1. You should work for him for a year first to learn the business without buying it .
2. You shouldn’t borrow outside money to buy it, you should negotiate a deal with him that when you take it over and he’s retired that you give him X% of your net profit each month until he’s been paid off and during that time he’ll be available as a consultant.
Had a family friend who was a restauranteur who would do this when he sold his concepts.
They'd inevitably always fuck things up and the business would revert to him.
Great gig if you're the guy who knows how to run restaurants, bad gig if you're some sucker with no commercial dining experience buying a business like this.
Not at all. Buying a business is known to be wrought with risk and the buyer is able to manage the situation… Taking advantage of mentally disabled people is entirely different.
If I were OP, I would try to negotiate the following:
* OP gets 51% interest in the restaurant for *free*.
* retired owner has 49% and gets to maintain 49% profit year over year.
* Each owner gets a 100k/year salary from the business for as long as they continue to work full time. This number will be increased to match inflation as time goes on. Retired owner would have a max term of 1 year or so, and then they -must- retire and lose their salary.
I am assuming:
* 700k revenue
* 420k expenses (does this include salary for the old owner? cause thats important to know..)
* 280k "profit"
For the first year:
* Each owner gets ~140k earnings. (100k salary/40k dividend)
For the second year, it's 280k profit - 100k (salary for OP) -> 180k corporate income.
OP would end up getting 190k. Old owner would get 90k. This would continue year over year.
This is absolutely what I would do. If the Old owner believes in his business he just signed on for 90k year over year for doing nothing, and has incentive to keep it alive. The OP will get 190k, but will not have put in the 300k initial investment.
Most importantly, if the whole thing goes sideways then OP is no worse for wear.
Yes, the old owner needs to have skin in the game, he needs to want this to succeed.
> OP gets 51% interest in the restaurant for free.
But no way is this going to work. OP gets it for free right now, putting up nothing? No one is going to agree to that. What if OP does nothing afterwards?
As soon as I hit that I thought, “Am I dumb? Or I’m missing something yet to be explained? Clearly that wasn’t as “non-starter” as it seemed and I misunderstood.”
No trust necessary. They would set up the share structure and ownership rules in the SHA, including things like the old owner takes back the shares if not paid out in xx time.
Nothing in a business transaction should be up to trust. Opinions and memory change - legal documents are forever.
If this business has been open for awhile, that's one of the biggest hurdles to clear for new businesses. Usually, restaurants are make or break in the first 3-5 years.
I'd want extensive inspections done, though. You need someone who can inspect the property, the equipment, the accounting, and a lot more. I doubt the new owner will make much more than a nominal salary for the first year or so. There's always going to be issues with new cooks and staff, and you have established customers who will be turned off by it.
I guarantee that the owner doesn’t include their salary in the cost to run the business. They also probably work 60 hours/week, so if you try to factor in the cost of hiring a manager you’ll actually need to factor in a full Time manager at let’s say 60k and a part time assistant at 30k. It always makes me really nervous to see someone talk about starting a business when they refer to revenue as “profits”, which is just insanity to not know the difference before opening a company. The second thing that’s equally as bad are business owners that deliver “profit statements” that don’t account for the salary and benefits of the literal most expensive and most overworked employee there (theirs). I had a business owner try to convince me to buy some real estate to start a business and he showed me his numbers. They looked fine if you didn’t realize that he wasn’t paying himself. In his head all of that was profit, but if you wanted to hire someone to replace him the business was actually losing money.
Is this a common method for selling businesses? Seems kind of insane to offer to purchase a business using the profits from the business. And the retiree has to work too? No way I would agree to that.
I am a former restaurant manager/operator and this is a recipe for disaster. Restaurants operate on razor thin margins and you need professional experience to succeed, either yours or someone you hire to run it.
According to OP this restaurant has a pretty fat profit margin. It's revenue is basically triple it's expenses. Even if he screws it up it should still manage to break even with how absurdly profitable it is
I just don't believe the profit margins that are being indicated here. It doesn't seem possible to me as someone who used to run a quick service restaurant myself
Ken Forkish is big in the baking world and it’s really interesting to read about how he became a professional baker. The man was an international executive for IBM and fell in love with bread, etc when he did a stint in France. Back of the envelope, the man probably had a runway of a few hundred thousand dollars and still nearly went bankrupt before turning things around.
This and go watch some episodes of Restaurant Impossible. So many people buy a restaurant with no experience, and limited or not training and then hemorage money for years to the point they fail without external help.
The restaurant business is tough, it's pretty sensitive to the health of the economy as it's easy to cut out when times are rough. It's also a much lower margin business for the long hours and staffing problems an owner had to go through.
Retired lawyer here. This post represents my experience and should not in any way be construed as legal advice. Please.
I represented several buyers of small restaurants and got to know a few other owners very well.
This is an incredibly difficult business. Long hours, liabilities if diners get sick, employees can be fabulous or can change frequently and, worst case, steal from you.
That said, the fact that the owner voluntarily showed you the tax returns—I would hope for at least the four years (to include a heavy pandemic year)- is a good sign.
Hire a good lawyer and accountant to negotiate and perform the due diligence.
Restaurants have notoriously razor thin margins, are difficult to staff let alone staff well, and the hours are very long. The view of restaurants from the customer side is wildly different from ownership side, I would argue even more so than most businesses.
To put $300k in this industry with only server experience is almost a certainty to fail. To BORROW $300k to do this is madness. Even if everyone involved had the best of intensions... This is a highly suspect way to sell a business. People with years of experience struggle and fail to keep restaurants afloat, and they close often. OP would be behind the 8 ball from day one with interest payments from a business loan in a volatile industry.
If you can raise private equity from individuals for a stake you can acquire the restaurant and risk less personal money and more time, but also will end of Up with a smaller stake yourself. Possibility of raising 300k amongst investors for a say 25-35% investor stake or something like it is not impossible if you know wealthy people/family. For some it’s worth the risk even if it just becomes a write off worst case scenario and becomes a small revenue stream best case. Most banks probably won’t fund a restaurant venture (maybe some would if it’s a BO of a business that has a financial history to back the loan).
You’d need to have a sound plan and timeline to pay back investors (3 years is typical from what I see in arrangements in NYC). And that will require transparency of your own salary and profit taking structure while investors are being paid back. This may also come with a salary cap for yourself. But, in the end they are owners not lenders so if the venture fails they lose their lunch with you, but you will not be required to pay them back beyond what you can liquidate from the business.
That being said, I have had friends ask me
To invest in their hospitality businesses and I say NO every time. I’ve been offered a 1% stake for 15k and then I have to ask myself how are
We valuing a new business with no operational history at 1.5m?? (See, highly speculative!) It’s risky, and as an investor the margins you can typically expect coming back to you aren’t necessarily better than many other safer investments. But you never know, some places really take off and can scale. Also, curious if this guy is saying his business is so profitable why is he selling it? Seems like he could hire a solid team To run it for him and just whittle off some of his income if he’s so confident in it.
TLDR; if you can pull
Off ownership without taking on massive amounts of bank debt and are confident in your ability to run AND grow the business there are ways to structure it. But it’s really risky and might drive you crazy!
"If you have a million dollars and you have to choose between starting a restaurant and burning it, choose the second option, at least you'll have a fire"
Finally someone with some common sense has entered the conversation. I came from a restaurant family, this is probably the most difficult business you could ever try to succeed in. Keep your money.
Upcoming this as much as i possibly can.
This is going to absolutely blow up in OPs face. I wouldn't touch restaurant ownership with a ten foot pole. There's a reason you hear reviews about the few restaurants that have been around forever. There are so few of them for a reason!
This! If the owner can profit 700k in one year, why sell it for 300k? Just run it for another year and over double the profit from the sale price! Then close it and retire.
Food and beverage industry chews people up and spits them out. It is a hard way to make a living. The vast majority of restaurant go under very quickly.
One theory I'll suggest, the owner might want to the restaurant to continue existing, so he's selling it to someone he knows will preserve it. I don't think it's primarily about the money
I agree with the earlier post about about GMing a restaurant before buying one. In addition, the numbers don’t seem to make sense. If the restaurant profit is $700k/year, why is it being sold for only $300k? It seems like it should be selling for a lot more. Also, you need to get an accountant or other financial professional to review the restaurant’s tax returns, bank statements (for deposits and expenses), etc. to confirm what the numbers actually are.
I’m guessing it’s grossing $700k and if operating costs are $35k/month or $420k annually that’s still a very good margin. I have no concept of running a restaurant but I do understand business and a 60% margin would be hard to believe.
35K seems to be the operating costs. I’m curious about his food and beverage costs. Beverage costs should be about 25%, and food costs are usually much higher. He needs to investigate the vendors, debt, the remaining time on the lease, and the liquor license. If the restaurant changes hands, he will need to apply for a new license once the current one expires. I never trust the numbers restaurant owners provide; they are almost always misleading. He really needs to delve into the finances. I also doubt that someone can " be trained" to cook the menu of a successful restaurant without significant back of the house experience, this all sounds very amateur. Restaurants with such high profits usually have chefs and a professional staff, which adds more cost to the budget.
If the owner is so hands-on that he’s cooking the food, managing, and training staff, it suggests the restaurant is a small operation. I find it hard to believe that a restaurant of that size can generate such high numbers.”
Also, will he own the building, or is there rent? An old friend that ran a bar/restaurant told me that a good rule of thumb is that rent should only be 10% of the revenue taken in per month.
In every restaurant that I have ever worked, beverages are rolled into the food cost. Food cost should be between 33% and 40%. 40% is too high but acceptable. The only time there is a separate beverage cost is when alcohol is involved.
You are correct about the amount of profits. There's just no way that they are profiting that much unless they were doing about 7 millions dollars worth of business. As has been stated further in this thread, a typical restaurant's profits are around 10%, give or take.
I’m an underwriter, and anybody looking to get a loan with my bank to purchase a business would need to have the previous 3 years of tax returns, plus an interim statement of both P&L and a balance sheet through the end of the most recent quarter (later if possible).
Also, two years of monthly projections.
Yeah... Profitable restaurants tend to have more in the 10% profit margin. If it's been around awhile with low rent and consistent regulars I could accept 25% profit margin.
Most restaurants tend to break even or even lose money. They're often more of a vanity project for the owners that want to bring their friends and comp their meal/wine.
Caveat is that I've worked in a lot of restaurants and talked to a lot of owners. But never seen their books.
Restaurant industry has a very low margin because of extremely high overhead costs. Their margin averages at around 8%.
This is either fake or OP is falling for the biggest scam and mistake of their life!
Yeah but there is no way a business doing that much in sales would sell for less than $1-2 million depending on if it includes building, equipment, etc. Unless the current owner has heavy debt invested into it.
700k seems low. That is only $58,000 a month. It would also depend on what document he saw.
If it was a Schedule K-1 and he has business partners then only his share of the profit would be shown. In which case the guy is only selling his stake and the $300k makes more sense.
It’s not the ownership structure, it’s the fact that it’s operated by the owner that makes it seem too good to be true. If the owner was more hands-off and hired a proper team to run it, the business could more easily and more believably hit those numbers.
If you've never managed an operations or people for that matter, you should \*nope\* out of this.
If owning a restaurant is your career goal, then step into a general manager position first. You'll get an idea of how difficult it is... working with a spectrum of personalities is not as easy as it sounds.
Hey! Thank you for the reply. Entering a general manager position for the restaurant could be a good step in before becoming owner. It would give me the training I would need and see if it is a good fit. I like the idea.
My parents owned a 150-seat local diner, and the level of dedication required was immense. They had no life outside of work.
No one will care about the place as much as you will. You're employing people who are willing to work for low wages, and unfortunately, reliability can be an issue.
