Restaurant for Sale — Your Complete Guide to Buying a Restaurant

Existing or New — Weighing Up the Facts

Making the decision whether to take over an existing business or to start from scratch can be tricky. The advantages of an existing business can be alluring. After all, the bones, such as furniture, fittings and equipment can be included in, or negotiated into the deal and can translate to a walk-up start.

When contemplating buying existing premises with a commercial kitchen layout and design, consideration needs to be given to whether it can be modified to suit your intended purpose and vision.

Equipment and fit-out, which would normally comprise a substantial part of your budget, may be integrated into the current layout. However, should you need to include substantial sized equipment or machinery such as a commercial freezer or oven, the presence of existing equipment may in fact prove to be a hindrance to your tailored design plan.

Additionally, do your due diligence and have a professional assess all existing equipment for signs of damage, to verify it is safe and functioning correctly.

A critical review of terms and conditions needs to be given to any outstanding lease agreements which may be in place at the time of handover.

TIP: Registering with sites such as businessesforsale.com or commercialrealestate.com.au, allows you to access comprehensive information regarding businesses for sale within your desired location, and enables you to be updated on current listings as they hit the market.

Goodwill is often touted as a positive selling point, however this is difficult to quantify. Conversely, ‘badwill’ may have tainted customer’s perceptions of that business. The resultant negative reviews and contaminated branding can be difficult to negate. You may be faced with having to lure clientele back to a business with a tarnished image or reputation.

One simple question must be asked of any established business looking to sell and that word is why?

After all, very few people walk away from a cash cow. It is true that retirement or the demands on time and family when running a food service business can have a detrimental impact on one’s life. This being the case, there are genuine circumstances where sellers are motivated to sell a profitable business.

Nevertheless, a vendor’s motives for selling must be thoroughly investigated. It may seem like looking a gift horse in the mouth, questioning the motivation behind offering a thriving, profitable business for sale, but it is reasonable to query the rationale of a vendor looking to walk away from a viable concern. A genuine vendor should have no hesitation in opening up their financial records for your inspection.

Do not take the vendors reasons for selling on face value. Do you research by speaking to other similar establishments in the area about their experiences.

Finding that a business is simply struggling in a competitive market needn’t be a deal breaker. Perhaps, simply offering a more suitable cuisine or price point would turn around the premises viability but at the very least, it provides you with some negotiating leverage.

Performing due diligence when taking over an existing business therefore, is imperative. This can be performed by a lawyer, accountant or business advisor but must include a review of the following:

• Records of accounts receivable and payable
• Income statements
• Profit and loss records for the past 3 years
• Reasons the vendor has for placing the business on the market
• Details about the value and condition of fixtures, fittings and equipment which are included in the sale
• Existing contracts with suppliers
• Seller's credit history
• Has the business been served with notices regarding health, water or sewerage which contravene government laws and require extensive work to address?

Location — Finding the Sweet Spot

The old real estate adage of Location, Location, Location, goes triple when you are scouting for the ideal premises to set up shop. In fact, the importance of positioning cannot be overstressed. Some of the attractions to consider are:

• High visibility
• Filling a niche
• Ample parking
• Lack of competition for your particular cuisine
• Surrounding population numbers and demographic

Setting up a five star restaurant in a poorer neighbourhood is a recipe for disaster. However, there is benefit to be had in positioning yourself in your local area, where you can monitor and fill in for staff and if needed, where you can be at a moment’s notice.

Take into account the formula being used by existing successful food businesses in the area. Is there a niche or opportunity to develop or expand an existing business which competitors may not have considered?

There is an increasing amount of interest in restaurant ‘precincts’, attracting people looking for night-out packages, which combine a meal followed by an entertainment option.

As a perfect example of this, consider Knox Ozone in Wantirna South in Melbourne’s East. Situated adjacent to a busy shopping centre, this hub of restaurants, cafes and hotels offers visitors the full gamut of entertainment options. The adjoining Village Cinema, bowling facilities and nightclubs means that patrons have no need to leave the area to enjoy a full, rounded, comprehensive evening out.

Whilst the overheads for such a site must be considerable, the benefit of having the drawcard of a central entertainment or restaurant hub, cannot be underestimated.

