Once you have a better understanding of the market, you should now focus on the building and ‘the deal’.

1. Base the value of the business on trading profits and not the number of seats in the restaurant. Whatever you think you can add to the revenue should not be included in the price. This is your risk and your premium.
2. Separate the revenue generated by food and beverage and the sale of other services. Do the proportions of revenue indicate under-performance in one area or another?

3. The purchase price should be between 4 and 8 times profit, except in exceptional circumstances, nd excluding any living accommodation.

4. Purchase price should be .75 to 2 times annual revenue.

5. Total loans should be less than 70% of the purchase price – and preferably be much less!

6. Is the property freehold or leasehold. Determine how future rents will be fixed – will you end up paying more due to your own investment? And at the end of the lease will you have anything to retain – such as a second income from a business you can develop through the restaurant operation – an outside catering business, a catering consultancy etc.?

At this point I wish you every success with the transaction and future operation of your restaurant.

During the last 14 years we have worked with many operators in many different markets, areas and countries.

If the market is the most important consideration when buying a restaurant, what do you need to know?

The following quick guide is designed to help you channel your thoughts in the right direction:

Who are the current customers? Are they: business people, shoppers, theatre goers, car or train travellers, day trippers, visitors to local attractions, people looking for a gastronomic experience, people celebrating special occasions, local residents who wish to save time cooking, people enjoying a night out visiting your restaurant as part of a established circuit? You will probably find that your intended restaurant is currently serving a number of different markets differentiated by time of day, so you need to find out all that are relevant – and visit at different times of the day.
What are the demographics of the main customers drawn by each market? In other words are they: young, old, male, female, singles, families, small or large groups of friends? Once again you will find that it will not be just one type of person but there is normally a predominant group attracted to the restaurant. Are these the type of people you want to continue attracting or will some of your proposed changes lead to some loss of trade?

Ask the existing owner for details of any major customers. These may be local companies, group operators or local attractions etc. If you can track down some of the current customers, do so and find out their views.

Consider the match between opening hours, menu style and the different types of customer. Can changes be made that will improve trading?

What is the image of the restaurant in the local area? Can you change or improve it or do you want to preserve it?

Calculate the average spend per different type of customer and also the range of spend. This latter point is frequently missed and can alert you to additional trading opportunities. For example, people may spend at the low and high ends of the scale meaning that the average spend is a misnomer. Concentration on the higher end may be more viable – or even high volume at a lower spend may be the key.

Determine whether a significant volume of existing trade is generated by the existing owner. This may include his/her membership of local organisations or simply a reputation built up over the years. Is this level of trade really transferable to you – or will it be lost? Restaurants can be very personal businesses, built around the character of the owner.

Ask for details of past marketing activity, including copies of marketing literature and details of how the restaurant has been promoted. How extensive was the activity? Are there gaps you can exploit? Can you match the activity previously undertaken? What can you do better? If the restaurant was previously owned by a group, can you replace the business currently generated by national or regional image or promotional activity?

Once you have identified which are the main markets for your restaurant, ask yourself whether the existing restaurant is catering well for the needs of these specific visitors. For example are the opening hours the right ones, is the menu in line with the market, could more be made of wine, drink and the sales of other items? Visit the restaurant as a customer and sample the sales process as well as the food and drink offered – visit at different times of the day and night and on different days of the week.

Visit competitors. Consider how competitive your potential new restaurant is in terms of facilities, price, service, standards and location relative to the main markets you are seeking to cater for.

Consider how you can raise revenue, either by increasing seat turnover, the average spend or both. This may mean a change in service style, booking systems, if any, menu format, increased promotional activity internally and externally. It may also mean the introduction of more efficient operating and food production methods.

Consider whether you can increase the number of customers by increasing marketing activity, drawing different types of customers, re-focussing the menu, adding new services such as private dining areas, changing the opening hours, offering take-away services, providing delivery services, increasing repeat trade through improved promotional activity and special theme events.

Finally consider capacity, the one key factor missed by many. A 40 seat restaurant will obviously support lower levels of revenue that 80 seats. Can you survive on the current capacity – or can it be increased?

Next: Six restaurant value checks.

From this one decision will flow everything else you do in your life – until you sell it. The security of your investment – and your family’s future financial health – depends upon this one, simple decision.

Of all hospitality businesses, restaurants are probably the most fickle. It used to be said that the average restaurant lasts for just two years – and the last few months of that short time are probably horrendous!

Its Different for My Type of Restaurant

The type of restaurant you are buying does not make any difference to your approach. Whether you looking at a pizza restaurant or a £50 per head French restaurant, the questions are the same. Don’t believe that your business is any different because it operates on a low or high average spend per head. The key issues remain exactly the same.

So don’t believe that buying decisions for one type of restaurant are different from those used for others.

And the number one trap is that people think they are buying a building! They look at the eating area, the kitchen, the grounds, the car park and believe that that is what they are investing in – and whilst these are very important, they aren’t the key.

Understand What You are Buying

When buying, don’t limit your focus to the building, the physical structure. Don’t believe that the building marks the extent of your purchase.

What you are really buying is access to the eating out market. That’s it. Nothing more and nothing less. If you don’t believe this, just think about some of the restaurants in your neighbourhood that flourished and then died, with the buildings turned into homes, shops or simply demolished. Or just consider how past shops have been turned into restaurants or take-aways.

This may sound dramatic, but the fact is that a restaurant only remains as a restaurant whilst it can trade profitably. Once that is no longer the position, its just a building looking for another purpose – but with much less value.

The restaurant is the funnel through which you will draw your revenue. It is the customers who will provide the cash. So research the market the first and concentrate on that as much, if not more, than the building.

Details of key restaurant buying questions here.