How To Buy A Restaurant
Let Us Help You To Understand
The Process
of Considering
Restaurants For Sale

Top 10 Things to Consider in Purchasing A Restaurant

Buying a Restaurant is a major decision. It will not only affect you financially, but it is also, and
perhaps more importantly, a lifestyle decision. How you live your life is shaped and influenced by what
you do for a living. If you have decided that now may be an opportune time to consider going into
business for yourself, working with a Restaurant broker can provide you with the professional
assistance necessary for a smooth and successful transaction.

Here are some commonly asked questions by buyers along with responses based on our
professional experience and knowledge. If you have any questions on any topics that we have not
covered, we are always happy to try to answer them.

Why should I go to a Restaurant broker?

A professional Restaurant broker can be helpful in many ways. They can provide you with a
selection of different and unique businesses, including many that you would not be able to find on your
own. Approximately 90 percent of those who buy businesses end up with something completely
different from the Restaurant that they first inquired about. Restaurant brokers can offer you a wide
variety of businesses to look at and consider.

Restaurant brokers are also an excellent source of information about Restaurant and the Restaurant
buying process. They are familiar with the market and can advise you about trends, pricing and what is
happening locally. Your Restaurant broker will handle all of the details of the Restaurant sale and will
do everything possible to guide you in the right direction, including, if necessary, consulting other
professionals who may be able to assist you.

Your professional Restaurant broker is the best
person to talk to about your Restaurant needs and requirements.

Why should I buy a Restaurant rather than start one?

An existing Restaurant has a track record. The failure rate in small Restaurant is largely in the startup
phase. The existing Restaurant has demonstrated that there is a need for that product or service in
a particular locale. Financial records are available along with other information on the Restaurant.
Most sellers will stay and train a new owner and most will also supply financing. These last two are
important considerations. Finding someone who will teach you the intricacies of running a Restaurant
and who is also willing to finance the sale can make all the difference.

What is the real reason people go into Business for themselves?

There have been many surveys taken in an attempt to answer this question. Most surveys reveal the
same responses, in almost the same identical order of priority. Here are the results of a typical survey,
listed in order of importance:
• to do my own thing, control my own destiny.
• Don’t want to work for someone else.
• To better utilize my skills and abilities.
• To make money.
• It is interesting to note that money is not at the top of the list, but comes in fourth.

“The Restaurant Specialist”

How are Restaurants priced?

Generally, at the outset, a prospective seller will ask the Restaurant broker what he or she thinks the
Restaurant will sell for. The Restaurant broker usually explains that a review of the financial
information will be necessary before a price or a range of prices can be suggested for the Restaurant.
Most sellers have some idea about what they feel their Restaurant should sell for – and this is certainly
taken into consideration. However, the Restaurant broker is familiar with market considerations and by
reviewing the financial records of the Restaurant, can make a recommendation of what he or she feels
is what the market will dictate. A range is normally set with a low and high price. The more cash
demanded by the seller, the lower the selling price; the smaller the cash requirements of the seller, the
higher the price.

Since most Restaurant sales are seller-financed, the down payment and terms of the sale are very
important. In many cases, how the sale of the Restaurant is structured is more important than the
actual selling price of the Restaurant. Too many buyers make the mistake of being overly concerned
about the full price when the terms of the sale can make the difference between success an failure. An
oft-quoted anecdote may better illustrate this point: If you could buy a Restaurant that would provide
you with more net profit than you thought possible even after subtracting the debt service to the seller,
and you could purchase this Restaurant with a very small down payment, would you really care what
the full price of the Restaurant was?

What should I look for?

Obviously you want to consider only those restaurants that you would fell comfortable owning and
operating. “Pride of Ownership” is an important ingredient for success. You also want to consider only
those restaurants that you can afford with the cash you have available. In addition the Restaurant you
buy must be able to supply you with enough income – after making payments on it – to pay your bills.
However, you should look at a Restaurant with an eye toward what you can do with it – how you can
improve it and make it more productive and profitable.

There is an old adage advising that you shouldn’t buy a Restaurant unless you feel you can do better than the present owner. Everyone has seen examples of a Restaurant that needs improvement in order to thrive, and a new owner comes in and does just that. Conversely, there are also cases where a new owner takes over a very successful Restaurant and not soon after it either closes or is sold. It all depends on you!

