There are numerous items that should be researched before purchasing an existing restaurant.  If some of these potential problem areas are not caught before the sale is final the new owner can get a large financial surprise.   There are several that if found to be in existence, the new owner should walk away from the deal or get a substantial reduction in price.  This makes buying a restaurant considerably different than buying any other type of business. 

What do suppliers say about the business

Suppliers know their customers inside out and are in place to know if the business is doing okay financially.    Are the bills being paid in a timely manner and are the food quantities inline with sales.  Check with all suppliers to see if the business account is current or if there are outstanding debts.  Do not take statements made by the owner without verifying.   Make sure that any agreement for purchase does not include your assumption of old bills or if it does that this amount will be deducted from the purchase price.

Do your homework and make sure that there are no surprises that will show up after you buy the company.  Maybe a percentage of he purchase price can be delayed to protect the new owner from any old bills that show up for payment.

Equipment replacement and repair

Restaurant equipment is used daily and needs timely service and repair in order that it is properly maintained.  The age of the major appliances should be noted and a repair expert brought in to make sure the appliances are in good shape.  If they are going to need to be replaced, this could be a major expense and it should be negotiated into the final price for the restaurant.  Check into an agreement for ongoing maintenance of the major appliances.  Stove, refrigeration equipment and dishwashing equipment should be on this check out list.  All of these get substantial use and the business could be brought to a halt if they broke down and could not be fixed.  Replacement could be a substantial expense. 

Do not assume that all equipment come with the sale.  You could find out it was on loan as long as the old owner used a certain supplier.  Make sure of ownership or any use agreements.  Surprises are caught before they happen by asking questions and then verifying the facts as stated.

Fire marshal requirements

There are two areas the sale should be contingent on passing before it is a done deal.  Fire Marshal approval is one of them.  The health department is the other.

One of the most powerful enforcement people a business has to deal with is the fire marshal.  You must pass his inspection before you can open or stay open.  Any code discrepancies that he finds must be corrected before you can open.  His rulings are basically beyond appeal, so the best path of action is to do exactly what is requested as soon as possible.  Make sure you have in your agreement who is responsible for any old violations.   If your changes or new equipment cause the problem then you are on your own nickel.   If the code problem is from the old owner then it is his problem.  You want your business to be within code requirements.  In fact your insurance may require it.   This requirement is an absolute in order to open your doors.

Health Department

The other all-important inspection is the heath department clearance.  You cannot operate without their approval.  Make sure that you make the sale contingent on passing this requirement.  Especially if you are changing nothing and the business is just as it was under the old owner.  Code changes may have been passed and a new business inspection is a timely place to enforce the changes.  The health department clearance is written in the owner’s name. 

Both of these inspections can be anticipated by bringing in a private inspector to advise you of any possible violations that may come up.  Correct them before the formal inspections as not finding any obvious problems will make the inspection by these all-powerful enforcers move along in a positive manner.  When they find problems they have a tendency to dig deeper and that is not what you want.

Do a legal search

Have your attorney do a legal search for any liens, employee problems or other legal claims that may be outstanding on the business.  Make sure that all taxes have been paid or will be paid out of escrow.  Collections by old suppliers are also a warning sign that all may not be as it seems with the sale.  If any problems are found then ask lots of questions of the old owner.  If they are not resolved walk away from the deal.  Problems that seemed to be hidden may be just the tip of the iceberg and may be just a precursor to other even more serious legal entanglements.  Ask and verify are the operative words when buying a restaurant.

Talk with the staff

The staff will be aware of both the good and the bad for any restaurant.   Talk to them and ask questions and listen very closely to the answers.  Late paychecks or partial paychecks are warning signals that all is not as it seems.  This brings up the point of making sure employee withholding has been paid.  The staff will not know this, but they will know other things from the inside operations of the business.  Let them know how you intend to run the business and watch for their reactions.  It may be time to keep notes on those employees that give favorable impressions.  The final result of these interviews is you will learn from an inside source what they think of the business.  This along with the suppliers will tell a lot about the business.

Conclusions

Restaurants are a difficult business to evaluate as so much of its success is in its reputation or goodwill.  Physical assets are not usually a high percentage of the final price.  Any real estate may or may not be valuable without the business connection. 

There are also many hidden problems that need to be looked for before purchase.  Contingencies must be worked into the purchase agreement.  These need to be there to protect the buyer from surprises.  A restaurant purchase has many more elements to research and inspect by the buyer or his agents.  Other businesses may not have as many bodies that need to be appeased as a restaurant.   Not only that, these enforcement agencies are normally the one and final answer on whether you can open or stay open.

Restaurants can go out of fashion or the cliental can outgrow the desire to go to the restaurant.   This is difficult to measure and different investigators could come up with conclusions that are odds with one another.

There is a romance about owning a restaurant with a great bar and filled with happy people.  The reality is this is the result of hard work and complete focus by the owner and his staff.  It does not happen by accident.  Do not let the mystic get in the way of a very tough inspection of the facts.

More articles on starting a restaurant biz:

• How can you make your restaurant buy a smart one?
• Main tips on how to open a restaurant
• Buying a restaurant - Pros and Cons
• How to make a restaurant menu
• Calculate your restaurant worth