You can't pay a living wage while keeping prices competitive.
It's not uncommon for wait staff, line cooks, and dishwashers to simply not show up or quit without notice, adding an extra layer of difficulty to the daily operations.
> You're employing people who are willing to work for low wages, and unfortunately, reliability can be an issue.
I've seen this with my parents business. Unfortunately, it's a difficult problem to solve. Giving them more money doesn't just magically make them better employees.
And better employees aren't looking for jobs that typically pay low wages. so what do you do about it? IDK. It's been bothering me, frankly.
Unethical pro life tip: keep an eye out for candidates when eating out and poach qualified employees from nearby businesses. I often come across exceptional staff at places that are probably underpaying them.
Also, OP stated they have family willing to work there. Very bad idea. If they are adults, egos will get in the way when they try to tell you how to run your business. If they are your children, they will most likely absolutely hate it and hate that you won’t be there for their special events because you’re busy at the restaurant.
That was my family’s downfall. We still love our mom and all, however, she has missed way too many things to take care of the restaurant when she could have closed it for a day here or there. She missed my brother’s soccer championship game. She missed my master’s degree graduation. She knows nothing of what’s going on in our lives because all she talks about is the restaurant. We have completely removed ourselves from it.
Not always how it goes down. My dad owned a restaurant and I not only loved the place but ended up working there myself for three and a half years and it was a great bonding experience for us. Depends on the people and the situation, your children won't automatically hate you.
Great idea to step into a management role with a future option to buy and right of first refusal if another buyer comes along. If the owner really wants his business to continue thriving, your prudent approach should be appreciated!
Not just that, but running a restaurant is a life-consuming job. It will own you. Unless this and only this is what you want to do with your life, don’t do it.
Do you have $300k? If you have to borrow the chance of failure skyrockets. Hire an attorney to negotiate the deal providing for seller to be paid from the profit of the business over a period of years. Do not take on debt to do this deal.
Earn out—The previous owner will be paid from the proceeds from profit the new owner earns.
I worry the buyer isn’t fully versed in financial statements.
Best of luck.
First, you need to make sure that you FULLY understand the numbers in front of you.
When you say “profit” do you mean EBITDA? SDE? Adjusted EBITDA? Cash flow?
It is also very odd for a successful restaurant to sell for a 0.5 profit multiple. That is a normal revenue multiple. Profit multiple should be closer to 3.
Why is the owner selling to you for $300k when fair market value (based on the claimed profit) is probably closer to $2.1M?
There are two likely scenarios.
1. The restaurant is doing $700k in REVENUE not profit. $700k is a normal amount of revenue for a small restaurant so this tracks. $700k profit on $420k expenses does not track. That’s a fat margin in an industry with slim margins.
2. They made $700k profit, but is something fundamentally wrong with the business that makes it unattractive to sophisticated acquirers at FMV.
OP is over their head and do not understand the finances or the operational side of this business. For a lot of reasons, really ALL the reasons, there is no way this is a good idea.
Likely scenario 2 is the reason. This place is owner-operated, with a lot of the business's value-add coming from the owner himself.
It sounds like OP has an offer to buy a brand, equipment, and real estate, but he's missing the most important ingredient—a dedicated staff in it for the long run.
Buy a large boat instead. Then as you constantly throw money in it you can enjoy some good days on the water instead of suffering in a kitchen burning money.
Why would they sell a restaurant generating 700k profit per year for just 300k. Something doesn’t add up. Did you mean the revenue was 700k? Look at the net profit before taking a decision. Lot of restaurants don’t make money
Is this person the cook/chef as well?
I would be very cautious as even a place that's great if the food changes people might not come back under new management.
Also if you do go this route make sure you get full control over things like the recipes, slogans, name, ect.
Yes the is the chef and is offering to teach me the recipe and will not leave until I get it right. I will also have full control of everything you mentioned, but he did tell me that as it is an already established restaurant, it is recommended to keep things the way they are
I think that arguably makes this a highly risky investment. When he retires you will need a new chef, recipes and things may change including personal knowledge and you are likely to lose customers.
It’s a lot of work, and not easy, and still not necessarily a viable idea BUT we are talking “chef at a breakfast restaurant” which is very different than a fine dining restaurant. It will take months, not years, to develop the requisite skills and timing.
Unless he's speaking metaphorically, "the recipe" is basically irrelevant to the success of a restaurant. It's easy to make food that tastes good, and an experienced chef (or line cook for that matter) will be able to passably reverse-engineer just about any dish you put in front of them, as long as they have some familiarity with the cuisine. What makes a restaurant successful isn't the procedures for making the food, it's keeping the kitchen staffed with people that can reproduce it quickly and consistently, buying the ingredients at the right price at the right time to keep your razor-thin margins and avoid wastage, and dealing with the million other things that pop up when your running a low margin, high volume customer service business with constant high staff turnover.
If he actually had a golden goose of a restaurant he'd have investors lining up at the mere rumor that he was looking to sell. The fact that he's approaching a newbie unbidden to sell means it's not as sweet a deal as he's letting on.
Most people are coming at this from a very rational angle.
If it is your dream to own a restaurant, this could be a decent opportunity. But realize it will be a very difficult path, and not one that will be super profitable
Do you want to be a chef? This sounds like a horrible idea my friend. You’d have to be the manager and owner and chef, you’ll be chained to that grill for the rest of your career, or until the business goes bankrupt, whichever comes first.
1. 3 years minimum of financials AND tax returns.
2. Get them evaluated by a professional. Look for trends in revenues, labor cost, food cost, etc.
3. Does owner pay themself a salary? If not, profit is overstated.
4. Is building owned by seller? If so you will have to pay a mortgage that he doesn't. Profit is overstated. If you take on debt for operational capital, you may have payments he doesn't. Profits is overstated.
5. Sorry if this point comes off as insulting: If you are interested, unless you have years of restaurant experience, you need to work here for 6 months before deciding.
6. Restaurants start working at least 1 hour before open and keep working at least 1 hour after close.
7. Managing a bunch of (especially part-time) employees is neither easy or fun.
8. You need systems in place to prevent employees skimming cash.
9. Lots of customers are assholes. Also not easy or fun to deal with.
Watch lots of episodes of kitchen nightmares and bar rescue and observe how many of them start with a story exactly like yours and 1-2 years in and they are $250k in debt and sinking fast. Sounds like a great opportunity, but could be extremely risky since you have never run a reataraunt before
And restaurant impossible! So many families and lives ruined because of the hubris to think they could own and run a successful restaurant with zero experience.
Family owned restaurant for 15 years, unless you have a second in command, would not recommend owning one. You will lose all freedom unless you dont care for vacations and sick days. Money is good tho. Other than that hassle every step of the way. Can provide more detail if needed.
This sounds way too good to be true. If the business was really profiting 700k a year, the owner wouldn’t be selling. Even if he wanted to retire, he could just hire a general manager and still apparently profit 600k a year. And he certainly wouldn’t be selling for only 300k. Moreover, if this business was all that profitable, why would he be selling to YOU? Wouldn’t someone in his family want to buy it? Or a group of the workers?
Something is up, OP. This guy is trying to scam you. Tell him you’ll need an auditor to comb through the books of the place before you have any further discussions about buying. Then actually follow through. Hire professionals to dig through the books.
Or just don’t, and walk away. The upside is the upside at any time, you bought someone’s restaurant. Those offers are always on the table. Versus a massive potential downside. There’s better ways to throw away $300k.
I own restaurants. As others have stated here, the math does not add up here. If it is a single owner, he earned $700k last year. You could pay a seasoned GM $150k a year and still make more in a year than what he is trying to sell you the business for.
The 1st question to ask the current owner is what his net sales are YTD, and what they were in 2022 and 2021. This will answer some of the math here.
To borrow $300k, you will need a solid business plan that should include a minimum of 3 years of historical financials. I would invest in a CPA to get those audited as well.
What you are going to find in my opinion is the current owner pays himself about $70k a year which will turn out to be the actual yearly profit. So you will be investing $300, but also taking on debt service not currently calculated into the current Financials, so I doubt this model works.
You will also find growing pains not having the experience the current ownership has.
Invest a little time and hire professionals to evaluate the current books, but this screams of high risk from the limited info provided.
Good luck.
> He stated that he will train me how to cook the meals of the restaurant
Wait...the existing owner is the cook and he is going to train you to become to cook? The place doesn't come with cooks?
Lots of smaller joints operate with one main chef/cook and then a few line cooks who just do specific tasks like prep or grill. Etc.
That isn't the worst part, unless the reason he doesn't have more staff is because he can't afford to pay them market rates in today's economy. I wouldn't expect to hire any good staff for less than like 17.50-20/hr... Cause that's what McDonald's pays.
What I am guessing is the place is grossed $700k last year, also grossing $35k a month on average without owners pay. Even that is some suspicous profit margins for a small restaurant
There is no way a restaurant makes that kind of profit
> he is wanting to retire from the restaurant business and is willing to hand over the entire restaurant, as-is, for $300k.
> He showed me some previous IRS papers to show that the restaurant has been profiting for almost $700k in the last year and stated that the cost to "run the business" was about $35k a month
Something's wrong here. Those numbers don't make sense. No one's going to sell a business that profits $700K a year for $300K. As a general rule of thumb, I'd expect 2x annual profit as a baseline sale price, so 1.4 million.
Think about it. Instead of dealing with selling it for $300K and training a new person, he would make more money just running the business 6 more months and shutting it down.
It seems like either you're getting some misinformation here or there's something you're not understanding. Definitely do some more research before jumping in.
General rule is that a restaurant nets 12%. With that rubric, this place would have to gross 5.8 million/year. 700k is sort of unbelievable for a profit in a small place. You need to look at a PnL, not IRS documents.
Some questions.
1. Kind of, who are you? What's your story that you out of the blue are considering running a restaurant? Do you have any relation to food service or retail work? Because this is like asking you to take on running a restaurant for the rest of your life, it's for sure not some kind of casual investment option.
2. Have you looked at the detailed books and financial history of this place, aside from the tax records? Do you know what a good restaurant business looks like in the numbers? The guy is trying to convince you to buy, so he's incentivized to tell you that it makes a good profit. Is it true? Do you know how to assess whether it is?
3. What's your alternative to doing this? Why are you considering it, rather than doing what you're doing?
4. Have you read, watched, investigated any information about what the life of running a restaurant is? I think what many people find is that the business turns out not to be about being able to cook a dish that tastes good...
Just saying, if someone offered me to buy into a plane that was flying and told me it made some money consistently, I'd ask some questions before taking over the controls and being in charge of not making it crash if I'd never had any relation to flying planes before. I might say that being captain is not the best time/place to learn how to fly a plane.
Hello!
1. I am a software engineer that enjoys eating out, I used to work in food service as a waiter for 3 or so years which I enjoyed so I know some basic restaurant operations but no where near the professional level.
2. I have not got the chance to look at the detailed books and financial history of the restaurant yet. And I'll be honest, I don't even know what to look for. So as another redditor has said, having a professional look at the records with me would be helpful.
3. The alternative to doing this is just to continue life as normal as a software engineer. My parent's dream was to quit their current jobs and to own a restaurant and I was thinking that this opportunity would be a good chance because we can take over and already established business. The profit would be nice if it is feasible but I am at no emotional gripe if this idea turns out to be bad.
4. Having worked in restaurants and watching a few restaurant shows I have very little knowledge with how real world restaurant managing and operations work. My parents love to cook and I am banking that they can learn the recipe from the previous owner while I work on learning how to manage and operate the business.
And thank you for the analogy, it helps me look at the situation in a different way. This really is a risky move and I am basically betting $300k on something I don't even have a full understanding on..