What does it take to be successful?

Certainly you need adequate capital to buy the Restaurant and to make the improvements you want,
along with maintaining some reserves in case things start off slowly. You need to be willing to work
hard and to put in long hours. Unfortunately, many of today’s buyers are not willing to do what it takes
to be successful in owning a Restaurant. A Restaurant owner has to, as they say, be the janitor,
errand boy, employee, bookkeeper and “chief bottle washer”! too many people think they can buy a
Restaurant and then just sit behind a desk and work on their Restaurant plans. Owners of small
businesses must be “doers.”

What happens when I find a Restaurant I want to buy?

When you find a Restaurant, the Restaurant broker will be able to answer many of your questions
immediately or will research them for you. Once you get your preliminary questions answered, the
typical next step is for the broker to prepare an offer based on the price and terms you feel are
appropriate. This offer will generally be subject to your approval of the actual books and records
supporting the figures that have been supplied to you. The main purpose of the offer is to see if the
seller is willing to accept the price and terms you offered. There isn’t much point in continuing if you
and the seller can’t get together on price and terms. The offer is then presented to the seller who can
approve it, reject it, or counter it with his or her own offer. You, obviously, have the decision of
accepting the counter proposal from the seller or rejecting it and going on to consider other
restaurants.

If you and the seller agree on the price and terms, the next step is for you to do your “due diligence.”
The burden is on you – the buyer – no one else. You may choose to bring in other outside advisors or
to do it on your own. Once you have checked and approved those areas of concern, the closing
documents can be prepared and your purchase of the Restaurant can be successfully closed. You will
now join many others who, like you, have chosen to become self-employed!

Do I need an attorney?

It may be advisable to have an attorney review the legal documents. It is important, however, that the
attorney you hire is familiar with the Restaurant buying process and has the time available to handle
the paperwork on a timely basis. If the attorney does not have the experience in handling Restaurant
sales, you may be paying for the attorney’s education. Most Restaurant brokers have lists of attorneys
who are familiar with the Restaurant buying process. An experienced attorney can be of real
assistance in making sure that all of the details are handled properly. Restaurant brokers are not
qualified to give legal advice. Your attorney will be, and should be, looking after your interests;
however you need to remember that the seller’s interests must also be considered. If the attorney
goes too far in trying to protect your interests, the seller’s attorney will instruct his or her clients not to
proceed. The transaction must be fair for all parties. The attorney works for you, and you must have a
say in how everything is done.

If you know of someone who has owned their own Restaurant for a period of time, he or she may
also be a valuable resource in answering your question about how small business really works. You
have to make the final decision that “leap of faith” between looking and actually being in Business for
yourself is a decision that only you can make!

IT’S ALL IN THE LEASE

(How to avoid Property Lease nightmares)
Ready to cash in? Considering selling your equity and taking it easy? Well, the chances of selling your
restaurant are slim to none unless you and your professional advisors have done some homework
regarding your property lease! Horror stories are a Dime a Dozen with commercial leases. When
negotiating a lease, it always pays to work with a good Real Estate Broker and Attorney – experienced
professionals who understand your needs. You must always consider the resale implications when
negotiating a lease. Resale value is often made or broken on several points:

• Obtain a long-term lease with options to renew. A five-year lease with three five-year options
always works!
• Lock in your increases based on reasonable numbers, such as C.P.I. increases with a
percentage cap.
• Obtain the right to assign or sub-lease your space, with a clause specifying that the Landlord
cannot unreasonably withhold an assignment.
• Beware of unreasonable Percentage of Sales clauses.
• Avoid renewal clauses based on sales levels.
• Avoid assignment clauses that automatically cancel Options to Renew upon the Sale of the
Restaurant.
• Obtain “concept exclusive” rights, if in a Mall or Shopping Center.
• Do not accept an “Open” option, to be negotiated at option time.
• Beware of the “Landlord’s Lien” provision – understand it fully before executing the lease.
• Do not sign any lease with a “Kickout” clause based on possible future events with the real
property.
• Do fully understand the default provision of the lease.
• Do “flag” landlord notices required to exercise your option. Some landlords require up to 180
days notice.
• If membership in the Merchants’ Association is a requirement, review the by-laws and talk to
other tenants. It is working?
CAM (Common Area Maintenance) clauses are often deal killers in the resale of a restaurant. If you do
not negotiate a favorable CAM agreement at the beginning of the relationship with the property owners, it
may just break you before you decide to cash in! Professional assistance is paramount when negotiating
a lease with a Shopping Center or any other location that requires the payment of Common Area
Maintenance.