Scout these types of locations and talk to current business owners about their experiences. Smaller shopping strips in high visibility locations can be attractive to locals and the services of delivery companies such as Menulog can expand your customer base and territory.

To Rent or Buy? — That is The Question

There is no definitive answer to this question due to the amount of variables involved, and it falls into the category of ‘how long is a piece of string’.

Lease Logic

The major consideration involved is of course, the capital you have available. If capital is limited and your vision for your cafe or restaurant is immense, you may find leasing a better option, especially when starting out. Leasing can free up vital funds which are then available to be invested into fit-out, equipment and marketing your new venture.

The limitations of leasing are the constraints of the property and what the owner will permit as far as remodelling to fit your purpose. This is especially so if the premises was not originally fitted or designed for food service. To bring everything up to code as far as wiring, ventilation and plumbing is concerned, can mean a substantial overhaul of the existing building.

If leasing is the best option for you and you have located a viable premises, done your due diligence, researched the area, competition and demographic, then you are ready to haggle.

Your position as a negotiator is really tied to how motivated the owner is to tenant their property. In a situation where you will be doing major structural changes, you may be adding substantial long term value to it.

An example of this is the inclusion of a cafe in a new building complex. This drawcard will lure other tenants to the building and puts you in a strong position to negotiate your lease terms.

It is imperative that you seek legal advice before signing on the bottom line of any lease. Clauses regarding regular rent increases can dramatically affect your budget, yet are a common inclusion in commercial leases.

Also consider whether you have the right to renew your lease after your agreed term has ended. The considerable costs involved in fit-out and equipment means that you will need to get maximum benefit from your investment.

Buying Benefits

Whilst buying a property is a major financial commitment, if you have previous restaurant experience, chances are you have the ability to make an informed decision based on that. Buying when you know what to expect can be the more viable option in the long term.

As an example of this, purchasing a premises can offer:

• An asset where any improvements and upgrades, directly translate into value added profit
• Increased capital growth, which represents equity that can be accessed for marketing, expansion or simply the security of having a financial buffer in reserve
• Budget for your mortgage rather than the vagaries of regular rent increases
• The flexibility of being able to adapt to your changing business needs without having to gain consent of an owner
• Freedom to set a long term business plan and invest in a location where you know you can’t be evicted or asked to vacate at the end of a tenancy lease

Employing the services of a qualified lawyer, accountant and/or business advisor (see below) at the outset of your venture, will provide you with the expertise to review any business contracts you sign

Financing Your Vision

Starting up any new food business is going to require substantial capital outlay. Leasing or buying premises, licences, equipment and staff are just a few of the costs you will be facing. It is impossible to quantify exactly how much you will need but it will likely lay somewhere between $20,000 for a small venture such as a food truck to $250K plus to fit-out a commercial kitchen.

There is no point in making big plans until you know exactly what your financial position is. Understanding what your financial institute will lend you and weighing that against your forecasted costings for premises, permits, licenses, building alterations and equipment, enables you to structure a prudent budget and contingency.

Presenting a well formulated and researched business plan which outlines your product, forecasts, sales and marketing strategies along with your cost and profit estimates, will give you the best basis for success when approaching a lender.

As a guide consider the Business Plan template provided by the state government which can be viewed here.

The Process to Purchase

As we have seen, arriving at the point where you are ready to make a commitment to purchase a restaurant, may involve a number of false starts. Unmotivated sellers or those with unrealistic expectations can be frustrating to those keen to begin their journey as an independent restaurateur. View these hiccups as learning curves which will hold you in good stead when you begin negotiations in earnest.

When the time arrives and you have identified a restaurant which meets all your desired criteria, the process to purchase can commence.

Retain a Lawyer

For the uninitiated, purchasing a business can seem like an intimidating undertaking and should be a embarked upon only under the guidance of a Commercial Real Estate Lawyer. These specialised lawyers are experienced in legalities surrounding:

• Drafting of contracts
• Contract negotiations
• Taxes
• Titles
• Conveyancing
• Conducting due diligence
• Licensing requirements
• Restrictive covenants

Securing the expertise of a Commercial Real Estate Lawyer, may save you more in the long term, than the initial financial outlay for their services.