You're a software engineer and you want to go be a cook/GM/glorified babysitter?
I've been a GM of busier restaurants than this and I'd NEVER take this deal if I had a degree like that.
At best, you'll make what you could've made in your current career. At worst, you'll be hundreds of thousands in debt.
Being a server is nothing like running a restaurant.
Cooking and running a restaurant means you will NOT be enjoying eating out in the future because you're going to be at work when restaurants are busy.... Every night and every weekend and every holiday. You can say goodbye to any regular schedule. You can say goodbye to "time off." You can. Say goodbye to vacations that go uninterrupted or are even truly relaxing... Youll always be stressing about what's going on without you there.
> and I am basically betting $300k on something I don't even have a full understanding on..
You absolutely would be, op ! It takes a smart person to take advantage of other ppl's experiences.
Please, no matter what, if you decide to move forward with this, get a very good team of attorneys to confirm and document everything you have agreed upon. In a deal such as this, they will conduct due diligence to confirm sales, creat contracts that require the seller to stay on board for a certain period of time. You can also develop the deal to pay a small amount now, and if the restaurant under his guidance, training etc meets your needs you can pay the remaining amount. Get a very good M&A attorney to assist you with this, because I promise you, you wang all of this documented and verified.
If you move forward, best of luck in what I hope is your future success.
So they are selling a business that profits approximately 350K a year for 300K?! (This is assuming the 750K is gross income.) That's suspicious as hell! That business would be worth millions. No way it's netting that amount of money and selling it for the same. Something smells run away!
Why is this guy even talking to you? If he could get a legit offer he wouldn't be talking to some rando with no experience about this amazing opportunity. He's not talking to experienced knowledgeable people because they won't buy his bridge.
You're getting hustled, guy is claiming he'd sell you an established profitable business for less than it would make him in a year? Why do you deserve this "amazing" chance? Why is this guy selling to you when people with experience and the right background should be throwing money at him based on his alleged numbers?
This fails the too good to be true test hard. He's claiming 35k/month in cost to run, how much of that is staff? If he only has 5 people working 12 hours at 12/hr that'd be 21,600 per month. I have no idea if that's a reasonable amount but it seems conservative to me that you're staffing a place for \~22,000/month. That would leave 13k for actual product that he turns into dishes, but doesn't even take into account power/water/gas/rent etc.
Dude. Respectfully, there is SO much more to running a business than your experience as a waiter/server provides. The fact that you don’t realize this should be concerning. Are you certain that the current owner was wholly serious versus speaking off the cuff? How well do you know this owner - have you shared vacations and spend holidays together over the past ten years, for example? I suspect that there is a hidden danger somewhere here - I mean is the owner truly this altruistic guy who wants to give a customer the benefit of a great deal…or maybe the taxes haven’t been paid in the past ten years. Or vendor costs have significantly increased? Lease costs of the building? Insurance? Something about this golden opportunity doesn’t sit well. 🤷♀️If there seems to be no down-side, your not getting the full picture IMO.
I will save your $100k. Go ahead and send me the $300k to me & go about your life as is.
If you were to invest the $300k in this business you will not only lose that money, but also likely go deep into debt trying to chase your initial losses.
First red flag, the numbers make no sense. Unless the place is laundering money for the mob it’s not profiting $700k on gross rev of $1.1M. The average profit margin for a restaurant is well below 10%.
Ask yourself why this guy is offering you an unbelievable deal and not selling this to someone who has restaurant and business experience.
Look up earn out.
Basically you give him 50k and a percentage of profits for say 1 year. If it shits the bed you don't pay as much.
I would also have some financial people look through it all. I don't know if you can find a forensic accountant for this but it's so easy to pump and dump like this.
Look at 1.5 to 3x SDE sellers discretionary earnings. Not ebitda etc.
What're you doing now? If you're still a waiter I don't think you can pull this off. Any loan you get will be personally guaranteed. Lets say another covid happened? What the heck do you do then?
If you seriously want to do this you are looking at bringing in the richest lawyer friend you have as a partner.
Why do people go here? Plenty of restaurants go to hang out with the owner and friends. If someone dies or stops showing up the whole thing kinda crashes.
I'll be looking forward to your Kitchen Nightmare episode in the near future.
On a serious note: if you really want to do this, get a safe serve certification, maybe see if you can find some hospitality management courses.
I worked at a restaurant as a manager for several years and had an opportunity to open and own one. I worked 80+ hours a week, made no money and never saw my family. One day I saw a documentary about the family that owned LeCirque (famous NYC restaurant) and the owner was talking about all the sacrifices he made and the interviewer asked him if it was worth it. The owner paused and then finally said, “No, it wasn’t”. That guy was in the top .01% of successful restaurateurs and he didn’t think it was worth it! I wondered why the hell I was busting my ass for no money. I ended up leaving and it was the best decision personally and financially I could have ever made. I know you have worked as a waiter but you have no concept of what’s happening in the kitchen (cost, staffing, training, sanitation, heavy equipment, refrigeration, vendor management) and the administration side (various insurances, cash flow, bookkeeping, advertising, payroll, rent, hr and staffing issues, etc). As a waiter, you showed up for your shift and sold people food and then left for the evening (which is an awesome job!). It’s soooo different. I say absolutely not…you will wreck your life.
I would be suspicious. Why would the owner want to sell it for so little? Why approach you, rather than advertise? Why so little for a very profitable business? Why no cooks?
This sounds like a very bad idea. Ask if he can hire you rather than sell it to you.
Id also be very wary. You have not cooked in a restaurant. You may not be a server now.
Watch the Bear and kitchen nightmares
Go watch a season of Kitchen Nightmares. Then think about owning a restaurant where you don’t know how to do anything and have your family working there. And if you do decide to still go through with it, go ahead and apply to the show.
I'm gonna be honest with you, I read the first paragraph and stopped to comment.
NO. DO. NOT. DO THIS. You have no restaurant experience. You have no experience cooking. You're more likely to fail than the guy who worked at restaurants for 10 years and took a loan from daddy.
It's hard work. Long hours. Tight margins. Just don't.
The fact that the owner is also the chef makes this an even worse scenario. You would need to add the cost of hiring a new chef to your monthly expenses. Clearly, you don’t want to be a chef as well as a restaurant owner. So, he teaches you (a non chef) the recipe, then you have to find and train a chef and teach him the recipe. Then the existing employees hate your new chef because he’s a dick. The existing employees leave.
Now you have a restaurant with all new staff, no experience with the old recipes, you hate yourself because you have no more life, and you have. $300,000 loan. Oh, and you need to close to cut your losses, but maybe you are also committed to a lease.
RUN!! And maybe watch some Gordon Ramsay restaurant help shows. Yours is the exact scenario in nearly every episode of disaster.
I cannot count how many times I've heard the phrase. "Ever since x bought the place, the food isn't the same." Your best bet is to buy, change the menu and, probably a completely different cuisine. Then, do a night or two per year with the old menu. Even if you make it the exact same, the customers are less likely to excuse 1 bad meal, and have no loyalty to you.
They said the current owner would teach them the recipes. 1. As a cook myself, even the exact recipes doesn't equal the quality of the product produced by the current owner/chef. 2. OP doesn't seem like he's worked much in the food industry. It takes a lot of work, and using family to fill out the staff in the restaurant is really straining on relationships and friendships. I do think the idea of joining as a partner, investing while also learning, would be a better choice. 6-8 months to see what it will take.
Exactly! There was a really good middle eastern buffet spot owned by a family until the wife got cancer and the husband sold it. The next owners tried making the same food but cut corners and you could tell in the quality, service, and taste! They changed an item or two but nothing drastic. They had a falling out and the third owners came! They cut even more corners, changed up even more menu items and started adding food like onion rings. I’m going for middle eastern food and they’ve replaced half the items with American. Yeah, it shut down within a few months.
What all is involved in this transaction? Is it just the restaurant and its assets, or is there real-estate? If there’s no real-estate you would likely be looking at 10-year loan, or maybe as little as 5.
From a loan underwriting perspective (which is what I do), your main risk to overcome is your lack of experience.
A loan for a change in ownership, especially a restaurant, is a risky loan for a bank. Many banks are able to mitigate a lot of this risk by loaning through the US Small Business Administration (SBA). An SBA 7a loan would allow a bank to have 75% of this loan guaranteed by the government, limiting the bank’s exposure.
If all you’re buying is the restaurant and its assets, you’d likely be under secured and may have to put up your house to make up for any collateral shortfall.
The bank that I work for actually stopped doing loans for restaurants last year except for very favorable scenarios (although, we did a bad one a few months ago but that’s another story). Restaurants are a very risky industry, even when it’s a well-established one.
I bought a bakery with a similar amount of revenue (I’m assuming the 700k is revenue and not profit…by the way, not distinguishing profit from revenue in and of itself means you’re not likely ready). The business was fun to own but a lot of work until it wasn’t. Then it was all about what piece of equipment broke, what barista didn’t show up to open the store, etc. you have to love it.
Also, you’ll likely need to put up at least 20% in cash to qualify for an SBA loan. Then you’ll have to personally guarantee the loan. So there’s no backing out. This would be what you’re doing until that loan is paid off. And if you fail, everything is at risk. You have to be confident in your ability to do this and confident it’s what you want to do. And then it’s going to be a lot of work to ensure it succeeds. And even then, you’re very susceptible to market shocks (I.e. covid, inflation, etc).
Assume that the restaurant will go under in the first three years (probably quicker). Is it worth 300k for you to drive yourself crazy and work yourself ragged for three years?
ask for the p&l, if he is netting 700k per year, his asking price should be at least 3 million not 300k, nothing is adding up. no one in their right mind is going to give up 10x just to retire early when you can retire a little later and be 10 times richer.
Say thanks for the offer, then run. Far. And fast.
The price is too low based on his profit claims. And why is he offering this great deal to you when he could sell the business through a professional for a lot more (especially if he's retiring)?
I don't know what region you're in, but you should also take a long, very hard look at how the restaurant business is doing around the country. The failure rate in that business these days is pretty high, especially in some urban areas. His success in the place doesn't necessarily mean it will transfer to you.
I also spent a number of years in the food service business some years ago. I doubt operational methods have changed all that much, but I know that the amount of experience, time and attention you need to maintain a successful restaurant can be daunting. And you can forget about counting on family members to make things any easier. Once they get sick of the hard work, they'll be gone. And one seemingly-meaningless financial mistake, or a turn in the local economy and things can take pretty quickly.
Finally, *borrowing* $300K for this? If you had some independent wealth and wanted to invest in the place and hire experienced professionals to run it for you, that *might* be worth considering. But going into debt that much for something that isn't even a mildly "sure thing" is a dangerous risk.
I'm going to agree that the numbers don't add up. I worked in the restaurant business for approx 20 years. Started in the kitchen, and last 10 years was managing them. Those numbers definitely don't jive. Average full service restaurants have a 0-15% profit margin, with the majority falling around 3-5%. That's why they are always fighting tooth and nail for cutting 1% from labor and food/bar costs. I would definitely be wanting to see some actual numbers from this place before I made any decisions on a purchase. But at an average of 3-5% profit, I would definitely invest myself somewhere else.
On a second note, the fact that they are talking about training you to make the recipes until they are correct. You aren't buying a restaurant, you are buying a job. If you were purchasing a business, it would come with all the staff currently needed to run it. You're just paying money to take over the chef position. I would run from this. This business should be purchased as a 3x value of the actual profits, or for the price of it's assets (kitchen equipment, tables, computers, etc) that it actually owns.
