BUYING A RESTAURANT, CAFÉ, CATERING COMPANY OR HOSPITALITY BUSINESS
“Plan to sell your business before you start!”
Why is it important to plan to sell your business before you start?
Many people enter the hospitality industry hoping to own their own business and earn the money that employers have deprived them.
They want to be their own boss and seek to fulfil their aspirations within their chosen industry, and this is why we are here.
We want to help people make their businesses work.
Let us sit back and reflect on the past few decades of the hospitality industry. In retrospect, the industry has evolved to one of the most pertinent
fields of business. There is an assortment of hospitality businesses nowadays such as café’s, restaurants, catering companies and the list goes on. However,
it is nothing new to see one business doing better than another. The reasons are aspects such as location, quality of the product, marketing, equipment,
etc, and most people are aware of this and keep this in mind when they wish to purchase a business. However, there is one aspect that many people do not
necessarily take into consideration, thus often neglect. This is ‘structure’.
Structure is the key to bringing together a successful model. Imagine your business where you were not tied down to the technical roles. Imagine that you
have everyone buzzing around you, doing what is needed to be done. Now think what it would be like to have a person taking care of all the technicians, a
person who ‘manages’ everything for you. That would leave you with the role of entrepreneur, the most important role within a business, the role that would
enable you to improve on every facet of the business that you will be able to replicate and sell with ease.
Many people are interested in creating or expanding their own business. They usually have been in the industry for several years and realise its time to
become their own boss, and be exposed to the potential dollars that bosses get… If that is the case for you, then there are several questions you need to
ask yourself. How do I buy right? Who has the best business for sale? What do I really want my business to achieve? How must I run the business to ensure
its success?
It is a given that successful businesses are built on successful models. This can be reflected in key aspects that people look for when they buy. Many
business owners wishing to expand, or people purchasing their first business tend to appreciate is One such idea born from this manifestation is franchising.
Franchising has changed the face of the hospitality industry ever since Ray Kroc discovered the potential of McDonalds. It is the idea of creating a
structured environment, where any individual can fit into a role within an organisation. The process is structured around pre-determined goals and
objectives, planning to achieve goals, site specifications and a great team to realise the plan.
When you buy a Restaurant are you buying a business or a space with plant and equipment and somewhat dubious goodwill? What is a business and will this
proposed operation realise the expectations when the previous owner receives their cheque and leaves forever? Due diligence is required to ensure you are
getting what you are paying for, 30% of businesses change hands every year.
What is your fundamental business concept?
You have an idea, will it work? And have you researched the market? What is involved in bringing the concept into reality? Should you buy an existing
business or start from scratch? The following will assist with broadening your knowledge of the buying process and what information to collate in this
process to make an informed decision.
What is your motivation?
Determine what your goals are before deciding to buy a restaurant. If you don't set specific goals, you could waste time while your ideal site is gobbled
up by someone else. So, what are your goals for this restaurant? Do you want to make enough money from this venture to retire in 10 years with $1 million
in the bank, an annual income of $200,000 and the ability to travel four weeks out of the year?
Establishing clear goals will cut down on the number of businesses you consider buying and will help you avoid biting off more than you can chew.
"Do you have the stamina, energy, desire and capital to handle a large busy business?
Determining how much money you have to invest in a new venture will also limit the type of establishment you can buy and may affect your goals and objectives.
MAKE A PLAN
The research manual
Research is fundamental in creating a detailed plan for reaching your restaurant ownership goals. Start by getting demographic information on potential
customers to help focus your search. If you know the demographic profile of your target customers, then finding a restaurant to buy will be much easier.
It will allow you to screen out locations that would not appeal to your targeted customers. Successful buyers include the following criteria for
acquisition in their buying plans:
Return on Investment & Net cash flow: What is the minimum cash flow the restaurant has to generate to meet your objectives? What rate of return do you
require on your investment? You should know the answer to both of those questions before you set out to buy a restaurant.
