Perform Due Diligence When Buying a Restaurant

Everybody needs to eat to live, and over time we have turned this requirement into a social activity. Currently, a restaurant is - by far, one of the most popular businesses, and one which could be an even more desirable buying proposition if you happen to have a taste for a specific kind of food!

Conduct due diligence when buying a restaurant business even though your heart, or even your stomach, might tell you that this is the vocation for you. This industry is very competitive and there are many elements you want to consider. Allocate a period of time, experts recommend four weeks, to observe the operation of the business. This should enable you to get a good feel and to smooth out any peaks or troughs before you make your final decision.

You have several key areas to investigate including the premises, the financials, the equipment, lease, the operations and the employees. Do not be afraid to bring in experts, including an accountant experienced in the food business to help you, but as you go through your observation period, use your general business sense and a good portion of common sense to observe how everything works, especially from a client point of view.

For your paper and number crunching chores, expect to review the tax returns, profit and loss statements, cash flow worksheets, inventory records, employee records, equipment agreements, maintenance schedules, all necessary licenses, health inspections certificates and a history and copy of the lease.

When dealing with financials, you must know that the restaurant business has a large quantity of cash sales. Some business owners choose to siphon some of this off and not report it. Over time this is not a good practice as this money could have been used for marketing purposes, and when it comes purchase business assets, it can be very difficult to prove income and therefore worth.

When you are inspecting the property, look at it from an overall perspective as well as in detail. Can it be adequately seen from nearby major roads, is signage appropriate, well-maintained and presentable? Are there any other major competitors and are they overbearing? What is your first impression when arriving in the parking lot? Take a look at external dumpsters and trash removal areas to make sure that these are as well-maintained as possible and are unobtrusive.

Moving inside, what is your first impression of the decor. Is the waiting area pleasant and contributory to the overall ambience? Is there adequate signage for bathrooms, emergency exits? Pay close attention to the bathrooms. They should be in perfect working order, comfortable and impeccably clean and well-maintained. In a restaurant, everything, repeat everything should be clean, presentable and in full working order.

Most of the equipment contained in a restaurant and specifically within its kitchen is subject to certification, inspection and permitting. Check to see that this is all up-to-date and timely. While every element of the equipment should be operated according to the letter of the law, you must also ensure that regular maintenance and cleaning schedules are top-notch. For major items and appliances, see whether contractor warranties are available and can be transferred to you.

Very often a lease can be a potential stumbling block when looking at a restaurant for sale. The landlord will want to ensure that the business is being operated as efficiently as possible and may be wary of transferring or issuing a new lease to someone who does not have much experience. Look for terminology within the lease stating that transfers will "not be unreasonably withheld," and aim to ensure that you get at least as favorable terms during your tenancy. This would be a good time to assess the overall viability of the environment within which the business operates. If in a strip mall of some kind, are the anchor stores in good shape and do the majority of other businesses also appear sound? You do not want to see an anchor store disappear and the overall visitor level to the area decline.

When you analyze the operations of the business, you want to learn how the current owner operates and whether there are any immediate issues or challenges that you will have to take into account. Look closely at any "special arrangements" or unique selling points that involve a particular individual, a style or presentation of food. You want to be sure that these elements are transferable or will be present when you take over.

A restaurant will likely rise and fall on the strength of its employees. While you can expect a high turnover in any kind of restaurant, if you see some loyal staff and a good "team spirit" this can be a definite plus. Check to see how people are hired, the terms and conditions offered to them and exactly how they are paid.

While you should insist on an observation period, before you are involved in formal discussions with the seller why not kill two birds with one stone and visit the restaurant for a few nice dinners or lunches with other companions? You don't have to show your hand at this stage and can get a really good feeling by observing how the staff come and go, the operation within the kitchen ideally and in general get an opinion of whether everything is orderly and well-structured during the busiest times.