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  Home > Discussions > Due Diligence: What Should I Look For When Buying A Restaurant?

Blog Post Due Diligence: What Should I Look For When Buying A Restaurant?

Initiated By: Joe Ranieri, Business Broker at 714-292-5448, 714-292-5448 (Cell) - Log In To Message/Email This Contributor

Comments & Replies: 1   Topics: buying a business, due diligence

Discussion Description: It's no secret that both small and large restaurant purchases are sometimes tricky to pull off & can be difficult to determine if a deal is a good one to move forward with. BizBenNetwork Members weigh in with critical investigative components & tips of buying a restaurant in the due diligence phase.

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It's no secret that restaurants, especially ones made from scratch in a brand-new location, take a lot of time and effort to run, and while a percentage fail, another percentage change hands every 3 years or so because the owner is just burnt out. Many new owners think they can run a successful restaurant, because friends and family have told them over the years that they are a good cook, and when starting their business or buying an existing one, they are unaware of the cost percentages to go into running a successful restaurant.

Here a few such percentages, which may help them better understand:

1. Food Costs: A general industry standard for food costs in the restaurant business is typically between 28%-35% of the overall monthly sales. Fast food restaurants may have a lower food costs of 25%, while fine dining costs can exceed a little over 35%. A tip: track exactly how much and what you are selling every day. I once had a seller who owned a coffee shop and I realized they were throwing out huge amounts of unused pastries every day, and so by analyzing what was sold, they changed their purchasing habits and increased their bottom line. Typically, more experienced restaurateurs are better at lower food costs either through kitchen efficiency or more effective purchasing habits.

2. Labor Costs: Most restaurants will typically have labor costs that run between 30%-40%. Regarding fast food restaurants, many owners are investing and investing in automation, either in the kitchen or ordering kiosks, you may have already started seeing these types of kiosks in McDonald's restaurants all throughout the country. Studies have shown that people typically spend more when ordering at a kiosk, then when their order is taken from a live human being. When buying a restaurant, beware of family run restaurants, where on the business disclosure it shows much lower labor costs, because the kids basically work there for free or the owners work and they don't need other labor, and so if that won't be your situation as a new owner, it will cost you more in labor.

3. Rent: This one is the killer, because it's a fixed expense, and will often go up every year, and can really lead to the downfall of a restaurant. The rent should generally be between 10% -15%. The higher the monthly gross sales, will often have a higher rent. Many new buyers, especially inexperienced ones, are intimidated by high rents, such as $8,000 and up, and are more comfortable with $3,000-$4,500. Rent will often include CAM (Common Area Maintenance), so when analyzing the rent, do so very carefully, and acknowledge with what you are comfortable with. A buyer should not pass up a good buy if the rent is high, but the restaurant is also highly profitable.

This Discussion's Contributors

Contact: Joe Ranieri at 714-292-5448, 714-292-5448 (Cell)   Log In To Message/Email This Contributor
Profile: Having owned businesses for over 22 years, my interest turned to listing and selling businesses rather than owning them. I specialize in high volume restaurants, fast food independents & chains, bars, liquor stores, small manufacturers & service businesses in Orange and LA Counties in California.
Key Words: joe ranieri, remax, re/max commercial, business broker, restaurant, cafe, fast food, buffet, retail, bakery, food, juice, bars, mexican, coffee, tea, dessert, sandwich, grill, coffee house, mediterranean, turkish, pizza, asian, sushi, japanese, chinese, sports bar, diner, liquor, market, mart, orange, san bernardino, huntington beach, long beach, los angeles, costa mesa, hollywood, fountain valley, cerritos,
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Joe Ranieri - Business Broker, Orange County, LA County, California - 0219
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