Verification of Financials: There should, ideally, be a history of profits for the restaurant. Check the sales for the last three years — preferably
five — to determine whether the operation has been in the red or in the black. Look for growth, or at least stability. If volume and profits haven't
grown, find out why and whether those numbers can be turned around with a reasonable amount of work.
You must request Bas Statements for last 12 months, Tax Returns last 3-5 years, Profit and Loss and balance sheets, depreciation schedules, add backs,
Budget & Price range: How much are you willing to pay for a restaurant? Calculate how much work must be done on the concept to get it up to your
operating standards when figuring out how much you'd be willing to spend on the restaurant.
Location: The restaurant should be located in a market that appeals to your typical customer on the basis of demographic profiles. Source a demographic
profile of the area so customers can see whether it meets their specifications. These profiles include not only the current population but also past and
projected totals, growth rates, income, household size and age of consumer.
Suppliers are another good source of information for potential buyers. They can often tell you which areas of the city have increased in volume, as well
as which restaurants are seeing more traffic, on the basis of their own orders from clients.
Don’t forget the importance of location; the rent may be higher, however don’t neglect to consider the traffic, accessibility, visibility when evaluating
an acquisition. It is a measure of how visible the business is to potential customers. It isn't enough for customers to just be able to see the place;
they must also be accessible for them.
Capacity: What are your requirements for minimum square footage and seating capacity? These requirements are based on your income goals and are critical
for the survival and profitability of the business.
Rent & Rent Reviews: Check the rent and rent reviews. Refer ‘Lease negotiations and assignments’ on our web site for comprehensive details.
Lease terms: Does the premises have a good lease? Is the rent in proportion to existing sales and achievable with rental increases? How long is the lease,
what are the options? What are the terms of assignment of the lease to a new owner? What special conditions or restrictions are on the lease? Are there
body corporate restrictions? Copy of original lease, disclosure document, amendments to lease? These are a few of the details you should look for in the
lease. To view the information kit for retail tenants please visit: http://www.retail.nsw.gov.au/
Terms of Assignment: Financial Capacity, qualifications and operating capital reviews. Refer ‘Lease negotiations and assignments’ on our web site for
comprehensive details.
Local Council: Are there any Council restrictions that could affect your plans, such as unauthorised footpath dining, place of entertainment licences and
registrations, DA’s, physical limitations on water or sewer systems, grease traps , mechanical ventilation and road construction, should also be researched.
Are health regulations, fire-code restrictions and occupancy limits reasonable or onerous? What are the limitations on signage? Is there a parking issue,
will I need to pay a parking levy?
Liquor license: What is the current liquor licence, is it a Restaurant or Drink-or-Dine Authority, Nightclub, Hotel, Place of Entertainment, can I achieve
a Liquor licence? What is the cost? How many toilets and other facilities do I need? What are the existing hours of operation of the business in terms of
the liquor licence trading hours? Does the licence cover the outside dining areas? Who will be the licensee? What is RSA, What is a responsible service of
alcohol house policy? What are the requirements of the liquor licence currently in operation? Any restrictions?
Type of building: Do you require a freestanding building for your operation? A shop front, will an upstairs location be of issue? Are shopping centres
suitable for my business?
Reputation: Does the operation you are considering buying have a good reputation with customers and suppliers? The restaurant's reputation may be tied to
key employees. Will they stay on after you buy the restaurant?
Physical condition: What's the condition of the building housing the restaurant? Is it up to code? Will the power system meet your needs? Does the premise
have natural gas supply? What is the condition of the heating, ventilation and air-conditioning systems? Does the operation need a fresh coat of paint or
refurbishment? How does the floor covering look and how much longer will it last? Will you have to do costly repairs or renovation?
Continuity: Will the owner stay on for a reasonable period of time to train you? How long has the current owner owned the business? Why are they selling?
Are the owners current with all their business creditors? Are there any legal breaches or legal action pending against the business?
Trial Period: do the financials satisfy your due diligence? Do I need to request a trial to verify the cash-in-draw revenue? This process is only conducted
as a condition of the contract and is not usually required unless financials are not verifiable in a cash only business.