For those unfamiliar with Commercial Real Estate Lawyers, recommendations can be solicited through business associates and friends. Alternatively, contact the Australian Bar Association’s lawyer referral service.

Making a Move

In consultation with your lawyer, the time has come to make initial contact with the restaurant via their selling agent. If the current proprietor is selling without an agent, a discreet enquiry can be made directly — ensuring staff, who may be unaware the business is on the market, are not unnecessarily alarmed.

Inspection and Inclusions

Organise a time to inspect the property, ideally in the company of the current owner. Take copious notes regarding:

• Inventory
• Existing equipment including leases and warranties
• Condition of existing equipment
• Note the layout and design of the kitchen and whether it will work with your plans without major overhaul
• Assess what you don’t require — furniture, fixtures and equipment. These may be negotiated out of the sale price
• If the current kitchen and dining area will require renovation or modernisation, budget contingencies need to be formulated to allow for the time the business will be closed.

Assessing the Value

Once you have a good grasp of the scope of the assets and inclusions, it is time approach your lender so they can organise a valuation. This process covers four areas:

• Asset valuation — subtracting the business’ existing liabilities from the value of it’s assets
• Cap rate — the future return potential of the business
• Earnings multiple — multiplying the earnings before interest by the cap rate
• Comparable sales — comparing like sales (or apples with apples)

Letter of Intent

A letter of intent, is not a purchase agreement, rather a formal indication to the vendor of your interest in the property and an outline of the major details involved in the transaction. The letter can be drafted through your lawyer and should specify that it is non-binding.

This letter will outline:

• Your interest in the property
• A tentative purchase price based on the above assessments
• The terms of the purchase
• Conditions of the sale including provisos which may involve:
• The condition of equipment at handover
• Final inspections before settlement
• Inclusions such as equipment, furnishings and lease agreements

Section 52

By law, all sellers of small businesses (up to $350,000) must supply buyers with a Section 52. Prepared with their accountant, this statement outlines the financial performance of the business for the past two years and provides a due diligence guide for buyers.

Due Diligence

Once a letter of intent has been presented to the vendor and he has been assured of your serious interest, you are now entitled to a closer examination of the business’ minutiae, including:

• Examination of the lease — is the lease ‘assignable’? — meaning, does the current owner have the right to transfer the property’s lease to you?
• Ensuring the business is unencumbered by debt.
• Organising professional inspections of all equipment including cookers, cold storage and electrical appliances along with, furniture, fittings, electrical wiring and plumbing to ensure they are deemed safe and in good working order.
• If applicable, ensuring the liquor license is included in the sale. Check that it is transferrable through your state’s liquor control board.
• Determining which intellectual property will be included in the sale — business name, branding or trade secrets such as recipes.
• Have your lawyer analyse the profit and loss statements and review their findings under their professional guidance.
• Examine staff contracts and the ramifications of a change of proprietor.
• Research the reputation of the restaurant through platforms such as social media reviews.
• Through your lawyer or accountant, ascertain if there are outstanding debts including — tax, lease payments on the premises or equipment associated with the business. Also any pending lawsuits or health code violations.

Negotiating a Price

To this point, your intentions have been to assess the business’ prospect as a viable concern and perform a valuation on the equipment and resources you would wish to include in the deal.

Armed with this information and based on previous due diligence regarding assessment of the value based on the local market, previous turnover and future forecasts, it is time to make a formal offer. The offer should cover the specifics of the sale including all assets and be carried out in conjunction with your lender. It is always prudent to make the offer subject to finance.

Contract to Purchase

When both parties have agreed on a purchase price, a contract to purchase will be drawn up. The purchase and sale agreement is a formal legal document outlining your legal rights and responsibilities, warranties, transactions and agreements which must take place before closing.

This is the time to include conditions regarding:

• Repair or replacement of non-functional furniture, fittings and equipment
• Disbursements and ownership of debts
• Final inspection prior to settlement
• Cooling off period
• Restraint of trade covenant — prevents the current owner from opening in immediate competition to you
• Unforeseen changes occurring within the business prior to the transaction being completed
• Misrepresentation made by the vendor regarding inaccurate or false financial information

Make a Date

Once you have completed the processes above and when both parties are satisfied with the conditions of the purchase, a date will be arranged to sign the contracts to complete the sale.