Many leases are “NNN” where the tenant agrees to share building insurance costs, taxes and CAM with
the other tenants in the shopping center, based on the square footage of their space. Taxes and
insurance costs are fairly easy to document, but CAM costs can cover a myriad of expenses (from snow
removal to holiday decorations). These expenses can run out of hand, often escalating to an unfavorable
cost for the tenant.

The horror stories include charges for the leasing agents’ office party or for entertaining prospective
tenants. We have seen cases of poorly managed shopping centers where the CAM charges have
equaled or exceeded the base rent! We have also had the misfortune to represent clients who had
entered into a lease agreement with excessive CAM costs that prevented the owner of the restaurant
from selling his assets and good will.

How to avoid excessive CAM charges:

• Negotiate the specifics upfront and incorporate them into the lease.
• Negotiate both CAM inclusions and CAM exclusions.
• Cap the CAM at a reasonable square footage rate to avoid future escalations that may not be
affordable.
• Make sure the CAM is for current maintenance and not new construction costs.
• Make sure that capital costs are amortized over the life of the improvement, not charged for the
total investment. If the costs are not amortized, tenants who are in the last year of their lease
will have a bill that is difficult to pay and one that they will not benefit from!
• Have the landlord guarantee a minimum occupancy level for calculating CAM costs to avoid
overpaying CAM when/if occupancy falls. In older centers with many vacancies, this would
break tenants who had to maintain a half-empty center with high maintenance costs.
• Always include your right to audit the CAM account!

There are many other issues to address when considering a lease, including signage approval; leasehold
improvement approval and allowances; security deposits; building codes; usage clause restrictions; and
personal guarantees.

Before executing any lease document:
• Determine the extent of your personal financial exposure.
• Determine if the lease rates and charges will fit within your Restaurant plan’s operating budget
(Is the lease affordable?).
• Is the lease transferable? Is the lease an asset or a liability?
• Ask yourself: “would I buy the restaurant with this lease?”
A good lease has an economic value and is considered an asset! Proper planning means future resale
dollars!

BUYER DISCLOSURE

As a prospective Restaurant buyer, you should understand that as Restaurant brokers we represent
and are paid by the sellers who have employed us to sell their businesses. We are obligated by
law to act primarily for the seller’s (our client’s) benefit.
However, we also want you to know that it is our policy, as well as a legal requirement, that we treat you
fairly and honestly. We can provide you with valuable market information on businesses that we offer
for sale, education in the Restaurant buying process and assistance in buying a Restaurant.
Here are some other ways we can help you:

• We can show you businesses that are listed with our firm, helping you to develop an understanding of
how businesses are priced. We will also offer you a choice of businesses to consider purchasing.
• We will disclose to you material facts we know about the businesses that we have available.
• We will promptly submit all of your offers as instructed by the seller. We will promptly transmit all of the
seller's responses back to you.
• As Restaurant brokers, we are not qualified to advise you on legal or accounting matters. We can,
however, guide you through the transaction. We will provide you with information on how to engage
attorneys, accountants, and other professionals who may be of assistance to you.
• We offer businesses for sale without regard to the race, creed, or sex of the parties involved.
It is our goal to treat you fairly and with the highest level of competence. We encourage your questions
regarding our roles and responsibilities.

BUYING A RESTAURANT?

Whether you retain the current concept or institute a new one, the purchase of an established
restaurant can save you tens of thousands of dollars in start-up costs, in addition to giving you an
established Restaurant with proven income and cash flow.
First-time restaurant buyers can greatly reduce the elements of risk by structuring written offersto-
purchase based on “contingencies” of sale, which require a “Due Diligence” or inspection
period prior to any final structuring of the sale of the Restaurant.
Although many larger restaurants, especially chain operations, are sold through the purchase of
corporate stock, the majority of single-unit operations are considered ‘asset’ sales, which include
the assets but not the liabilities of the Restaurant.
Standard assets usually include equipment, fixtures, trademarks and other intangibles, but not
the inventory or perishables, dry goods and beverages.

