Restaurant for Sale — Your Complete Guide to Buying a Restaurant Whether you have your heart set on buying a five star restaurant, cafe, pub, or simply a food van, the challenges, risks and rewards of opening your own food venture can be immense. To speak in the vernacular of the foodie — success lies in implementing a fool-proof recipe. Get the perfect combination of quality ingredients, spend time on your preparation, planning and due diligence and you have positioned yourself well on the path to achieving the realisation of your dreams. With social and economic shifts influencing consumer spending, the resultant effect is driving a consumer demand for high quality dining experiences. The cafe and coffee shop industry alone is expected to top $8 billion dollars in revenue in the year 2016 – 2017, and restaurants over $20 billion. The temptation and enticement to wade into the market, is obvious. So what are the ideal ingredients for those interested in venturing into the world of entrepreneurial food service, and what are the first steps one needs to undertake? Below you will find a comprehensive, step by step guide composed to assist you in selecting your ideal location, outline legal issues, permits and laws, as well as discuss financing your project, through to equipment and marketing advice. Let’s take a look at how to navigate all these processes and pilot you on your way to becoming an independent, successful restauranteur.

Existing or New — Weighing Up the Facts Making the decision whether to take over an existing business or to start from scratch can be tricky. The advantages of an existing business can be alluring. After all, the bones, such as furniture, fittings and equipment can be included in, or negotiated into the deal and can translate to a walk-up start. When contemplating buying existing premises with a commercial kitchen layout and design, consideration needs to be given to whether it can be modified to suit your intended purpose and vision. Equipment and fit-out, which would normally comprise a substantial part of your budget, may be integrated into the current layout. However, should you need to include substantial sized equipment or machinery such as a commercial freezer or oven, the presence of existing equipment may in fact prove to be a hindrance to your tailored design plan. Additionally, do your due diligence and have a professional assess all existing equipment for signs of damage, to verify it is safe and functioning correctly. A critical review of terms and conditions needs to be given to any outstanding lease agreements which may be in place at the time of handover. TIP: Registering with sites such as businessesforsale.com or commercialrealestate.com.au, allows you to access comprehensive information regarding businesses for sale within your desired location, and enables you to be updated on current listings as they hit the market.

Goodwill is often touted as a positive selling point, however this is difficult to quantify. Conversely, ‘badwill’ may have tainted customer’s perceptions of that business. The resultant negative reviews and contaminated branding can be difficult to negate. You may be faced with having to lure clientele back to a business with a tarnished image or reputation. One simple question must be asked of any established business looking to sell and that word is why? After all, very few people walk away from a cash cow. It is true that retirement or the demands on time and family when running a food service business can have a detrimental impact on one’s life. This being the case, there are genuine circumstances where sellers are motivated to sell a profitable business. Nevertheless, a vendor’s motives for selling must be thoroughly investigated. It may seem like looking a gift horse in the mouth, questioning the motivation behind offering a thriving, profitable business for sale, but it is reasonable to query the rationale of a vendor looking to walk away from a viable concern. A genuine vendor should have no hesitation in opening up their financial records for your inspection. Do not take the vendors reasons for selling on face value. Do you research by speaking to other similar establishments in the area about their experiences. Finding that a business is simply struggling in a competitive market needn’t be a deal breaker. Perhaps, simply offering a more suitable cuisine or price point would turn around the premises viability but at the very least, it provides you with some negotiating leverage. Performing due diligence when taking over an existing business therefore, is imperative. This can be performed by a lawyer, accountant or business advisor but must include a review of the following: Records of accounts receivable and payable

Income statements

Profit and loss records for the past 3 years

Reasons the vendor has for placing the business on the market

Details about the value and condition of fixtures, fittings and equipment which are included in the sale

Existing contracts with suppliers

Seller's credit history

Has the business been served with notices regarding health, water or sewerage which contravene government laws and require extensive work to address?

