Buying a Restaurant

If you’re buying a restaurant you are buying both a property (either leasehold or freehold) and a business. Buying a restaurant is therefore a major decision and one which requires significant thought and preparation.

This page describes how to buy a restaurant in 8 steps and shows you the points in the process at which UK Pub Sales can assist you.

Step One: Create a Business Plan

The first step in buying a restaurant is to get clear on what type of restaurant you want to run, the location, the target market, whether you want leasehold or freehold and how you will make a success of it.

Your choices here will depend on three main factors:

• What you want personally from running a restaurant business.
• What experience and skills you have in the restaurant trade.
• What level of finance you have access to.

All these factors interact to determine what type of business is going to be most suitable for you. In terms of your personal requirements, you need to think about what are you hoping to gain by running a restaurant. Here are a few common motivations for buying a restaurant, with an indication of how each motivation affects your buying choice.

Do you like the idea of being your own boss? This may be the motivation of restaurant staff who have worked for other people up until now and feel ready to run a restaurant of their own. If you do not have much money to invest you may look for a tenancy initially, as a way of getting more business experience at a lower personal risk. However, a tenancy may involve restrictions such as what type of restaurant it is – and it is usually limited to a period of 5 years with a short notice period. If you are successful, the profits generated can be taken forward to a leasehold or freehold business in the future. A leasehold agreement (typically between 5-15 years) involves a much higher financial input but you still do not own the premises and the terms of the lease may restrict what type of business you can run. A freehold gives you the greatest level of freedom, since you own the premises outright, but also the greatest financial risk.

Do you love cooking and want to turn your passion into a career? Being an excellent cook is a useful skill to have, but there is far more to running a restaurant than cooking. Many great chefs fail in business because other aspects of the business, such as finance and day to day management, don’t get the attention they need because the owner is in the kitchen. However, an owner/chef arrangement can work very well if the owner is aware of this problem from the start and organises the business so that essential responsibilities are delegated to professional staff.

Are you hoping to bring a new cuisine or style of food into an area? In this scenario you will not be looking for an existing restaurant business to take over, but you will want a building with kitchen facilities which you can convert. For cuisines which are already popular but simply unavailable in an area (e.g. Indian, Chinese, fish & chips) this can be a good, low-risk option since the uptake is likely to be immediate and high. But lesser known or minority cuisines (e.g. Polish, vegan) offer a more risky business proposition unless you have a good marketing strategy and/or you have an appropriate community in the neighbourhood.

Do you want to create a family business which you can pass on? If your desire is to pass on a business to future generations this requires that you own the freehold. This means either raising the finance for a freehold site, or saving up the profits from a tenancy or leasehold business over time. You probably also want to choose a type of restaurant which is likely to still be in demand, at least in some form, in 30 or 50 years time. Offerings with a good track record such as Indian, Chinese, fish and chips or cafés are good options here. Offerings based on new trends or fashions are less promising.

Are you simply looking for a profitable business opportunity? Here, the focus is on being an entrepreneur, rather than a restaurant owner specifically. If it is the opportunity for profit which attracts you most, there are many other types of business which could also generate a profit for you, so it may be advisable to consider some of those alternatives before buying a restaurant. Alternatively, you may have no intention of being involved in the day to day running, and may want to let out the restaurant as a tenancy. This can be a way to invest in commercial property which also generates a rent. In this case, you will be looking for a freehold property to own outright. The appearance of restaurants, coffee shops and similar businesses often help to improve the property prices in an up-and-coming area, which can ultimately improve the value of the restaurant property too.

Once you have an idea of the general type of restaurant you want to own (type of cuisine, type of ownership and geographical area) you need to create a detailed business plan.

Look at competition in the area – what they offer and what you will offer differently. Look at existing turnover (if you are considering taking over an existing business) and/or work out how many customers you will need to have and what average per-head revenue you need to make from each customer in order to break even. If your business is seasonal (e.g. a seaside cafe) you will need to calculate peak and off-peak figures and show how this affects the overall performance over the year. Don’t forget to factor in realistic staff costs too, as well as any other known outgoings such as maintenance costs, insurance and so on.

Your business plan needs to be detailed enough that you can take it to a bank to discuss raising finance. Even if you do not need a loan it is highly recommended that you create a business plan for yourself so that you clearly see how the business is going to operate and what kind of profits (your salary) you can expect to generate, and where the risks are.