Offers to the seller should include these contingencies:
• Seller must prove sales and income.
• All equipment should be in good working order, meet all codes and inspections of local
health agencies.
• The premises must also pass all inspections.
• Offers must be contingent on the buyer being able to obtain satisfactory lease arrangements
and financing.
• Most offers also should include a Non-Compete Agreement from the seller, which also has
tax advantages for the buyer.
Once all contingencies have been met, an experienced Restaurant attorney should prepare the
closing documents.
Also, an experienced restaurant intermediary can be of valuable assistance in wading through
the myriad of details and red tape.
In addition to the standard contingencies, the buyer should expect the seller to warrant the
following:
• Normal Restaurant hours will be maintained until the sale is finalized.
• No organizational or operation changes will be made without the buyer’s permission, while
the sale is pending, such as changing the menu prices, hiring or firing employees or granting pay
raises, changing food vendors and suppliers, or liquidating assets.
• The seller is unaware of any pending new competition, or planned government activity that
could harm the restaurant’s operation.
• Several other important contingencies are recommended, too, which a restaurant
intermediary can advise you on.
Structuring the sale of the Restaurant determines the success or failure of your transition.
For more information on buying or selling a restaurant go to...

OPENING A RESTAURANT:
CONVERSIONS vs. NEW START-UPS

The prospective restaurant owner faces three options, which will play a critical role in the success or
failure of the new Restaurant. The purchase of an established, profitable restaurant with a proven concept,
a recognized trade name and a solid customer base offers the least amount of financial risk. Sales,
expenses and profits can be verified during a “due-diligence” or inspection period. Proven cash flows are
usually sufficient to service normal debt and provide a reasonable managerial fee for the new owner. The
acquisition of a successful ongoing restaurant operation usually requires the least capital outlay and
operating capital, the fastest return of investment and the smallest chance of failure.

Many creative restaurateurs have their own concept, menus, recipes and decors in mind, and want to open
a new facility. But recent changes in building, traffic and health codes have resulted in skyrocketing site
planning and approval costs. In addition to those, the owner usually experiences an upfitting expense of
$125 to $200 per square foot for basic upfitting costs such as heating and air, plumbing, décor, signage
and electrical systems in addition to the high cost of furniture, fixtures and equipment. The least expensive
option to a new start-up operation would be the purchase of an established restaurant, which could be
converted to the new owner’s concept and menu. Most marginal operations suffer from weak management and poor concepts; many successful restaurateurs know that there is no such thing as a bad location, just“bad concepts” and poor management!

Consider the following issues before deciding whether to open a new restaurant or purchase a pre-existing
one:

• Location: Will the demographics traffic patterns and traffic generators support the clientele that the
proposed new concept will require? What is the availability of desirable commercial space in the area?
• Leasehold improvements: Can I minimize my capital requirements by purchasing a pre-existing
restaurant with minimum cosmetic changes? Is the current signage adequate for the new name? Are
the mechanical systems in good working order?
• Furniture, fixtures and equipment: Is the current equipment in good working order? Does it pass all
inspections necessary to continue to operate, and will the package meet your needs with a minimum
cash outlay for new equipment?
• Governing authorities’ approval: In most cases, the purchase of an existing operation survives
“grandfather” clauses and new requirements for parking, zoning, traffic and health codes.

How To Buy A Restaurant
Let Us Help You To Understand
The Process of Considering Restaurants For Sale

1. INTERVIEW

   Initial Phone Call 
   You make an initial phone call to Atlanta Restaurant Exchange inquiring about purchasing a restaurant, bar or club and describing your criteria for purchase.

   Background Information
   You will provide Atlanta Restaurant Exchange with your personal background information including your financial history. Restaurant Realty Company will in turn provide you with information on various restaurants, bars and/or clubs that most closely meet your criteria.
    

2. SHOWING
   
   Meeting
   Atlanta Restaurant Exchange will set up an appointment for you to tour the business and talk to the owner. At this time you may ask the seller specific questions about the business. This appointment is generally scheduled during non-business hours so as not to interrupt or alert the employees or customers.
    