Location — Finding the Sweet Spot The old real estate adage of Location, Location, Location, goes triple when you are scouting for the ideal premises to set up shop. In fact, the importance of positioning cannot be overstressed. Some of the attractions to consider are: High visibility

Filling a niche

Ample parking

Lack of competition for your particular cuisine

Surrounding population numbers and demographic Setting up a five star restaurant in a poorer neighbourhood is a recipe for disaster. However, there is benefit to be had in positioning yourself in your local area, where you can monitor and fill in for staff and if needed, where you can be at a moment’s notice. Take into account the formula being used by existing successful food businesses in the area. Is there a niche or opportunity to develop or expand an existing business which competitors may not have considered? There is an increasing amount of interest in restaurant ‘precincts’, attracting people looking for night-out packages, which combine a meal followed by an entertainment option. As a perfect example of this, consider Knox Ozone in Wantirna South in Melbourne’s East. Situated adjacent to a busy shopping centre, this hub of restaurants, cafes and hotels offers visitors the full gamut of entertainment options. The adjoining Village Cinema, bowling facilities and nightclubs means that patrons have no need to leave the area to enjoy a full, rounded, comprehensive evening out. Whilst the overheads for such a site must be considerable, the benefit of having the drawcard of a central entertainment or restaurant hub, cannot be underestimated. Scout these types of locations and talk to current business owners about their experiences. Smaller shopping strips in high visibility locations can be attractive to locals and the services of delivery companies such as Menulog can expand your customer base and territory.

To Rent or Buy? — That is The Question There is no definitive answer to this question due to the amount of variables involved, and it falls into the category of ‘how long is a piece of string’. Lease Logic The major consideration involved is of course, the capital you have available. If capital is limited and your vision for your cafe or restaurant is immense, you may find leasing a better option, especially when starting out. Leasing can free up vital funds which are then available to be invested into fit-out, equipment and marketing your new venture. The limitations of leasing are the constraints of the property and what the owner will permit as far as remodelling to fit your purpose. This is especially so if the premises was not originally fitted or designed for food service. To bring everything up to code as far as wiring, ventilation and plumbing is concerned, can mean a substantial overhaul of the existing building. If leasing is the best option for you and you have located a viable premises, done your due diligence, researched the area, competition and demographic, then you are ready to haggle. Your position as a negotiator is really tied to how motivated the owner is to tenant their property. In a situation where you will be doing major structural changes, you may be adding substantial long term value to it. An example of this is the inclusion of a cafe in a new building complex. This drawcard will lure other tenants to the building and puts you in a strong position to negotiate your lease terms. It is imperative that you seek legal advice before signing on the bottom line of any lease. Clauses regarding regular rent increases can dramatically affect your budget, yet are a common inclusion in commercial leases. Also consider whether you have the right to renew your lease after your agreed term has ended. The considerable costs involved in fit-out and equipment means that you will need to get maximum benefit from your investment. Buying Benefits Whilst buying a property is a major financial commitment, if you have previous restaurant experience, chances are you have the ability to make an informed decision based on that. Buying when you know what to expect can be the more viable option in the long term. As an example of this, purchasing a premises can offer: An asset where any improvements and upgrades, directly translate into value added profit

Increased capital growth, which represents equity that can be accessed for marketing, expansion or simply the security of having a financial buffer in reserve

Budget for your mortgage rather than the vagaries of regular rent increases

The flexibility of being able to adapt to your changing business needs without having to gain consent of an owner

Freedom to set a long term business plan and invest in a location where you know you can’t be evicted or asked to vacate at the end of a tenancy lease Employing the services of a qualified lawyer, accountant and/or business advisor (see below) at the outset of your venture, will provide you with the expertise to review any business contracts you sign

Financing Your Vision Starting up any new food business is going to require substantial capital outlay. Leasing or buying premises, licences, equipment and staff are just a few of the costs you will be facing. It is impossible to quantify exactly how much you will need but it will likely lay somewhere between $20,000 for a small venture such as a food truck to $250K plus to fit-out a commercial kitchen. There is no point in making big plans until you know exactly what your financial position is. Understanding what your financial institute will lend you and weighing that against your forecasted costings for premises, permits, licenses, building alterations and equipment, enables you to structure a prudent budget and contingency. Presenting a well formulated and researched business plan which outlines your product, forecasts, sales and marketing strategies along with your cost and profit estimates, will give you the best basis for success when approaching a lender. As a guide consider the Business Plan template provided by the state government which can be viewed here. The Process to Purchase As we have seen, arriving at the point where you are ready to make a commitment to purchase a restaurant, may involve a number of false starts. Unmotivated sellers or those with unrealistic expectations can be frustrating to those keen to begin their journey as an independent restaurateur. View these hiccups as learning curves which will hold you in good stead when you begin negotiations in earnest. When the time arrives and you have identified a restaurant which meets all your desired criteria, the process to purchase can commence. Retain a Lawyer For the uninitiated, purchasing a business can seem like an intimidating undertaking and should be a embarked upon only under the guidance of a Commercial Real Estate Lawyer. These specialised lawyers are experienced in legalities surrounding: Drafting of contracts