Plant & Equipment: What is the quality of the plant and equipment and who owns it? Is it owned by the business encumbrance free, owned by the landlord,
owned by third parties, leased or rented? Motor Vehicles that may be used in the business obtain Registration papers and log books.
Certificates and Registrations: Business name, Trade Marks, Footpath dining permits, Council Health Certificates, workplace certificates & environmental
licence (some states).
Contracts in place: Foxtel, apra, cleaning, maintenance, equipment
Staff and Employment details: Names & Job descriptions, date of commencement, long service liability?, Average gross wages, workers compensation,
superannuation, Sick leave entitlements, annual leave accruals, AWA’s, how are the staff paid?, what arrangements for taking over and or terminating
staff Caution that this process must be handled with care to avoid employment issues seek advice from Restaurant and catering Association, your Solicitor
or an Industrial Relations advocate.
Stock in Trade: Food, Beverage, Forward bookings and or contracts.
Freehold Property: DA Applications, Pest and Building Inspections, Valuations, Rates Notices, Certificate of title.
Check that there are no: Covenants, easements, defects, local government notices or orders against the business. Contact the local council to have a
kitchen inspection prior to ensure the kitchen complies with council requirements, if in doubt of compliance issues.
Franchises: Obtain the disclosure document and terms of assignment, franchises are complex in achieving assignment and often require psychological
assessment and multiple interviews to achieve acceptance as a franchisee.
Other Information required: photos, awards, certificates, articles, TV commercials or reviews, menus, wine lists, promotional information, marketing
materials, floor plans.
Systems and Procedures: does the business have systems and or procedures to maintain the business after the owner has long gone?
You must ultimately develop a system that is applied purposely to the business development process and has the power to transform your business into an
incredibly effective and profitable success. Naturally it helps to get expert advice and make sure the health of the Business is great externally and
internally. There is no surprise that failure rates of small business are: 90% in the first 2 years, 90 – 95% first 5 years and 80% second 5 years. Be
a success story; use the resources at your disposal as the alternative is a self professed expert flying blindfold!
You can improve the odds of successfully purchasing a viable business by seeking expert advice and assistance. There are too many minefields to try to
handle such a large purchase on your own. You are also racing against other restaurateurs who want to expand their business, and good operations don't stay
on the market for long. But on the other hand, don't let haste lead you to purchase a lemon.
You don't have to hire a full-time expert; you may need to get just a few hours of advice. An accountant can tell you whether the operation's records
are in order — an indicator of whether the restaurant was properly run and whether the business numbers the current owner gave you are accurate.
An accountant can also advise you on tax implications and scrutinize financial statements.
· Ask your Solicitor to check out prospective leases to advice on the terms and conditions. He or she can help ensure that you will not be assuming
unwanted liabilities.
· Examine the Plant and Equipment, so you'll know whether it's worth the purchase price and how long the equipment will last before it needs to be
replaced.
· Get an independent building inspector to examine your prospective location from top to bottom for an unbiased report on the operation's condition
(especially for freehold purchases). Ask the inspector for an estimate of the maintenance and leasehold-improvement costs you face to get the restaurant
up to your standards.
Close Encounters Trading Network has a network of professionals that will assist you in this process from buyers agent to help you locate a business in
the right location, estimate future business trends in the area and determine whether your targeted clientele is moving into or out of the area. We can
arrange a break-even analysis to tell you what amount of sales you will need to cover costs and expenses before you can earn a profit, and can advise
you about consumer trends.
Close Encounters Trading Network, restaurant hospitality & business consultants are here to assist in your long term success in buying, selling or
growing a successful business.
We recommend you register for our free seminar on buying, selling and growing a Restaurant, Café or Catering Business.
Finding the right restaurant to suit your business needs can be tricky, but there are great opportunities hidden among the risks. You can improve your
odds of buying success by doing your homework before you shop around.
Call Australian Business Sales Corporation for advice on buying or selling a business ! 1300 722 556 Noel Currie