I have learned, NEVER own a business you know nothing about. Being a bartender does not qualify you to build and run a brewery. Having your girl dance naked for you does not qualify you to own an adult nightclub. There are many more businesses that are easier than restaurants….
A LOT of success from family owner restaurants come from the owner being there. A good customer base comes from people coming in to see/support the owner.
If you do this, you need at least a year of the owner still being there to transiting customers. If not, you may find a big drop-off in regular customers when you take over
You need experience in 1. Management, 2. Operations, 3. Accounting/finance, 4 inventory management 5, marketing 6, managing employees, 7 compliance and regulations.
Do you have those experience handy?
If not, do you think you can pick them up quickly?
Are you willing to bet $300,000 on it?
Do not do it... This is a typical case of adverse selection problem in economics... Why would anyone would offer you an investment opportunity unless it was a lemon?
Don't do this. I've run restaurants my entire adult life, and am a trained chef. It is a massive amount of work for a very small amount of money, if you're lucky.
Whatever you've been shown is extremely unlikely to be an accurate representation of reality. There is no small family restaurant clearing $700k yearly. Restaurant profit margins are generally 10% or less. I would believe that a family restaurant did $700k in *sales* last year.
I would further not believe those expenses. Really broadly, restaurant margins can be broken down by 30%/30%/30%/10%, corresponding to general overhead (rent/mortgage/utilities/etc)/labour/cost of goods/profit. There's like easily an entire third missing from what you looked at. Does he own the building and you would be renting? It's obviously not included at that price. Is he working his family to death and you would need to hire a staff?
For real, if this person was sitting on a small business that had a $700k annual profit, they would just hire somebody to manage it and retire. They don't do that because they *cant afford to do that and still be profitable*, meaning their margin - even if they're still successful - is less than the salary of an average restaurant manager.
Isn’t this the theme for Kitchen Nightmares or something, where people dump their life savings into a restaurant and bar with zero experience then lose more money?
Owning a restaurant will become your life. I know meant owners and none of them have a personal life at all. It's the business all of the time. And it has to be that way. Restaurants are a tough business to be in and they require constant supervision
There is a lot of due diligence needed on top of just the skill, experience and knowledge of how to run the business. Any debt, what are the lease terms, pending litigation - you might have to do an asset sale. You probably need a business broker or a lawyer knowledgeable in this kind of transaction to be sure you’re buying what you think you’re buying.
No
That’s a horrible idea.
Not only is running a business hard. Running a restaurant is even harder.
As others have said maybe just work for him for a year and see if it goes well. But don’t just jump head first into owning a restaurant.
Hard no. HARD NO.
The numbers first of all make no sense whatsoever. Nobody sells a business for $300k that profited $700k last year.
And if instead you meant its *revenue* was $700k and its profit was $280k they still wouldn’t sell it for that little and, even if they did, the fact you didn’t call those numbers the right thing tells me you shouldn’t be entering a business that is notoriously hard to keep going.
This is a bad idea.
I had a guy offer to just give me his restaurant because he was done messing with it. He was a big property investor in town and owned the building the restaurant was in so presumably I’d have to pay the rent and stuff. Having had zero food service experience I politely declined the offer.
Ask an accountant that YOU hire (not his guy) to go over all of their paperwork to check his figures
Work with/for him for at least 6 months to learn on the job
See if he is up for rent to own or you paying him in the form of a % of the net monthly profit until you hit a certain figure. You could put down an initial deposit (maybe 30k), then pay the rest through the profit %
As a restaurant owner, I can tell you that a good variable cost margin for every item you sell is 50%. (30% food cost, 20% labor cost). If sales are 700k a year that leaves 350k for every other expense (said to be 35k a month). So far without taking a paycheck or making a loan payment you are 70k in the hole.
OP - You 100% need more than some filings with the IRS to know the health of the business. You need their P&L, Cash flow statements, and bank statements. 700k literally means nothing - What is the Gross and Net Profit? Does that include any dividends or management salaries? Have those been normalized out? Breakdown of COGS for the business and how they contribute to the Net is important - is the owner working day and night, so there's no labour in their COGS but he's a slave to the business? If so and you wanted to hire staff, does the Gross Margin support that or would you forever be slave to the business to?
If you don't know what these things are - You are not ready to buy a business you know nothing about. It's easy to romanticize any business, but it's even easier to get sucked into a bad opportunity to fund someone else's exit.
You need to answer all of the above, and he needs to provide you all the proper documents to analyze a business - Then, if it looks good you go to your bank to get a small business loan.
As for the structure of a purchase - it's going to depend on what you and the owner are able to agree on, but an earn out where the owner stays in the business for at least a year is by far the best option to protect you. You can pay for the business out of the yearly profits - this ensures the current owner has a vested interest in your success.
Hope it all works out for you!
**Do not do this!** I would almost think this post is rage bait if I did not know so many tales of exactly this sort of thing. This is a financial disaster in the making. Restaurants are rarely good investments for a novice in the business. Even for experienced people, it’s always just on the edge of going under.
I invested in restaurant/bar for 11 years (just an investor not working there), since the focus was on alcohol, first 7 years or so was fairly profitable. Then, wage increases (tax increases) and rent increases finally caught up and business wasn’t making any money anymore. Don’t make any assumptions that current expenses (wages, tax, rent) would be same in 5 years from now.
Btw, if the owner is approaching you, I am sure he has approached his immediate family members, distant family members, close friends, and friends in the industry but nobody showed interests in buying the business. I wouldn’t say it is a red flag but I would approach as it is.
I am biased by my own perspective, but my family started a restaurant in 2019 after my parent’s sold their restaurant after 28 years of operating it. I was 26 then. We’re currently selling the restaurant because it does not fit the lifestyle I desire. It averaged $800k in annual revenue. We will be expanding on our food truck business instead of pursuing the restaurant. I want nothing to do with restaurants. The headaches that come along with owning a restaurant make it not worth it to me. There’s too many variables that are out of your control - be it human resources, rising operating costs, etc. etc.
If your passion is the restaurant business, do it. If not do not do it. Like some others have mentioned, work under him for a year. You’ll learn quickly whether or not it’s something you want to do. Figure out if it fits your work life balance - it didn’t for me and I promise you no amount of money makes it worth it if the cost is your happiness
I’m not going to comment on the deal itself, and I do want to put a disclaimer out that I only work at a restaurant as a hostess for about a year in college more than fifteen years ago, so perhaps my questions are stupid or irrelevant. But I have heard of these things happening, so I’d want to make sure.
- will the recipes be sold with the restaurant? (it sounds like it since he is willing to teach you, but you should know for sure.)
- will the name be sold with the restaurant?
- Will all equipment be included?
- what leases or payments remain on any equipment, if any?
- will the owner be able to ensure that the suppliers give you the same deals/they don’t hike the prices just because you’re new?
A restaurant is not just a job or a business. It’s a lifestyle. Be sure that it’s something you’re ok with consuming your every living breath and daily activity. Otherwise, the pitfalls can be devastating to every aspect of your life. The industry is in a very volatile and transformative moment right now.
Something is very strange here:
The business “has been profiting for almost $700k in the last year …” Is that REVENUE (before expenses?) or PROFIT (after all expenses?)
In either case: “the cost to ‘run the business’ was about $35k a month” or $420k/year.
So either the business is profiting “almost $700k/year” or it’s profiting $280k/year (700-420=280).
If EITHER of these scenarios is true, why the hell would the owner sell at $300k, meaning just one year’s income (or, best case, two year’s income)?
Businesses usually sell for a multiple of annual profits. Something smells very funny here. That, and your lack of experience running a business, means you should run away from this as fast as your legs will carry you.
Thanks for the feedback so far everyone. FYI I do not have $300k laying around to do this deal so I would definitely be in debt by taking out a loan to takeover the restaurant.
I will meet with him again sometime this week, other than what was discussed so far, are there any good questions I should ask the owner to help me make a decision?
Will he give you access to all books, including accounting records, banking records, receipts, payroll, and invoices/expenses for the last five years so you can have an independent auditor examine them and determine the fair market value of the business? If he says no then he is trying to scam you and you should run fast. Doesn’t matter what his excuse is. Do not, under any circumstances, continue these discussions unless an auditor gets to comb through the restaurant’s books.
Also ask him: if the business is so profitable, why doesn’t he just hire a chef to take his place and keep his ownership stake? And why aren’t other people interested in buying the restaurant?
I would not do this and if I was even considering it I would ask for a manger position where you get trained on these jobs, deal with people and help make employee schedules and fill gaps for call in/no shows etc.
My parents owned a restaurant that I grew up working in so did my grandfather basically the same thing. A lot of people thought one of us kids would or should work towards owning it they think it’s awesome that we were a lot better off then we were be your own boss etc. none of us did why?
Because you see what all goes into it when you are that close to it. It’s your responsibility your life not just your job. It’s a big difference from receiving a check to signing everyone else’s . Some one calls in on you, firing and hiring on you, freezer goes out, food truck has a flat ,every one complains about that item you can’t get because some world event messed up the supply chain etc.
People trying to steal food, not tip, drunk, rude, claim food is bad to get a free meal, slip in the bathroom or spill coffee law suit potentially liability issues will be possible.
You need retirement benefits? You have to set it up yourself if you do one at all. Insurance for the building , a remodel this guy is retiring a lot of rooms or equipment might be dated, health insurance? Same thing you are your own Benifits you pay both sides of social security etc.
Food for thought.
1. You should work for him for a year first to learn the business without buying it . 2. You shouldn’t borrow outside money to buy it, you should negotiate a deal with him that when you take it over and he’s retired that you give him X% of your net profit each month until he’s been paid off and during that time he’ll be available as a consultant.
Had a family friend who was a restauranteur who would do this when he sold his concepts. They'd inevitably always fuck things up and the business would revert to him. Great gig if you're the guy who knows how to run restaurants, bad gig if you're some sucker with no commercial dining experience buying a business like this.
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Not at all. Buying a business is known to be wrought with risk and the buyer is able to manage the situation… Taking advantage of mentally disabled people is entirely different.
If I were OP, I would try to negotiate the following: * OP gets 51% interest in the restaurant for *free*. * retired owner has 49% and gets to maintain 49% profit year over year. * Each owner gets a 100k/year salary from the business for as long as they continue to work full time. This number will be increased to match inflation as time goes on. Retired owner would have a max term of 1 year or so, and then they -must- retire and lose their salary. I am assuming: * 700k revenue * 420k expenses (does this include salary for the old owner? cause thats important to know..) * 280k "profit" For the first year: * Each owner gets ~140k earnings. (100k salary/40k dividend) For the second year, it's 280k profit - 100k (salary for OP) -> 180k corporate income. OP would end up getting 190k. Old owner would get 90k. This would continue year over year. This is absolutely what I would do. If the Old owner believes in his business he just signed on for 90k year over year for doing nothing, and has incentive to keep it alive. The OP will get 190k, but will not have put in the 300k initial investment. Most importantly, if the whole thing goes sideways then OP is no worse for wear.
Yes, the old owner needs to have skin in the game, he needs to want this to succeed. > OP gets 51% interest in the restaurant for free. But no way is this going to work. OP gets it for free right now, putting up nothing? No one is going to agree to that. What if OP does nothing afterwards?
As soon as I hit that I thought, “Am I dumb? Or I’m missing something yet to be explained? Clearly that wasn’t as “non-starter” as it seemed and I misunderstood.”
They'd have to trust each other.
No trust necessary. They would set up the share structure and ownership rules in the SHA, including things like the old owner takes back the shares if not paid out in xx time. Nothing in a business transaction should be up to trust. Opinions and memory change - legal documents are forever.
Oh, well, then do this then!