Contract negotiations

Taxes

Titles

Conveyancing

Conducting due diligence

Licensing requirements

Restrictive covenants Securing the expertise of a Commercial Real Estate Lawyer, may save you more in the long term, than the initial financial outlay for their services. For those unfamiliar with Commercial Real Estate Lawyers, recommendations can be solicited through business associates and friends. Alternatively, contact the Australian Bar Association’s lawyer referral service. Making a Move In consultation with your lawyer, the time has come to make initial contact with the restaurant via their selling agent. If the current proprietor is selling without an agent, a discreet enquiry can be made directly — ensuring staff, who may be unaware the business is on the market, are not unnecessarily alarmed. Inspection and Inclusions Organise a time to inspect the property, ideally in the company of the current owner. Take copious notes regarding: Inventory

Existing equipment including leases and warranties

Condition of existing equipment

Note the layout and design of the kitchen and whether it will work with your plans without major overhaul

Assess what you don’t require — furniture, fixtures and equipment. These may be negotiated out of the sale price

If the current kitchen and dining area will require renovation or modernisation, budget contingencies need to be formulated to allow for the time the business will be closed. Assessing the Value Once you have a good grasp of the scope of the assets and inclusions, it is time approach your lender so they can organise a valuation. This process covers four areas: Asset valuation — subtracting the business’ existing liabilities from the value of it’s assets

Cap rate — the future return potential of the business

Earnings multiple — multiplying the earnings before interest by the cap rate

Comparable sales — comparing like sales (or apples with apples) Letter of Intent A letter of intent, is not a purchase agreement, rather a formal indication to the vendor of your interest in the property and an outline of the major details involved in the transaction. The letter can be drafted through your lawyer and should specify that it is non-binding. This letter will outline: Your interest in the property

A tentative purchase price based on the above assessments

The terms of the purchase

Conditions of the sale including provisos which may involve:

The condition of equipment at handover



Final inspections before settlement



Inclusions such as equipment, furnishings and lease agreements Section 52 By law, all sellers of small businesses (up to $350,000) must supply buyers with a Section 52. Prepared with their accountant, this statement outlines the financial performance of the business for the past two years and provides a due diligence guide for buyers. Due Diligence Once a letter of intent has been presented to the vendor and he has been assured of your serious interest, you are now entitled to a closer examination of the business’ minutiae, including: Examination of the lease — is the lease ‘assignable’? — meaning, does the current owner have the right to transfer the property’s lease to you?

Ensuring the business is unencumbered by debt.

Organising professional inspections of all equipment including cookers, cold storage and electrical appliances along with, furniture, fittings, electrical wiring and plumbing to ensure they are deemed safe and in good working order.

If applicable, ensuring the liquor license is included in the sale. Check that it is transferrable through your state’s liquor control board.

Determining which intellectual property will be included in the sale — business name, branding or trade secrets such as recipes.

Have your lawyer analyse the profit and loss statements and review their findings under their professional guidance.

Examine staff contracts and the ramifications of a change of proprietor.

Research the reputation of the restaurant through platforms such as social media reviews.

Through your lawyer or accountant, ascertain if there are outstanding debts including — tax, lease payments on the premises or equipment associated with the business. Also any pending lawsuits or health code violations. Negotiating a Price To this point, your intentions have been to assess the business’ prospect as a viable concern and perform a valuation on the equipment and resources you would wish to include in the deal. Armed with this information and based on previous due diligence regarding assessment of the value based on the local market, previous turnover and future forecasts, it is time to make a formal offer. The offer should cover the specifics of the sale including all assets and be carried out in conjunction with your lender. It is always prudent to make the offer subject to finance. Contract to Purchase When both parties have agreed on a purchase price, a contract to purchase will be drawn up. The purchase and sale agreement is a formal legal document outlining your legal rights and responsibilities, warranties, transactions and agreements which must take place before closing. This is the time to include conditions regarding: Repair or replacement of non-functional furniture, fittings and equipment

Disbursements and ownership of debts

Final inspection prior to settlement

Cooling off period

Restraint of trade covenant — prevents the current owner from opening in immediate competition to you

Unforeseen changes occurring within the business prior to the transaction being completed

