Updated: Jun 20, 2020
Have you always dreamed of opening a restaurant?
You imagine the decor, the delicious food that you serve and you believe that your restaurant will have the best service. That will be amazing right?
And the next question you have in mind is, how can you own a restaurant?
There are two ways of owning a restaurant:
1. Build-out a new restaurant - have a new restaurant from scratch that can cost between $50,000 to $500,000 or $70,000 to $700,000, depending on how fancy you get.
It will involve a landlord that will give you at least 90 days to finish the build-out. They will give you a shell or a room and turn that into a restaurant.
You usually have 90 days to finish the installation of gas pipes, electrical wiring, sinks, walk-in fridges, ovens and all other pieces of equipment that you need for your restaurant.
All of these cost a lot of money and you have a very limited time to make everything happen. This would require very concise and tight planning before that 90-day hit.
And if this is your first venture, this route isn't the best choice for you, even though for instance, you are a chef or have been working at a restaurant for a decade.
Owning a restaurant, and working at a restaurant are totally different things because they require a different set of skills.
There are a lot of things to do when building-out a restaurant, from small things like deciding what cups or frying pan you are going to use, to bigger things like what brand of the oven or stove is the best. It can be very stressful.
2. Buy an existing restaurant - there are two options in buying an existing restaurant:
1. The restaurant is closed - it was previously operational and now it is on sale. This can be likely an asset purchase.
It means you are purchasing the physical assets of a restaurant such as equipment like stoves, ovens, fridge, etc. The purchase price will vary depending on the value of assets.
Here's a tip, hire an equipment appraisal person to come up with what the equipment actual worth is versus what the seller is offering.
Equipment appraisal persons are certified individuals who can assess the actual value of the assets.
For instance, if the owner and the broker said it’s $35,000 and but in actual, the value of the asset is $25,000. You pay an equipment appraisal person for $400 who can save you a few thousands of dollars.
Or instead of purchasing the assets, you may consider leasing them. For instance, the owner is leasing a dishwasher monthly.
Here, they are simply going to change the lease name to your name as the new owner. And then, you get to inherit all the equipment and the lease contract and take over the paying.
If you do this, which is upfront, you are not putting as much money in, you do need to consider that your monthly overhead rate will be higher having all those leased equipment.
This is fine for as long as you do the math, check your break-even point to make sure you're being profitable.
2. The restaurant is for sale and currently operational- as in it is currently in business, serving customers, and it's listed for sale.
Things to consider if an operational restaurant is for sale, most likely, it's not profitable as in it's below break-even, or barely hitting break-even.
It's most likely not making much money at the end of the month. So you need to go into that with an assumption and study the numbers to prove it otherwise.
There are formulas for calculating the purchase price of a restaurant. If you buy a new restaurant, they might tell you that it is listed at $60,000, $100,000, or $200,000, and that number they came up with has an applied formula.
They vary here and there so you need to do your own due diligence for:
1. Net profit times a factor of 3 to 5; or
2. The gross sales divided by 3.
To give you an idea, if a restaurant makes $100,000 in yearly profit, its asking price should be between $300,000 to $500,000. This is considered a fair deal.
If there's a broker involved, the broker can charge somewhere around 10% of the purchase. So if you purchase the restaurant for $400,000, $40,000 goes to the broker.
The broker may give you records of the previous owner's tax returns, or their profit and loss (P and L) statement for the last two to three years.
These numbers can be easily manipulated and changed in a manner that makes the P and L look good.
And they will present the tax returns of the previous owner which would technically look legit because it's a legal document right?
It's the money that the previous owner declared to the government, what they're making and the taxes they're paying.
Two things to share with you though, everything can be "cooked", and so you must do your own research.
We purchased the restaurant where the P and L are cooked, so are the tax returns. They did not at all reflect the actual numbers. Some people are lying on their taxes and that's a fact.
If the restaurant is making what's below the breaking point, you must have a very strong marketing plan before opening that restaurant.
If you do not start with a bang, you're going to get dismayed because every month you are going to get negative results.
On the other hand, what is the bare minimum amount of money that you nee