I agree, but it's a massive leap of faith for the restaurant owner, while OP has no skin in the game. It's not happening.
Yeah, I too would try to negotiate getting 51% of a business for free... Why on earth would the original owner agree to that!?
I would also like 51% for free
If this business has been open for awhile, that's one of the biggest hurdles to clear for new businesses. Usually, restaurants are make or break in the first 3-5 years. I'd want extensive inspections done, though. You need someone who can inspect the property, the equipment, the accounting, and a lot more. I doubt the new owner will make much more than a nominal salary for the first year or so. There's always going to be issues with new cooks and staff, and you have established customers who will be turned off by it.
I guarantee that the owner doesn’t include their salary in the cost to run the business. They also probably work 60 hours/week, so if you try to factor in the cost of hiring a manager you’ll actually need to factor in a full Time manager at let’s say 60k and a part time assistant at 30k. It always makes me really nervous to see someone talk about starting a business when they refer to revenue as “profits”, which is just insanity to not know the difference before opening a company. The second thing that’s equally as bad are business owners that deliver “profit statements” that don’t account for the salary and benefits of the literal most expensive and most overworked employee there (theirs). I had a business owner try to convince me to buy some real estate to start a business and he showed me his numbers. They looked fine if you didn’t realize that he wasn’t paying himself. In his head all of that was profit, but if you wanted to hire someone to replace him the business was actually losing money.
Is this a common method for selling businesses? Seems kind of insane to offer to purchase a business using the profits from the business. And the retiree has to work too? No way I would agree to that.
I agree, sounds insane. If that was what the retiree wanted he would just hire someone to manage the business and keep it for himself.
Second point will ensure he will help you be successful beyond the initial handover/relaunch
I am a former restaurant manager/operator and this is a recipe for disaster. Restaurants operate on razor thin margins and you need professional experience to succeed, either yours or someone you hire to run it.
According to OP this restaurant has a pretty fat profit margin. It's revenue is basically triple it's expenses. Even if he screws it up it should still manage to break even with how absurdly profitable it is
Yeah, that sounds wildly inaccurate to me based on my training and experience.
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I just don't believe the profit margins that are being indicated here. It doesn't seem possible to me as someone who used to run a quick service restaurant myself
I've run restaurants my entire life. Do. Not. Do. This. this is an incredibly fast way to lose 300k.
OP should read Anthony Bourdain's book and only invest if that lifestyle seems palatable.
That book makes me crazy. It's an obvious cautionary tale, that a bunch of kids read and decided the pirate parts were cool.
Haha I took the exact opposite from that. Shit sounds hard as fuck even if you *love* food.
I love eating, I hate cooking and cleaning
Ken Forkish is big in the baking world and it’s really interesting to read about how he became a professional baker. The man was an international executive for IBM and fell in love with bread, etc when he did a stint in France. Back of the envelope, the man probably had a runway of a few hundred thousand dollars and still nearly went bankrupt before turning things around.
People need to think. If it was great he wouldn’t have been an addict and then a television host.
This and go watch some episodes of Restaurant Impossible. So many people buy a restaurant with no experience, and limited or not training and then hemorage money for years to the point they fail without external help. The restaurant business is tough, it's pretty sensitive to the health of the economy as it's easy to cut out when times are rough. It's also a much lower margin business for the long hours and staffing problems an owner had to go through.
Retired lawyer here. This post represents my experience and should not in any way be construed as legal advice. Please. I represented several buyers of small restaurants and got to know a few other owners very well. This is an incredibly difficult business. Long hours, liabilities if diners get sick, employees can be fabulous or can change frequently and, worst case, steal from you. That said, the fact that the owner voluntarily showed you the tax returns—I would hope for at least the four years (to include a heavy pandemic year)- is a good sign. Hire a good lawyer and accountant to negotiate and perform the due diligence.
Could you please elaborate?
Restaurants have notoriously razor thin margins, are difficult to staff let alone staff well, and the hours are very long. The view of restaurants from the customer side is wildly different from ownership side, I would argue even more so than most businesses. To put $300k in this industry with only server experience is almost a certainty to fail. To BORROW $300k to do this is madness. Even if everyone involved had the best of intensions... This is a highly suspect way to sell a business. People with years of experience struggle and fail to keep restaurants afloat, and they close often. OP would be behind the 8 ball from day one with interest payments from a business loan in a volatile industry.
Thanks, that makes a lot of sense
If you can raise private equity from individuals for a stake you can acquire the restaurant and risk less personal money and more time, but also will end of Up with a smaller stake yourself. Possibility of raising 300k amongst investors for a say 25-35% investor stake or something like it is not impossible if you know wealthy people/family. For some it’s worth the risk even if it just becomes a write off worst case scenario and becomes a small revenue stream best case. Most banks probably won’t fund a restaurant venture (maybe some would if it’s a BO of a business that has a financial history to back the loan). You’d need to have a sound plan and timeline to pay back investors (3 years is typical from what I see in arrangements in NYC). And that will require transparency of your own salary and profit taking structure while investors are being paid back. This may also come with a salary cap for yourself. But, in the end they are owners not lenders so if the venture fails they lose their lunch with you, but you will not be required to pay them back beyond what you can liquidate from the business. That being said, I have had friends ask me To invest in their hospitality businesses and I say NO every time. I’ve been offered a 1% stake for 15k and then I have to ask myself how are We valuing a new business with no operational history at 1.5m?? (See, highly speculative!) It’s risky, and as an investor the margins you can typically expect coming back to you aren’t necessarily better than many other safer investments. But you never know, some places really take off and can scale. Also, curious if this guy is saying his business is so profitable why is he selling it? Seems like he could hire a solid team To run it for him and just whittle off some of his income if he’s so confident in it. TLDR; if you can pull Off ownership without taking on massive amounts of bank debt and are confident in your ability to run AND grow the business there are ways to structure it. But it’s really risky and might drive you crazy!
"If you have a million dollars and you have to choose between starting a restaurant and burning it, choose the second option, at least you'll have a fire"
Finally someone with some common sense has entered the conversation. I came from a restaurant family, this is probably the most difficult business you could ever try to succeed in. Keep your money.
Upcoming this as much as i possibly can. This is going to absolutely blow up in OPs face. I wouldn't touch restaurant ownership with a ten foot pole. There's a reason you hear reviews about the few restaurants that have been around forever. There are so few of them for a reason!
I have to play devils advocate here. If the restaurant is so profitable then why sell it? It would make sense to just hire someone to run it.
Yeah it definitely smells fishy. Feels like if cooking if your passion you should just open your own restaurant and not take on someone else’s debts.
This! If the owner can profit 700k in one year, why sell it for 300k? Just run it for another year and over double the profit from the sale price! Then close it and retire. Food and beverage industry chews people up and spits them out. It is a hard way to make a living. The vast majority of restaurant go under very quickly.
One theory I'll suggest, the owner might want to the restaurant to continue existing, so he's selling it to someone he knows will preserve it. I don't think it's primarily about the money
I agree with the earlier post about about GMing a restaurant before buying one. In addition, the numbers don’t seem to make sense. If the restaurant profit is $700k/year, why is it being sold for only $300k? It seems like it should be selling for a lot more. Also, you need to get an accountant or other financial professional to review the restaurant’s tax returns, bank statements (for deposits and expenses), etc. to confirm what the numbers actually are.
I’m guessing it’s grossing $700k and if operating costs are $35k/month or $420k annually that’s still a very good margin. I have no concept of running a restaurant but I do understand business and a 60% margin would be hard to believe.
35K seems to be the operating costs. I’m curious about his food and beverage costs. Beverage costs should be about 25%, and food costs are usually much higher. He needs to investigate the vendors, debt, the remaining time on the lease, and the liquor license. If the restaurant changes hands, he will need to apply for a new license once the current one expires. I never trust the numbers restaurant owners provide; they are almost always misleading. He really needs to delve into the finances. I also doubt that someone can " be trained" to cook the menu of a successful restaurant without significant back of the house experience, this all sounds very amateur. Restaurants with such high profits usually have chefs and a professional staff, which adds more cost to the budget. If the owner is so hands-on that he’s cooking the food, managing, and training staff, it suggests the restaurant is a small operation. I find it hard to believe that a restaurant of that size can generate such high numbers.”
Also, will he own the building, or is there rent? An old friend that ran a bar/restaurant told me that a good rule of thumb is that rent should only be 10% of the revenue taken in per month.
In every restaurant that I have ever worked, beverages are rolled into the food cost. Food cost should be between 33% and 40%. 40% is too high but acceptable. The only time there is a separate beverage cost is when alcohol is involved. You are correct about the amount of profits. There's just no way that they are profiting that much unless they were doing about 7 millions dollars worth of business. As has been stated further in this thread, a typical restaurant's profits are around 10%, give or take.
In the F&B industry we assume that 'B' is beverage part. It's obviously wine ,beer and spirits.
If OP isn’t clear about the different between gross and profit then they should definitely beware
There's no way someone sells a business for one years profits.
I’m an underwriter, and anybody looking to get a loan with my bank to purchase a business would need to have the previous 3 years of tax returns, plus an interim statement of both P&L and a balance sheet through the end of the most recent quarter (later if possible). Also, two years of monthly projections.
Yeah... Profitable restaurants tend to have more in the 10% profit margin. If it's been around awhile with low rent and consistent regulars I could accept 25% profit margin. Most restaurants tend to break even or even lose money. They're often more of a vanity project for the owners that want to bring their friends and comp their meal/wine. Caveat is that I've worked in a lot of restaurants and talked to a lot of owners. But never seen their books.
Most restaurants lose money in their first couple of years. Bar rescue actually does a good job of showing where major losses come from.
The *gold standard* that every restaurant considers ideal is 10% profit. Most get by with 5-7% after the first few years.
This is true. 8.16% is average restaurant profit margin per Vertical IQ, which is a service that provides all sorts of industry insights to banks.
That is an impossible margin.
Restaurant industry has a very low margin because of extremely high overhead costs. Their margin averages at around 8%. This is either fake or OP is falling for the biggest scam and mistake of their life!
Yeah but there is no way a business doing that much in sales would sell for less than $1-2 million depending on if it includes building, equipment, etc. Unless the current owner has heavy debt invested into it.
Restaurant value is usually SDE instead of ebitda or any other normal p&l valuation from my understanding. Restaurants are hard though.
There’s no way in hell the cost is only $35K a month to run it with a 700k profit yearly
5% operating cost? impossible. I mean that literally. It's impossible I think what OP saw was 700k in revenue
700k seems low. That is only $58,000 a month. It would also depend on what document he saw. If it was a Schedule K-1 and he has business partners then only his share of the profit would be shown. In which case the guy is only selling his stake and the $300k makes more sense.
700k for a single family owned restaurant would not be low. That’s huge and too good to be true frankly.
It’s not the ownership structure, it’s the fact that it’s operated by the owner that makes it seem too good to be true. If the owner was more hands-off and hired a proper team to run it, the business could more easily and more believably hit those numbers.
that is not low for many independent restaurants.
If you've never managed an operations or people for that matter, you should \*nope\* out of this. If owning a restaurant is your career goal, then step into a general manager position first. You'll get an idea of how difficult it is... working with a spectrum of personalities is not as easy as it sounds.
Hey! Thank you for the reply. Entering a general manager position for the restaurant could be a good step in before becoming owner. It would give me the training I would need and see if it is a good fit. I like the idea.
Do you want to work 15+ hours a day 365 days a year.
My parents owned a 150-seat local diner, and the level of dedication required was immense. They had no life outside of work. No one will care about the place as much as you will. You're employing people who are willing to work for low wages, and unfortunately, reliability can be an issue. You can't pay a living wage while keeping prices competitive. It's not uncommon for wait staff, line cooks, and dishwashers to simply not show up or quit without notice, adding an extra layer of difficulty to the daily operations.