A week prior to the settlement date, an inspection of the premises and equipment should be carried out.

This inspection protects you from any loss or damage which may have occurred during the settlement period. It is also a time to ensure repairs and maintenance have been carried out as per the terms laid out in the Contract of Sale.

Sign on The Dotted Line

On settlement day, once all parties have signed the contract, the business has now transferred ownership to you. Congratulations! Time for that glass of champagne. Now the hard work begins…

Professional Protection — Calling in The Experts

It is strongly recommended that you recruit the services of a professional, competent business lawyer who can assist you in navigating the labyrinth of legal requirements surrounding setting up a new business. Not only can they organise independent valuations on your property, they have expertise regarding mandatory compliance laws particular to your state or territory.

There is a wealth of advantages in employing the services of a professional, ideally with experience in laws regarding:

• Health and safety requirements
• Licences
• Permits
• Contracts including property leases or purchases
• Tax laws
• Planning restrictions
• Insurances

As with a lawyer, the expertise of a talented business accountant is a necessity when starting up any business. They can assist you from day one in your business venture by:

• Performing due diligence with regards to vendors accounts and financial records
• Setting up business accounts
• Navigating business tax laws
• Minimising business tax

Licences — Navigating the Maze

If you are planning to apply for a liquor licence for your premises you will need to apply through your state government department. The paperwork involved can be daunting and generally involves:

• Notice of application
• Applicant and premises details
• An application fee
• A ‘personal particulars’ form of each person involved in the application
• Submissions from a public interest assessment
• Plans, specifications and details of the proposed premises
• Certificate of local government
• Development approval certificate issued by the local government
• Certificate of title (of the property)
• Evidence of the applicant's exclusive right to occupy the premises (tenure)
• Training certificates — mandatory training
• Harm minimisation including codes of conduct, house policies and management plans

There will be an ongoing licensing fee. To give you an idea of the base fee plus any loadings, you can use this calculator to estimate ongoing charges for a licensed restaurant or establishment in NSW.

Local councils need to be approached regarding other permits and licensing, and businesses also need to meet standards outlined in the Australian New Zealand Food Standards Code (FSANZ) and Food Act 2003 (NSW). Restaurants must satisfy the food and safety regulations.

Frustratingly there is no uniformity in Australian food service laws. Each state acts independently so you will need to consider the laws relevant to your state.

TIP: Of course, the single most important aspect of obtaining your liquor licence is your choice of glassware, including wine glasses, beer glasses and cocktail glasses.

Design and layout

Unlike your average domestic kitchen, a commercial kitchen requires fit for purpose design which will be based around the specific type of kitchen you require.

With the use of architectural software such as AutoCAD, a designer can bring together a virtual modelling which will include:

• Thoughtful designs incorporating food, hygiene and health and safety compliance
• Sanitation compliance
• OH&S compliance
• Mechanical ventilation systems
• Sustainable ergonomic design
• Building code compliance
• Designs to optimise workflow and productivity

The specific type and volume of cuisine you intend to deliver, storage requirements (both dry food storage and cold), preparation areas, cooking equipment plus plumbing and electrical placement all need to be catered for in the design phase.

The multitude of considerations involved in creating a practical, efficient and safe work area requires the expertise of an architect or specialist kitchen design company. They will be able to make the best use of your space to create a flow in high traffic areas as well as include:

• Industrial ventilation systems (including H-VAC and range hood)
• Commercial refrigeration
• Building code compliance
• Compliant electrical, gas, plumbing and sewage implementation

Equipment Matters — Products and Performance

Commercial grade restaurant equipment is a must for any food service venture. The essential base equipment required is:

• Stainless steel benches
• Sinks
• Dishwashing Facilities
• Dishwashing Machines
• Cooktops
• Oven Ranges
• Range Hoods
• Refrigeration

Depending on your cuisine, other equipment such as deep fryers, pizza ovens, blenders, food preperation equipment and coffee machines, will need to be included in your shopping list and catered for during the design phase.