Misrepresentation made by the vendor regarding inaccurate or false financial information Make a Date Once you have completed the processes above and when both parties are satisfied with the conditions of the purchase, a date will be arranged to sign the contracts to complete the sale. A week prior to the settlement date, an inspection of the premises and equipment should be carried out. This inspection protects you from any loss or damage which may have occurred during the settlement period. It is also a time to ensure repairs and maintenance have been carried out as per the terms laid out in the Contract of Sale. Sign on The Dotted Line On settlement day, once all parties have signed the contract, the business has now transferred ownership to you. Congratulations! Time for that glass of champagne. Now the hard work begins… Professional Protection — Calling in The Experts It is strongly recommended that you recruit the services of a professional, competent business lawyer who can assist you in navigating the labyrinth of legal requirements surrounding setting up a new business. Not only can they organise independent valuations on your property, they have expertise regarding mandatory compliance laws particular to your state or territory. There is a wealth of advantages in employing the services of a professional, ideally with experience in laws regarding: Health and safety requirements

Licences

Permits

Contracts including property leases or purchases

Tax laws

Planning restrictions

Insurances As with a lawyer, the expertise of a talented business accountant is a necessity when starting up any business. They can assist you from day one in your business venture by: Performing due diligence with regards to vendors accounts and financial records

Setting up business accounts

Navigating business tax laws

Minimising business tax Licences — Navigating the Maze If you are planning to apply for a liquor licence for your premises you will need to apply through your state government department. The paperwork involved can be daunting and generally involves: Notice of application

Applicant and premises details

An application fee

A ‘personal particulars’ form of each person involved in the application

Submissions from a public interest assessment

Plans, specifications and details of the proposed premises

Certificate of local government

Development approval certificate issued by the local government

Certificate of title (of the property)

Evidence of the applicant's exclusive right to occupy the premises (tenure)

Training certificates — mandatory training

Harm minimisation including codes of conduct, house policies and management plans There will be an ongoing licensing fee. To give you an idea of the base fee plus any loadings, you can use this calculator to estimate ongoing charges for a licensed restaurant or establishment in NSW. Local councils need to be approached regarding other permits and licensing, and businesses also need to meet standards outlined in the Australian New Zealand Food Standards Code (FSANZ) and Food Act 2003 (NSW). Restaurants must satisfy the food and safety regulations. Frustratingly there is no uniformity in Australian food service laws. Each state acts independently so you will need to consider the laws relevant to your state. TIP: Of course, the single most important aspect of obtaining your liquor licence is your choice of glassware, including wine glasses, beer glasses and cocktail glasses.

Design and layout Unlike your average domestic kitchen, a commercial kitchen requires fit for purpose design which will be based around the specific type of kitchen you require. With the use of architectural software such as AutoCAD, a designer can bring together a virtual modelling which will include: Thoughtful designs incorporating food, hygiene and health and safety compliance

Sanitation compliance

OH&S compliance

Mechanical ventilation systems

Sustainable ergonomic design

Building code compliance

Designs to optimise workflow and productivity The specific type and volume of cuisine you intend to deliver, storage requirements (both dry food storage and cold), preparation areas, cooking equipment plus plumbing and electrical placement all need to be catered for in the design phase. The multitude of considerations involved in creating a practical, efficient and safe work area requires the expertise of an architect or specialist kitchen design company. They will be able to make the best use of your space to create a flow in high traffic areas as well as include: Industrial ventilation systems (including H-VAC and range hood)

Commercial refrigeration

Building code compliance

Compliant electrical, gas, plumbing and sewage implementation

Staff Your staff can be the difference between return custom and a one star rating on Yelp. Professional, courteous and knowledgeable wait-staff helps make your customers’ experience the best it can be. So it’s important to hire the right people. Ready-made, trained staff can be sourced through hospitality agencies or alternatively, you can source and train your own staff. Staff will require food handling certificates and, if you intend to serve alcohol on the premises, they will require Responsible Service of Alcohol (RSA) certification. Obviously, an exceptional chef will be the star player on your team and can have patrons queuing up to sample their creations. Sourcing this vital component to your success can be tricky, time consuming and costly but ultimately rewarding. If you have the backing, head hunting a gifted head chef from an established, successful business is an option. This furnishes you with the ability to promote your business using the cache associated with their name. Alternatively, taking a punt on an up and coming talent can pay dividends in the long term.