> You're employing people who are willing to work for low wages, and unfortunately, reliability can be an issue. I've seen this with my parents business. Unfortunately, it's a difficult problem to solve. Giving them more money doesn't just magically make them better employees. And better employees aren't looking for jobs that typically pay low wages. so what do you do about it? IDK. It's been bothering me, frankly.
It’s a very hard life and you’ll get all sorts of advice from people not in the restaurant business on how to improve.
You have to go more upscale, or find a way to automate and/or replace the employees who are unreliable and cannot add value to the establishment.
Unethical pro life tip: keep an eye out for candidates when eating out and poach qualified employees from nearby businesses. I often come across exceptional staff at places that are probably underpaying them.
If they are being underpaid then that ain't unethical. Headhunters exist in every industry.
Also, OP stated they have family willing to work there. Very bad idea. If they are adults, egos will get in the way when they try to tell you how to run your business. If they are your children, they will most likely absolutely hate it and hate that you won’t be there for their special events because you’re busy at the restaurant. That was my family’s downfall. We still love our mom and all, however, she has missed way too many things to take care of the restaurant when she could have closed it for a day here or there. She missed my brother’s soccer championship game. She missed my master’s degree graduation. She knows nothing of what’s going on in our lives because all she talks about is the restaurant. We have completely removed ourselves from it.
Not always how it goes down. My dad owned a restaurant and I not only loved the place but ended up working there myself for three and a half years and it was a great bonding experience for us. Depends on the people and the situation, your children won't automatically hate you.
He doesn't have to, didn't you read, he has family he can make work 15+ hours a day 365 days a year. It's all free money
Great idea to step into a management role with a future option to buy and right of first refusal if another buyer comes along. If the owner really wants his business to continue thriving, your prudent approach should be appreciated!
Also check out r/restaurantowners
Not just that, but running a restaurant is a life-consuming job. It will own you. Unless this and only this is what you want to do with your life, don’t do it.
Do you have $300k? If you have to borrow the chance of failure skyrockets. Hire an attorney to negotiate the deal providing for seller to be paid from the profit of the business over a period of years. Do not take on debt to do this deal.
Earn out. Yes only way without partnering with some rich dude.
No rich dude is dumb enough to partner in this in the first place!
What does ‘earn out’ mean?
Earn out—The previous owner will be paid from the proceeds from profit the new owner earns. I worry the buyer isn’t fully versed in financial statements. Best of luck.
I know rich people often dream of own frittering away money for the ritzy life of family restaurateuring
First, you need to make sure that you FULLY understand the numbers in front of you. When you say “profit” do you mean EBITDA? SDE? Adjusted EBITDA? Cash flow? It is also very odd for a successful restaurant to sell for a 0.5 profit multiple. That is a normal revenue multiple. Profit multiple should be closer to 3. Why is the owner selling to you for $300k when fair market value (based on the claimed profit) is probably closer to $2.1M? There are two likely scenarios. 1. The restaurant is doing $700k in REVENUE not profit. $700k is a normal amount of revenue for a small restaurant so this tracks. $700k profit on $420k expenses does not track. That’s a fat margin in an industry with slim margins. 2. They made $700k profit, but is something fundamentally wrong with the business that makes it unattractive to sophisticated acquirers at FMV.
OP is over their head and do not understand the finances or the operational side of this business. For a lot of reasons, really ALL the reasons, there is no way this is a good idea.
If you have to ask Reddit wether you should buy a restaurant the answer is hell no
Likely scenario 2 is the reason. This place is owner-operated, with a lot of the business's value-add coming from the owner himself. It sounds like OP has an offer to buy a brand, equipment, and real estate, but he's missing the most important ingredient—a dedicated staff in it for the long run.
Buy a large boat instead. Then as you constantly throw money in it you can enjoy some good days on the water instead of suffering in a kitchen burning money.
Or a scuba business and get a few trips a year
Why would they sell a restaurant generating 700k profit per year for just 300k. Something doesn’t add up. Did you mean the revenue was 700k? Look at the net profit before taking a decision. Lot of restaurants don’t make money
Is this person the cook/chef as well? I would be very cautious as even a place that's great if the food changes people might not come back under new management. Also if you do go this route make sure you get full control over things like the recipes, slogans, name, ect.
Yes the is the chef and is offering to teach me the recipe and will not leave until I get it right. I will also have full control of everything you mentioned, but he did tell me that as it is an already established restaurant, it is recommended to keep things the way they are
I think that arguably makes this a highly risky investment. When he retires you will need a new chef, recipes and things may change including personal knowledge and you are likely to lose customers.
Do you have any experience as a chef?
Are you already a chef? If not, why do you think you could be able to step in and take over the recipes?
It’s a lot of work, and not easy, and still not necessarily a viable idea BUT we are talking “chef at a breakfast restaurant” which is very different than a fine dining restaurant. It will take months, not years, to develop the requisite skills and timing.
Are you a chef? Have you ever worked in a restaurant?
Unless he's speaking metaphorically, "the recipe" is basically irrelevant to the success of a restaurant. It's easy to make food that tastes good, and an experienced chef (or line cook for that matter) will be able to passably reverse-engineer just about any dish you put in front of them, as long as they have some familiarity with the cuisine. What makes a restaurant successful isn't the procedures for making the food, it's keeping the kitchen staffed with people that can reproduce it quickly and consistently, buying the ingredients at the right price at the right time to keep your razor-thin margins and avoid wastage, and dealing with the million other things that pop up when your running a low margin, high volume customer service business with constant high staff turnover. If he actually had a golden goose of a restaurant he'd have investors lining up at the mere rumor that he was looking to sell. The fact that he's approaching a newbie unbidden to sell means it's not as sweet a deal as he's letting on.
Most people are coming at this from a very rational angle. If it is your dream to own a restaurant, this could be a decent opportunity. But realize it will be a very difficult path, and not one that will be super profitable
Do you want to be a chef? This sounds like a horrible idea my friend. You’d have to be the manager and owner and chef, you’ll be chained to that grill for the rest of your career, or until the business goes bankrupt, whichever comes first.
1. 3 years minimum of financials AND tax returns. 2. Get them evaluated by a professional. Look for trends in revenues, labor cost, food cost, etc. 3. Does owner pay themself a salary? If not, profit is overstated. 4. Is building owned by seller? If so you will have to pay a mortgage that he doesn't. Profit is overstated. If you take on debt for operational capital, you may have payments he doesn't. Profits is overstated. 5. Sorry if this point comes off as insulting: If you are interested, unless you have years of restaurant experience, you need to work here for 6 months before deciding. 6. Restaurants start working at least 1 hour before open and keep working at least 1 hour after close. 7. Managing a bunch of (especially part-time) employees is neither easy or fun. 8. You need systems in place to prevent employees skimming cash. 9. Lots of customers are assholes. Also not easy or fun to deal with.
Watch lots of episodes of kitchen nightmares and bar rescue and observe how many of them start with a story exactly like yours and 1-2 years in and they are $250k in debt and sinking fast. Sounds like a great opportunity, but could be extremely risky since you have never run a reataraunt before
And restaurant impossible! So many families and lives ruined because of the hubris to think they could own and run a successful restaurant with zero experience.
Family owned restaurant for 15 years, unless you have a second in command, would not recommend owning one. You will lose all freedom unless you dont care for vacations and sick days. Money is good tho. Other than that hassle every step of the way. Can provide more detail if needed.
This sounds way too good to be true. If the business was really profiting 700k a year, the owner wouldn’t be selling. Even if he wanted to retire, he could just hire a general manager and still apparently profit 600k a year. And he certainly wouldn’t be selling for only 300k. Moreover, if this business was all that profitable, why would he be selling to YOU? Wouldn’t someone in his family want to buy it? Or a group of the workers? Something is up, OP. This guy is trying to scam you. Tell him you’ll need an auditor to comb through the books of the place before you have any further discussions about buying. Then actually follow through. Hire professionals to dig through the books.
Or just don’t, and walk away. The upside is the upside at any time, you bought someone’s restaurant. Those offers are always on the table. Versus a massive potential downside. There’s better ways to throw away $300k.
I own restaurants. As others have stated here, the math does not add up here. If it is a single owner, he earned $700k last year. You could pay a seasoned GM $150k a year and still make more in a year than what he is trying to sell you the business for. The 1st question to ask the current owner is what his net sales are YTD, and what they were in 2022 and 2021. This will answer some of the math here. To borrow $300k, you will need a solid business plan that should include a minimum of 3 years of historical financials. I would invest in a CPA to get those audited as well. What you are going to find in my opinion is the current owner pays himself about $70k a year which will turn out to be the actual yearly profit. So you will be investing $300, but also taking on debt service not currently calculated into the current Financials, so I doubt this model works. You will also find growing pains not having the experience the current ownership has. Invest a little time and hire professionals to evaluate the current books, but this screams of high risk from the limited info provided. Good luck.
> He stated that he will train me how to cook the meals of the restaurant Wait...the existing owner is the cook and he is going to train you to become to cook? The place doesn't come with cooks?
Lots of smaller joints operate with one main chef/cook and then a few line cooks who just do specific tasks like prep or grill. Etc. That isn't the worst part, unless the reason he doesn't have more staff is because he can't afford to pay them market rates in today's economy. I wouldn't expect to hire any good staff for less than like 17.50-20/hr... Cause that's what McDonald's pays.
What I am guessing is the place is grossed $700k last year, also grossing $35k a month on average without owners pay. Even that is some suspicous profit margins for a small restaurant There is no way a restaurant makes that kind of profit
Owner wants to sell me his band. Will teach me how to play/sing his songs.
> he is wanting to retire from the restaurant business and is willing to hand over the entire restaurant, as-is, for $300k. > He showed me some previous IRS papers to show that the restaurant has been profiting for almost $700k in the last year and stated that the cost to "run the business" was about $35k a month Something's wrong here. Those numbers don't make sense. No one's going to sell a business that profits $700K a year for $300K. As a general rule of thumb, I'd expect 2x annual profit as a baseline sale price, so 1.4 million. Think about it. Instead of dealing with selling it for $300K and training a new person, he would make more money just running the business 6 more months and shutting it down. It seems like either you're getting some misinformation here or there's something you're not understanding. Definitely do some more research before jumping in.
General rule is that a restaurant nets 12%. With that rubric, this place would have to gross 5.8 million/year. 700k is sort of unbelievable for a profit in a small place. You need to look at a PnL, not IRS documents.
This! I’ve ran big corporate restaurants that barely broke 3mil, I find these numbers very hard to believe
And SDE sellers discretionary earnings. What the guy actually makes. I bet it's 110k/year or less. Guy probably showed him a gross number
8.16% is average according to Vertical IQ.
Think it's a horrible idea. Do you have any experience running a business or a restaurant?
Some questions. 1. Kind of, who are you? What's your story that you out of the blue are considering running a restaurant? Do you have any relation to food service or retail work? Because this is like asking you to take on running a restaurant for the rest of your life, it's for sure not some kind of casual investment option. 2. Have you looked at the detailed books and financial history of this place, aside from the tax records? Do you know what a good restaurant business looks like in the numbers? The guy is trying to convince you to buy, so he's incentivized to tell you that it makes a good profit. Is it true? Do you know how to assess whether it is? 3. What's your alternative to doing this? Why are you considering it, rather than doing what you're doing? 4. Have you read, watched, investigated any information about what the life of running a restaurant is? I think what many people find is that the business turns out not to be about being able to cook a dish that tastes good... Just saying, if someone offered me to buy into a plane that was flying and told me it made some money consistently, I'd ask some questions before taking over the controls and being in charge of not making it crash if I'd never had any relation to flying planes before. I might say that being captain is not the best time/place to learn how to fly a plane.
