A Checklist for Purchasing an Existing Restaurant or Bar

Purchasing a restaurant can be an exciting but complex process. I’ve represented multiple buyers in both the asset and stock purchase of Westchester New York based restaurant chains, family-owned restaurants, bars, delis, and Edible Arrangements. Some of those client purchased business that have been existing for over 20 years. Some of those clients acquired restaurant chains with an established brand. Some of those clients acquired stand alone businesses. Whatever the type of transaction, in order to ensure a successful transaction, here is a checklist (subject to frequent updates) of things to consider when purchasing a restaurant, bar or similar business:

1. Determine your budget and financing: Determine how much money you have available for the purchase, including the down payment, closing costs, and ongoing expenses needed for the transition process. Sometimes acquisitions are funded through investors and sometimes they’re funded through loans such as an SBA loan. Understand what you’ll need in order to secure the appropriate financing such as obtaining requisite financials, obtaining independent valuations, and a detailed list of the assets being acquired.
2. Research the market: Research the local market to understand the competition, demographics, and demand for the type of restaurant you are interested in purchasing. How long has the target restaurant been in existence? What reviews does the target restaurant have online on platforms such as Google Business or Yelp.  Are you purchasing the target because of a successful menu or simply because of the location? Is the target restaurant maximizing its location and demographics?
3. Analyze the financials: Review the restaurant’s financial statements, including income statements, balance sheets, and cash flow statements to understand the business’s financial health. Gain access to and reports generated from the POS. Obtaining accurate financials can be tough when some restaurants don’t accurately report their cash receipts because they’re trying to minimize their taxable income.  However, this leaves room for negotiation when there isn’t sufficient documentation to support the proposed valuation/purchase price.
4. Evaluate the location: Evaluate the restaurant’s location, including accessibility, parking, and visibility, to understand its potential for success.
5. Consider the equipment and inventory: Evaluate the restaurant’s equipment and inventory to ensure they are in good condition and appropriate for the type of restaurant. Identify all existing warranties and inspection reports.
6. Understand the lease: Review the lease agreement, including rent, lease term, and any restrictions or conditions. As part of the lease you want to understand the insurance requirements and you want to understand the conditions/requirements in the event you look to sell the restaurant (which is usually part of a restaurants’s 5 year business plan/exit strategy).
7. Evaluate the staff: Evaluate the current staff to determine if they are capable of running the restaurant successfully. Target those employees that are the greatest asset to the company. Visit the location to taste the food, evaluate the staff, wait times, level of service, quality of the drinks, general hospitality, and so on. As part of the acquisition of a restaurant I’ve advised clients on proper hiring and firing employee protocols, and the importance of detailed employment record keeping in order to remain compliant with New York labor and employment statutes. As part of your due diligence you should obtain copies of worker’s comp. policies because you want to make sure that each and every employee is covered under the worker’s comp plan. All too often restaurant owners try to minimize their insurance expense by paying an employee “off the books”. This is a big no-no which can lead to civil and criminal penalties imposed by the New York State Dept. of Labor.  Furthermore, in my experience, no good deed goes unpunished. The employees getting paid “off the books” are the ones that are most likely to retaliate (with false claims and accusations) in the event their employment is terminated. You should discuss with your attorney how to address those issues and potential liabilities.
8. Research the licenses and permits: Research the licenses and permits required to operate the restaurant in the local area and ensure they are in place.
9. Consider the reputation: Evaluate the restaurant’s reputation by reviewing customer reviews and feedback on social media and review sites.
10. Conduct due diligence: Conduct thorough due diligence to ensure that there are no hidden issues, such as outstanding debts or legal disputes, that could affect the purchase. This becomes less relevant in asset purchase deals but it is important to understand the condition of the assets being acquired such as the condition of equipment, or the condition of the systems within the structure such as HVAC, sprinklers, plumbing, and the roof.  If the restaurant is going to be acquired in a developing area, find out if the town or landlords have any plans for extensive construction as that can and will effect your accessibility and profitability.
11. Seek professional advice: Seek the advice of professionals, such as lawyers, accountants, and business brokers, to ensure that you have a full understanding of the purchase and to assist with negotiations and documentation.
12. Develop a business plan: Develop a business plan that outlines your goals, strategies, and financial projections for the restaurant.
13. Negotiate the purchase: Negotiate the purchase price and terms, including any contingencies, with the seller or any seller-financing. For example, in one transaction my client was purchasing a stand alone business and according to the terms of the lease would be responsible for all repairs to the premises, including repairs to the roof, HVAC, and plumbing. A significant part of the transaction involved negotiating the indemnification agreement in the event the condition of the property required the purchaser to pay over $5,000 to repair things such as existing sprinkler systems, ventilation systems, structural defects, or repairs to the roof (which in my opinion is perhaps the biggest wild card when it comes to potential repairs).