Higher quality, commercial kitchen equipment is specially designed for purpose and manufactured to:

• Higher industrial standards using a thicker gauge metal and reinforced welded components
• Withstand high volume use
• Have the capability to be ‘banked’ with other equipment such as commercial cookers, ovens and deep fryers

Utensils

As with your large commercial equipment, utensils need to be a quality, heavy duty investment. From kitchen scissors and tongs to commercial sized pots and pans, woks, steamers, baking trays and oven to table cookware — the list is diverse and substantial.

Your chefs will know exactly what knives to buy for their kitchen. As well as each chef's preference for knives, colour coded knives are an ideal way to avoid cross contamination, whether at a deli counter or in the heart of your commercial kitchen.

Catering supplies need to be fit for purpose, induction compatible and designed to withstand excessive heat and high volume usage.

Article: Some of your customers will have food allergies, intolerances and their own dietary preferences, so it's important to read up on all of the different requirements your customers could have. Check out our Restaurant's Guide to Dietary Preferences for everything you need to know.

Staff

Your staff can be the difference between return custom and a one star rating on Yelp. Professional, courteous and knowledgeable wait-staff helps make your customers’ experience the best it can be. So it’s important to hire the right people.

Ready-made, trained staff can be sourced through hospitality agencies or alternatively, you can source and train your own staff. Staff will require food handling certificates and, if you intend to serve alcohol on the premises, they will require Responsible Service of Alcohol (RSA) certification.

Obviously, an exceptional chef will be the star player on your team and can have patrons queuing up to sample their creations. Sourcing this vital component to your success can be tricky, time consuming and costly but ultimately rewarding. If you have the backing, head hunting a gifted head chef from an established, successful business is an option. This furnishes you with the ability to promote your business using the cache associated with their name.

Alternatively, taking a punt on an up and coming talent can pay dividends in the long term.

The Magic of Marketing

You may have lured the greatest, most acclaimed chef in the world to your kitchen, secured the ultimate desirable address and have a retinue of immaculate wait-staff ready to cater to your client's every whim. The trouble is, if nobody knows you exist, you might as well be serving lukewarm dim sums out the back of your station wagon.

There is no better recommendation than word of mouth and this is where the advantages of digital marketing gives you a sustainable, competitive edge.

Online content can connect and align your business with your customers using multi-faceted platforms, including:

• SEO (Search Engine Optimisation) — can put you in the front row of search engine results. Considering over 90% of searchers don’t go past page one of search results and 50% of them don’t go past the first three results on page one, your business is basically invisible without the implementation of SEO. Involving an experienced digital marketing specialist or agency who has quantified, proven results can be a winning combination.
• An interactive, well designed website should reflect your business brand. Not only would it contain staples like menu details, opening hours and contact information, it can also incorporate the capability to take bookings.
• Interactive apps which encourage diners by streamlining their connection to you.
• The big social media players — Instagram, Facebook, and Twitter. These furnish customers with real time ability to create a ‘buzz’ around your business through user generated content, feedback and testimonials.
• Social media also assists with branding and promotes customer loyalty and alignment.

Article: Check out our complete guide to marketing your restaurant.

In today’s world of multi-platform technology, where Gen Y are able to react and review businesses in real time, having a digital marketing campaign in place can increase your business traffic manifold. With almost 90% of business reporting that social media has generated more exposure for their business, it makes perfect sense to incorporate it into your marketing campaign.

Sites such as Trip Advisor and Yelp are increasingly being utilised by those seeking highly ranked eating establishments and can draw visitors from not only your local neighbourhood but also from around the world, wishing to experience local colour and cuisine. You don’t have to be a five star restaurant to become a sought after destination for travellers.

A Word About Passion

Entering into the realm of the food industry can’t be done on a whim. The outlay both financially and emotionally are immense. The hours are long and the demands on your life can be 24/7 and dominate your time to the exclusion of family, friends and a social life.

To those who have the calling, it can be the most rewarding experience of their lives.

Positioning your business to optimise it for success requires thoughtful planning and research backed up by reliable professional acumen. The good news is, if you get this preparation period perfected, you can enhance your prospect of success immeasurably.

The ingredients are there, the tools are at your disposal, all they need now is you to bring them together to create a masterpiece of culinary cuisine which will delight and attract custom both locally and from around the world.