policy (how much and how long you store ingredients) and the payment terms granted by your suppliers.
Here you will mainly need to quantify the working capital, analyze whether the figure has increased or decreased, and try to identify levers to reduce it (such as inventory reduction, negotiation of payment terms, etc.).
Analysing the amounts invested by the restaurant to maintain its equipment (such as kitchen supplies, furniture, and the security system) will give you an idea of the amount you need to put aside for maintenance in the years to come.
Here, it is useful to analyze both the amounts, their relative weight in relation to the restaurant's revenue and EBITDA, and the methods of financing the equipment (through loans, leases, self-financing).
Cash flow from operations
Cash flow from operations corresponds to EBITDA, minus the change in working capital requirement, minus the amount of capital expenditure.
It is therefore the cash generated by the company's operations, before taking into account corporation tax and cash flows related to financing (such as loans and dividends,.).
Needless to say, this amount must be positive (otherwise you risk filing for bankruptcy fairly quickly), and ideally as high as possible.
11. Analyze the seller's motivations
Here, it’s a matter of making sure that the current restaurant owners' motivations for selling the establishment are genuine, and not just due to the fact that they suspect the profitability of the restaurant may decline.
If you do feel doubtful about the current owner’s intentions, don’t hesitate to include price adjustment clauses in the sale contract - in the event of a major and unexpected change in the restaurant’s performance after the takeover.
12. Understand the terms of the sales contract
A contract for the transfer of a business meets a set of extremely precise standards, so you must ensure that they are respected. Certain information is mandatory, it is therefore essential to consult a lawyer so you can chat through any terms you don’t understand.
That's it for this time, we hope this article helped you better understand the key areas to investigate when taking over a restaurant.
Taking over a restaurant means staying informed and mastering each step of the transfer, so don't hesitate to get in touch for advice in order to obtain complete control of your project.
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