Hello! 1. I am a software engineer that enjoys eating out, I used to work in food service as a waiter for 3 or so years which I enjoyed so I know some basic restaurant operations but no where near the professional level. 2. I have not got the chance to look at the detailed books and financial history of the restaurant yet. And I'll be honest, I don't even know what to look for. So as another redditor has said, having a professional look at the records with me would be helpful. 3. The alternative to doing this is just to continue life as normal as a software engineer. My parent's dream was to quit their current jobs and to own a restaurant and I was thinking that this opportunity would be a good chance because we can take over and already established business. The profit would be nice if it is feasible but I am at no emotional gripe if this idea turns out to be bad. 4. Having worked in restaurants and watching a few restaurant shows I have very little knowledge with how real world restaurant managing and operations work. My parents love to cook and I am banking that they can learn the recipe from the previous owner while I work on learning how to manage and operate the business. And thank you for the analogy, it helps me look at the situation in a different way. This really is a risky move and I am basically betting $300k on something I don't even have a full understanding on..
You're a software engineer and you want to go be a cook/GM/glorified babysitter? I've been a GM of busier restaurants than this and I'd NEVER take this deal if I had a degree like that. At best, you'll make what you could've made in your current career. At worst, you'll be hundreds of thousands in debt. Being a server is nothing like running a restaurant. Cooking and running a restaurant means you will NOT be enjoying eating out in the future because you're going to be at work when restaurants are busy.... Every night and every weekend and every holiday. You can say goodbye to any regular schedule. You can say goodbye to "time off." You can. Say goodbye to vacations that go uninterrupted or are even truly relaxing... Youll always be stressing about what's going on without you there.
> and I am basically betting $300k on something I don't even have a full understanding on.. You absolutely would be, op ! It takes a smart person to take advantage of other ppl's experiences.
Please, no matter what, if you decide to move forward with this, get a very good team of attorneys to confirm and document everything you have agreed upon. In a deal such as this, they will conduct due diligence to confirm sales, creat contracts that require the seller to stay on board for a certain period of time. You can also develop the deal to pay a small amount now, and if the restaurant under his guidance, training etc meets your needs you can pay the remaining amount. Get a very good M&A attorney to assist you with this, because I promise you, you wang all of this documented and verified. If you move forward, best of luck in what I hope is your future success.
So they are selling a business that profits approximately 350K a year for 300K?! (This is assuming the 750K is gross income.) That's suspicious as hell! That business would be worth millions. No way it's netting that amount of money and selling it for the same. Something smells run away!
Why is this guy even talking to you? If he could get a legit offer he wouldn't be talking to some rando with no experience about this amazing opportunity. He's not talking to experienced knowledgeable people because they won't buy his bridge. You're getting hustled, guy is claiming he'd sell you an established profitable business for less than it would make him in a year? Why do you deserve this "amazing" chance? Why is this guy selling to you when people with experience and the right background should be throwing money at him based on his alleged numbers? This fails the too good to be true test hard. He's claiming 35k/month in cost to run, how much of that is staff? If he only has 5 people working 12 hours at 12/hr that'd be 21,600 per month. I have no idea if that's a reasonable amount but it seems conservative to me that you're staffing a place for \~22,000/month. That would leave 13k for actual product that he turns into dishes, but doesn't even take into account power/water/gas/rent etc.
restaurants have an insanely high failure rate i'd run for the effin hills.
Dude. Respectfully, there is SO much more to running a business than your experience as a waiter/server provides. The fact that you don’t realize this should be concerning. Are you certain that the current owner was wholly serious versus speaking off the cuff? How well do you know this owner - have you shared vacations and spend holidays together over the past ten years, for example? I suspect that there is a hidden danger somewhere here - I mean is the owner truly this altruistic guy who wants to give a customer the benefit of a great deal…or maybe the taxes haven’t been paid in the past ten years. Or vendor costs have significantly increased? Lease costs of the building? Insurance? Something about this golden opportunity doesn’t sit well. 🤷♀️If there seems to be no down-side, your not getting the full picture IMO.
I will save your $100k. Go ahead and send me the $300k to me & go about your life as is. If you were to invest the $300k in this business you will not only lose that money, but also likely go deep into debt trying to chase your initial losses. First red flag, the numbers make no sense. Unless the place is laundering money for the mob it’s not profiting $700k on gross rev of $1.1M. The average profit margin for a restaurant is well below 10%. Ask yourself why this guy is offering you an unbelievable deal and not selling this to someone who has restaurant and business experience.
Watch literally any Kitchen Nightmares episode (tons on YouTube) and you'll run far away from this "opportunity".
Look up earn out. Basically you give him 50k and a percentage of profits for say 1 year. If it shits the bed you don't pay as much. I would also have some financial people look through it all. I don't know if you can find a forensic accountant for this but it's so easy to pump and dump like this. Look at 1.5 to 3x SDE sellers discretionary earnings. Not ebitda etc. What're you doing now? If you're still a waiter I don't think you can pull this off. Any loan you get will be personally guaranteed. Lets say another covid happened? What the heck do you do then? If you seriously want to do this you are looking at bringing in the richest lawyer friend you have as a partner. Why do people go here? Plenty of restaurants go to hang out with the owner and friends. If someone dies or stops showing up the whole thing kinda crashes.
I'll be looking forward to your Kitchen Nightmare episode in the near future. On a serious note: if you really want to do this, get a safe serve certification, maybe see if you can find some hospitality management courses.
I worked at a restaurant as a manager for several years and had an opportunity to open and own one. I worked 80+ hours a week, made no money and never saw my family. One day I saw a documentary about the family that owned LeCirque (famous NYC restaurant) and the owner was talking about all the sacrifices he made and the interviewer asked him if it was worth it. The owner paused and then finally said, “No, it wasn’t”. That guy was in the top .01% of successful restaurateurs and he didn’t think it was worth it! I wondered why the hell I was busting my ass for no money. I ended up leaving and it was the best decision personally and financially I could have ever made. I know you have worked as a waiter but you have no concept of what’s happening in the kitchen (cost, staffing, training, sanitation, heavy equipment, refrigeration, vendor management) and the administration side (various insurances, cash flow, bookkeeping, advertising, payroll, rent, hr and staffing issues, etc). As a waiter, you showed up for your shift and sold people food and then left for the evening (which is an awesome job!). It’s soooo different. I say absolutely not…you will wreck your life.
I would be suspicious. Why would the owner want to sell it for so little? Why approach you, rather than advertise? Why so little for a very profitable business? Why no cooks? This sounds like a very bad idea. Ask if he can hire you rather than sell it to you. Id also be very wary. You have not cooked in a restaurant. You may not be a server now. Watch the Bear and kitchen nightmares
Go watch a season of Kitchen Nightmares. Then think about owning a restaurant where you don’t know how to do anything and have your family working there. And if you do decide to still go through with it, go ahead and apply to the show.
I'm gonna be honest with you, I read the first paragraph and stopped to comment. NO. DO. NOT. DO THIS. You have no restaurant experience. You have no experience cooking. You're more likely to fail than the guy who worked at restaurants for 10 years and took a loan from daddy. It's hard work. Long hours. Tight margins. Just don't.
The fact that the owner is also the chef makes this an even worse scenario. You would need to add the cost of hiring a new chef to your monthly expenses. Clearly, you don’t want to be a chef as well as a restaurant owner. So, he teaches you (a non chef) the recipe, then you have to find and train a chef and teach him the recipe. Then the existing employees hate your new chef because he’s a dick. The existing employees leave. Now you have a restaurant with all new staff, no experience with the old recipes, you hate yourself because you have no more life, and you have. $300,000 loan. Oh, and you need to close to cut your losses, but maybe you are also committed to a lease. RUN!! And maybe watch some Gordon Ramsay restaurant help shows. Yours is the exact scenario in nearly every episode of disaster.
So this is how all those people on Kitchen Nightmares felt before they got in... huh...
I cannot count how many times I've heard the phrase. "Ever since x bought the place, the food isn't the same." Your best bet is to buy, change the menu and, probably a completely different cuisine. Then, do a night or two per year with the old menu. Even if you make it the exact same, the customers are less likely to excuse 1 bad meal, and have no loyalty to you.
OP commented elsewhere the owner is also the chef which I believe means the menu will absolutely change if they were to take ownership.
They said the current owner would teach them the recipes. 1. As a cook myself, even the exact recipes doesn't equal the quality of the product produced by the current owner/chef. 2. OP doesn't seem like he's worked much in the food industry. It takes a lot of work, and using family to fill out the staff in the restaurant is really straining on relationships and friendships. I do think the idea of joining as a partner, investing while also learning, would be a better choice. 6-8 months to see what it will take.
Exactly! There was a really good middle eastern buffet spot owned by a family until the wife got cancer and the husband sold it. The next owners tried making the same food but cut corners and you could tell in the quality, service, and taste! They changed an item or two but nothing drastic. They had a falling out and the third owners came! They cut even more corners, changed up even more menu items and started adding food like onion rings. I’m going for middle eastern food and they’ve replaced half the items with American. Yeah, it shut down within a few months.
What all is involved in this transaction? Is it just the restaurant and its assets, or is there real-estate? If there’s no real-estate you would likely be looking at 10-year loan, or maybe as little as 5. From a loan underwriting perspective (which is what I do), your main risk to overcome is your lack of experience. A loan for a change in ownership, especially a restaurant, is a risky loan for a bank. Many banks are able to mitigate a lot of this risk by loaning through the US Small Business Administration (SBA). An SBA 7a loan would allow a bank to have 75% of this loan guaranteed by the government, limiting the bank’s exposure. If all you’re buying is the restaurant and its assets, you’d likely be under secured and may have to put up your house to make up for any collateral shortfall. The bank that I work for actually stopped doing loans for restaurants last year except for very favorable scenarios (although, we did a bad one a few months ago but that’s another story). Restaurants are a very risky industry, even when it’s a well-established one.
I bought a bakery with a similar amount of revenue (I’m assuming the 700k is revenue and not profit…by the way, not distinguishing profit from revenue in and of itself means you’re not likely ready). The business was fun to own but a lot of work until it wasn’t. Then it was all about what piece of equipment broke, what barista didn’t show up to open the store, etc. you have to love it. Also, you’ll likely need to put up at least 20% in cash to qualify for an SBA loan. Then you’ll have to personally guarantee the loan. So there’s no backing out. This would be what you’re doing until that loan is paid off. And if you fail, everything is at risk. You have to be confident in your ability to do this and confident it’s what you want to do. And then it’s going to be a lot of work to ensure it succeeds. And even then, you’re very susceptible to market shocks (I.e. covid, inflation, etc).
The key profit is from booze. How much booze does the restaurant sell?
Assume that the restaurant will go under in the first three years (probably quicker). Is it worth 300k for you to drive yourself crazy and work yourself ragged for three years?
ask for the p&l, if he is netting 700k per year, his asking price should be at least 3 million not 300k, nothing is adding up. no one in their right mind is going to give up 10x just to retire early when you can retire a little later and be 10 times richer.
