How To Evaluate A Restaurant For Sale

You’ve found a listing for a “Restaurant For Sale” and you’re getting excited about restaurant ownership. There are some very simple restaurant buying checklists you can go through to decide whether this might be an opportunity for you. Or you might be buying another persons nightmare and taking them off the hook financially.

The first question you need to ask is…..

“Why Is This Restaurant For Sale?”

There are 3 common reasons why restaurants are put up for sale:

Restaurant For Sale: Reason #1

restaurant for saleThe owner has built a profitable restaurant business. They have constantly produced revenue and are now wishing to cash out and do something else. Many hard working restaurant owners build up their businesses with the idea that someday they’ll sell them.

It makes it much easier to really put a huge effort into the business if you have an exit plan. Think of this like looking forward to an upcoming vacation. I know many owners who will take a failing business, or start a new restaurant and work it very hard for a few years. Once there is a track record and the place is full, they list it for sale.

If you find this type of restaurant for sale you need to be VERY careful. The current owner has built the business to the absolute apex. And he wants to value his business at the peak of it’s popularity. There will be no deals here. You can probably get this owner to hold some financing. However, your business has only one place to go. A restaurant can’t continue to grow at 100% per year. Once you’re full there’s a very good chance your business can only go one way. I would avoid an optimized restaurant for sale.

Restaurant For Sale: Reason #2

There are many, many restaurants I see in this category. These restaurant are either losing money, or just breaking even. The owner is working 90 hours a week just to keep the doors open. When you visit these places there are usually burnt out lights, unclean floors, etc., The owner has lost his passion and can’t figure out what to do to turn things around. They want out.

The worst thing about this situation is that most sellers WON’T tell you the truth. You’ll see description in their “restaurant for sale” ads like:
- owner moving out of country: must sell
- illness forces sell
- owner has other business interests

Whenever you see those phrases be very skeptical. Usually the seller doesn’t want to admit they invested a large amount of money and are getting 0% return on their dollar (or are about to go under).

There are 2 reasons a restaurant has gotten to the point that the seller simply wants out.

1) The location is bad
There’s nothing you can do about a bad location. If the location is bad, this restaurant isn’t worth anything. Run away

2) The owner is bad

The owner has made some wrong assumptions, or simply lacks the knowledge and expertise to create a profitable restaurant. However, if the seller is too proud to reveal the details of their restaurant listed for sale you MUST walk away.

If you have a feeling that the owner is “hiding something”, PLEASE walk away. There will be another opportunity coming around the corner shortly.

Restaurant For Sale: Reason #3

This is the sweet spot for picking up some deals and turning them into diamonds. If you find a situation like #2, but have an owner who is being honest and transparent you might want to consider their restaurant for sale. Sometimes you’ll find a vendor that is SO motivated they will be extremely flexible on terms, price and financing. Once you know that the owner “just wants out”, you can do some serious market research and determine whether you can buy an existing restaurant for pennies on the dollar.

The second type of restaurant for sale worth investigating is the local restaurant where there owner is leaving but isn’t in the position of #1 or #2. Sometimes an owner has run a profitable restaurant business for quite a few years and just wants a change. You can tell that they’ve started to let a few things slide and there is definitely room for improvement.

This isn’t the “restaurant flipper” who builds restaurants to their peak to be sold. This is a nice little business with a steady profit, regular clientele and reputation. There can be great value in this as well. This type of owner is probably open to holding some financing, assisting where needs, and is flexible with terms. If you can negotiate a good price you might find yourself further ahead financially than building from scratch. And, you get to have money coming into the till on day one!

The “Restaurant For Sale” Sign

Start making it a practice to investigate the situation whenever you see a restaurant for sale. If you are looking to start your own restaurant it doesn’t hurt to inquire every time you see a restaurant for sale sign. With a little investigation you might find a little gold mind behind one of those “Restaurant For Sale” signs.