Step Two: Get Finances Together

Take your business plan to a bank or broker in order to raise the purchase price.
You should aim to obtain proof of lending in principal which you can show to a seller so that your offer will be taken seriously.

Raising finance for a restaurant business is a specialist area and UK Pub Sales can help to put you in touch with specialist brokers and other finance providers to help.

The price of a restaurant (if you are taking over an existing business) is typically linked to how many covers it has and the turnover they are achieving. In East Anglia the price for a tied leasehold restaurant doing £6-7k per week, is around £1,000 per cover. If the restaurant is not tied or is in excellent condition then premiums of £10,000-£20,000 can be added. Properties in major cities such as Cambridge or London will have increased values as the sales per week should be higher. You can get an initial indication of prices by looking at restaurants for sale in the area you are interested in.

Step Three: Start Searching for Restaurants for Sale

Once you know what type of business you want and what your budget it, it is time to start searching for specific restaurants up for sale.

Searchable web sites such as UK Pub Sales allow you to browse properties / businesses which are currently for sale. Registering with us means that we can let you know as soon as suitable properties come up for sale.

It is also useful to regularly check trade magazines such as Daltons, and your local press for properties coming up for sale in your area.

Step Four: Assess the Business Potential Carefully

When considering a particular property, it pays to look carefully not just at the physical premises, but to think about the business potential. The following factors are particularly important:

Consider location: Does the location of the business help or hinder trade? Does it have plenty of passing trade or is it in a more out of the way location? What else is in the area which might help generate trade?

Check out competition: Look at what other restaurants or food businesses are nearby and think about how your offering fits in. As well as existing businesses, find out about any new businesses that the council have approved. Does your business complement an existing thriving restaurant area, or does it directly compete with something very similar? If it competes, how will you distinguish yourself – on price, on quality, on variety, or some other way?

Review the current business accounts: This may not seem like an attractive job, but it can make the difference between your business succeeding or failing. If you don’t feel able to do it yourself, get a professional to do it for you. Compare their actual business performance with your own business plan and see if they are a good fit.

Find out why they are selling the restaurant: Are they reaping the profits of a successful venture and moving on? Or are they struggling to make a profit? If it is the latter you may be in a stronger position when it comes to negotiating a price – but you also want to make sure you understand why they were struggling and avoid repeating the pattern.

Check any legal terms: If it is a leasehold, make sure you understand the terms of the lease, how long is left, rental percentage in comparison with sales (should be no more than 12%) and any clauses which may restrict you (e.g. preventing changing the nature of the restaurant).

Step Five: Put in a Successful Offer

Your offer will be presented to the vendors for consideration and there will usually follow a period of negotiation. Alternatively, if there are multiple buyers, a timeframe is set for parties to submit their best and final offers and the vendor then chooses the best offer.

Once an offer has been accepted, Heads of Terms will be drafted and issued to both parties to sign. This document details the exact terms of the deal so everyone is clear what is involved before instructing solicitors and incurring costs. This is a chance for you to clarify anything you do not understand, negotiate any issues you are not happy with, or to withdraw from the deal if necessary.

When both sides are happy, buyer and seller sign the Heads of Terms and instruct their solicitors.

Step Six: Instruct Your Solicitor

If you do not have a solicitor already, UK Pub Sales can put you in contact with solicitors who specialise in the conveyancing of restaurants and similar businesses.

Once instructed, the solicitors will carry out any searches required and draft the relevant sales contracts. If the property is a leasehold, they will also advise the freeholder of the sale.

Step Seven: Carry Out a Stock Valuation

If you are taking over an existing restaurant business there will usually be stock on the premises at the point you take over ownership. The value of this stock can be considerable, especially if it is a licensed restaurant with a bar and/or wine cellar.

This stock needs to be assessed for its correct commercial value and paid for by the new owner, but at a time close to the actual takeover of the premises.

UK Pub Sales can recommend stock takers who specialise in the licensed trade.

Step Eight: Contracts are Completed and Exchange Takes Place

Once all the legalities are done and finance is in place, contracts are exchanged.

A completion date is then set at which point any agreed monies are transferred to the vendor and they vacate the business and hand it over to you.

Buying a Restaurant – contact us now to discuss your requirements or click here to view our Restaurants for Sale