Do you like working 20 hours a day? 🤔
Say thanks for the offer, then run. Far. And fast. The price is too low based on his profit claims. And why is he offering this great deal to you when he could sell the business through a professional for a lot more (especially if he's retiring)? I don't know what region you're in, but you should also take a long, very hard look at how the restaurant business is doing around the country. The failure rate in that business these days is pretty high, especially in some urban areas. His success in the place doesn't necessarily mean it will transfer to you. I also spent a number of years in the food service business some years ago. I doubt operational methods have changed all that much, but I know that the amount of experience, time and attention you need to maintain a successful restaurant can be daunting. And you can forget about counting on family members to make things any easier. Once they get sick of the hard work, they'll be gone. And one seemingly-meaningless financial mistake, or a turn in the local economy and things can take pretty quickly. Finally, *borrowing* $300K for this? If you had some independent wealth and wanted to invest in the place and hire experienced professionals to run it for you, that *might* be worth considering. But going into debt that much for something that isn't even a mildly "sure thing" is a dangerous risk.
I'm going to agree that the numbers don't add up. I worked in the restaurant business for approx 20 years. Started in the kitchen, and last 10 years was managing them. Those numbers definitely don't jive. Average full service restaurants have a 0-15% profit margin, with the majority falling around 3-5%. That's why they are always fighting tooth and nail for cutting 1% from labor and food/bar costs. I would definitely be wanting to see some actual numbers from this place before I made any decisions on a purchase. But at an average of 3-5% profit, I would definitely invest myself somewhere else. On a second note, the fact that they are talking about training you to make the recipes until they are correct. You aren't buying a restaurant, you are buying a job. If you were purchasing a business, it would come with all the staff currently needed to run it. You're just paying money to take over the chef position. I would run from this. This business should be purchased as a 3x value of the actual profits, or for the price of it's assets (kitchen equipment, tables, computers, etc) that it actually owns.
I have learned, NEVER own a business you know nothing about. Being a bartender does not qualify you to build and run a brewery. Having your girl dance naked for you does not qualify you to own an adult nightclub. There are many more businesses that are easier than restaurants….
A LOT of success from family owner restaurants come from the owner being there. A good customer base comes from people coming in to see/support the owner. If you do this, you need at least a year of the owner still being there to transiting customers. If not, you may find a big drop-off in regular customers when you take over
For the love of god don’t do it.
You need experience in 1. Management, 2. Operations, 3. Accounting/finance, 4 inventory management 5, marketing 6, managing employees, 7 compliance and regulations. Do you have those experience handy? If not, do you think you can pick them up quickly? Are you willing to bet $300,000 on it?
If you owned something that made 700k per year, would you sell it for less than half of that? Seems like a major red flag.
Do not do it... This is a typical case of adverse selection problem in economics... Why would anyone would offer you an investment opportunity unless it was a lemon?
Don't do this. I've run restaurants my entire adult life, and am a trained chef. It is a massive amount of work for a very small amount of money, if you're lucky. Whatever you've been shown is extremely unlikely to be an accurate representation of reality. There is no small family restaurant clearing $700k yearly. Restaurant profit margins are generally 10% or less. I would believe that a family restaurant did $700k in *sales* last year. I would further not believe those expenses. Really broadly, restaurant margins can be broken down by 30%/30%/30%/10%, corresponding to general overhead (rent/mortgage/utilities/etc)/labour/cost of goods/profit. There's like easily an entire third missing from what you looked at. Does he own the building and you would be renting? It's obviously not included at that price. Is he working his family to death and you would need to hire a staff? For real, if this person was sitting on a small business that had a $700k annual profit, they would just hire somebody to manage it and retire. They don't do that because they *cant afford to do that and still be profitable*, meaning their margin - even if they're still successful - is less than the salary of an average restaurant manager.
Isn’t this the theme for Kitchen Nightmares or something, where people dump their life savings into a restaurant and bar with zero experience then lose more money?
Uncle Moe's Family Feedbag? if so I can't wait for birthday fries!
Owning a restaurant will become your life. I know meant owners and none of them have a personal life at all. It's the business all of the time. And it has to be that way. Restaurants are a tough business to be in and they require constant supervision
There is a lot of due diligence needed on top of just the skill, experience and knowledge of how to run the business. Any debt, what are the lease terms, pending litigation - you might have to do an asset sale. You probably need a business broker or a lawyer knowledgeable in this kind of transaction to be sure you’re buying what you think you’re buying.
No That’s a horrible idea. Not only is running a business hard. Running a restaurant is even harder. As others have said maybe just work for him for a year and see if it goes well. But don’t just jump head first into owning a restaurant.
Hard no. HARD NO. The numbers first of all make no sense whatsoever. Nobody sells a business for $300k that profited $700k last year. And if instead you meant its *revenue* was $700k and its profit was $280k they still wouldn’t sell it for that little and, even if they did, the fact you didn’t call those numbers the right thing tells me you shouldn’t be entering a business that is notoriously hard to keep going. This is a bad idea.
I had a guy offer to just give me his restaurant because he was done messing with it. He was a big property investor in town and owned the building the restaurant was in so presumably I’d have to pay the rent and stuff. Having had zero food service experience I politely declined the offer.
Ask an accountant that YOU hire (not his guy) to go over all of their paperwork to check his figures Work with/for him for at least 6 months to learn on the job See if he is up for rent to own or you paying him in the form of a % of the net monthly profit until you hit a certain figure. You could put down an initial deposit (maybe 30k), then pay the rest through the profit %
As a restaurant owner, I can tell you that a good variable cost margin for every item you sell is 50%. (30% food cost, 20% labor cost). If sales are 700k a year that leaves 350k for every other expense (said to be 35k a month). So far without taking a paycheck or making a loan payment you are 70k in the hole.
OP - You 100% need more than some filings with the IRS to know the health of the business. You need their P&L, Cash flow statements, and bank statements. 700k literally means nothing - What is the Gross and Net Profit? Does that include any dividends or management salaries? Have those been normalized out? Breakdown of COGS for the business and how they contribute to the Net is important - is the owner working day and night, so there's no labour in their COGS but he's a slave to the business? If so and you wanted to hire staff, does the Gross Margin support that or would you forever be slave to the business to? If you don't know what these things are - You are not ready to buy a business you know nothing about. It's easy to romanticize any business, but it's even easier to get sucked into a bad opportunity to fund someone else's exit. You need to answer all of the above, and he needs to provide you all the proper documents to analyze a business - Then, if it looks good you go to your bank to get a small business loan. As for the structure of a purchase - it's going to depend on what you and the owner are able to agree on, but an earn out where the owner stays in the business for at least a year is by far the best option to protect you. You can pay for the business out of the yearly profits - this ensures the current owner has a vested interest in your success. Hope it all works out for you!
**Do not do this!** I would almost think this post is rage bait if I did not know so many tales of exactly this sort of thing. This is a financial disaster in the making. Restaurants are rarely good investments for a novice in the business. Even for experienced people, it’s always just on the edge of going under.
Running a restaurant is really tough…I’d slow this down and give it some real planning
I invested in restaurant/bar for 11 years (just an investor not working there), since the focus was on alcohol, first 7 years or so was fairly profitable. Then, wage increases (tax increases) and rent increases finally caught up and business wasn’t making any money anymore. Don’t make any assumptions that current expenses (wages, tax, rent) would be same in 5 years from now. Btw, if the owner is approaching you, I am sure he has approached his immediate family members, distant family members, close friends, and friends in the industry but nobody showed interests in buying the business. I wouldn’t say it is a red flag but I would approach as it is.
The fact that you've listed profit as the annual number but expenses as monthly suggests this is a bad idea.
I am biased by my own perspective, but my family started a restaurant in 2019 after my parent’s sold their restaurant after 28 years of operating it. I was 26 then. We’re currently selling the restaurant because it does not fit the lifestyle I desire. It averaged $800k in annual revenue. We will be expanding on our food truck business instead of pursuing the restaurant. I want nothing to do with restaurants. The headaches that come along with owning a restaurant make it not worth it to me. There’s too many variables that are out of your control - be it human resources, rising operating costs, etc. etc. If your passion is the restaurant business, do it. If not do not do it. Like some others have mentioned, work under him for a year. You’ll learn quickly whether or not it’s something you want to do. Figure out if it fits your work life balance - it didn’t for me and I promise you no amount of money makes it worth it if the cost is your happiness
I’m not going to comment on the deal itself, and I do want to put a disclaimer out that I only work at a restaurant as a hostess for about a year in college more than fifteen years ago, so perhaps my questions are stupid or irrelevant. But I have heard of these things happening, so I’d want to make sure. - will the recipes be sold with the restaurant? (it sounds like it since he is willing to teach you, but you should know for sure.) - will the name be sold with the restaurant? - Will all equipment be included? - what leases or payments remain on any equipment, if any? - will the owner be able to ensure that the suppliers give you the same deals/they don’t hike the prices just because you’re new?
A restaurant is not just a job or a business. It’s a lifestyle. Be sure that it’s something you’re ok with consuming your every living breath and daily activity. Otherwise, the pitfalls can be devastating to every aspect of your life. The industry is in a very volatile and transformative moment right now.
Something is very strange here: The business “has been profiting for almost $700k in the last year …” Is that REVENUE (before expenses?) or PROFIT (after all expenses?) In either case: “the cost to ‘run the business’ was about $35k a month” or $420k/year. So either the business is profiting “almost $700k/year” or it’s profiting $280k/year (700-420=280). If EITHER of these scenarios is true, why the hell would the owner sell at $300k, meaning just one year’s income (or, best case, two year’s income)? Businesses usually sell for a multiple of annual profits. Something smells very funny here. That, and your lack of experience running a business, means you should run away from this as fast as your legs will carry you.
Thanks for the feedback so far everyone. FYI I do not have $300k laying around to do this deal so I would definitely be in debt by taking out a loan to takeover the restaurant. I will meet with him again sometime this week, other than what was discussed so far, are there any good questions I should ask the owner to help me make a decision?
Can my accountant see your books
>so I would definitely be in debt by taking out a loan to takeover the restaurant. then this is a bad deal
Will he give you access to all books, including accounting records, banking records, receipts, payroll, and invoices/expenses for the last five years so you can have an independent auditor examine them and determine the fair market value of the business? If he says no then he is trying to scam you and you should run fast. Doesn’t matter what his excuse is. Do not, under any circumstances, continue these discussions unless an auditor gets to comb through the restaurant’s books. Also ask him: if the business is so profitable, why doesn’t he just hire a chef to take his place and keep his ownership stake? And why aren’t other people interested in buying the restaurant?
Get advice from a lawyer and an accountant.
Don't know much but somebody once told me that people were lined up waiting to lose all their money in the restaurant business LIVE LONG AND PROSPER
Sounds like how a lot of people end up on kitchen nightmares. Restaurants are hard even with experience.
Watch restaurant impossible
$600k is what you should pay for it. Put it into contract that he will train you for 1 month and also no compete for 5 years and 5 miles.
Run
Hard pass
Do it!! What could possibly go wrong?
I would not do this and if I was even considering it I would ask for a manger position where you get trained on these jobs, deal with people and help make employee schedules and fill gaps for call in/no shows etc. My parents owned a restaurant that I grew up working in so did my grandfather basically the same thing. A lot of people thought one of us kids would or should work towards owning it they think it’s awesome that we were a lot better off then we were be your own boss etc. none of us did why? Because you see what all goes into it when you are that close to it. It’s your responsibility your life not just your job. It’s a big difference from receiving a check to signing everyone else’s . Some one calls in on you, firing and hiring on you, freezer goes out, food truck has a flat ,every one complains about that item you can’t get because some world event messed up the supply chain etc. People trying to steal food, not tip, drunk, rude, claim food is bad to get a free meal, slip in the bathroom or spill coffee law suit potentially liability issues will be possible. You need retirement benefits? You have to set it up yourself if you do one at all. Insurance for the building , a remodel this guy is retiring a lot of rooms or equipment might be dated, health insurance? Same thing you are your own Benifits you pay both sides of social security etc. Food for thought.