3. VALUATION

   There are two basic methods for valuing a restaurant, bar or club which are as follows:

   1. Assets In Place Method
      This method means that only the lease, leasehold improvements and fixtures and equipment are being sold. The name, menu, concept and goodwill are not included as part of the sale. With this method little or no emphasis is put on the financials of the business and the major factors in determining the value are the value of the lease, leasehold improvements and the fixtures and equipment. There is no standard formula in determining value using this method and valuation is somewhat subjective based on the brokers knowledge of the marketplace and comparable sales sold using this method.
       
   2. Going Concern Method
      This method means that the lease, leasehold improvements, fixtures and equipment, name, menu, concept and goodwill are all included as part of the sale. The primary valuation method used for a going concern valuation is the yearly adjusted cash flow method. This means that the net profit on the tax return or on the year-to-date income and expense statement is adjusted by adding back the following items to the net income: one working owners salary and payroll taxes, any personal expenses the owner is charging the business (food for consumption at home, life, health and disability insurance premiums, auto expense, entertainment and vacation expense, etc.), depreciation, interest and amortization expense on any loans the buyer will not be assuming, net operating loss carry forward charges and any other expenses which are personal and will not be applicable to the buyer. Once the yearly adjusted cash flow is determined a multiple ranging from 1 1/2 to 3 is used to determine the value of the business. The multiple to be used is determined by several factors which include lease value (whether the lease is at market, below market or above market), the potential upside of the business (i.e. the current operation serves dinner only and has only a beer and wine license and there is potential for a strong lunch business and liquor sales), the quality and quantity of the leasehold improvements and fixtures and equipment, whether the operation is a franchise and whether the operation is a full service or self-service operation. For example, if the yearly adjusted cash flow of the business is $75,000 and the multiple to be used is 2 1/2, the value of the business would be as follows: $75,000 multiplied by 2 1/2 which equals $187,500 sales price.
       
4. OFFER
   
   Writing the Offer 
   With our assistance using Restaurant Realty Company's Purchase Agreement, you will submit an offer with a deposit to acquire the business. Your offer will be contingent upon your physical inspection of the business, your inspection of the financial records, the assignment of the premises lease or negotiation of a new lease and any other necessary contingencies (i.e. alcohol license transfer or other special licenses, financing, etc).

   Presentation
   Atlanta Restaurant Exchange will present your offer to the seller. We give the seller background information on you, your previous experience, your perspective on how you arrived at your price, terms and conditions, etc. We also present your financial statement, credit report, resume and business plan.

   Response
   The seller will either accept, reject or counter your offer. Restaurant Realty Company will notify you of the seller's response. At this point you may either accept, reject or counter the seller's response.

   Mutual Acceptance
   When both parties agree to all of the terms and conditions of the sale and sign all amendments and counteroffers, the offer then becomes a purchase agreement signed both ways. At this time there may be contingencies or conditions that still need to be satisfied prior to closing.

   Advisors 
   Atlanta Restaurant Exchange encourages you to include your CPA and/or your attorney in reviewing the transaction should you feel the need to do so.
    

5. ESCROW

Deposit
You deposit check is deposited and this opens the escrow holding account. Atlanta Restaurant Exchang will provide the escrow officer with copies of all documents relating to the sale.

Inspection
You will be given copies of the financial records of the business for your review.

Contingency Removal
As your requirements are met existing contingencies in the purchase agreement are removed. Once all contingencies are removed the purchase agreement becomes a binding agreement and the deposit is increased and the escrow is opened.

Closing Date
The closing date or the close of escrow is the date when title to the business and normally physical possession of the business is transferred to the buyer. The closing papers are signed in the title company's office or through the mail prior to the closing date.

Inventory
Arrangements are made for you and the seller and/or inventory service to take a physical inventory as it applies to the value of the salable items (food, beverages, etc.) and non-salable items (fixtures, equipment, etc.) usually one or two days prior to the close of escrow.

The Closing
All parties meet at the escrow office to sign the closing papers or the closing papers are sent to the parties to be executed prior to the close of escrow.

Fees 
You will generally be responsible for your own accountants and attorney's fees, half of the escrow fees, security deposit for the premises lease and sales tax on the value of the fixtures and equipment that you allocate as part of the purchase price.