TOP TEN CONSIDERATIONS WHEN BUYING A RESTAURANT OR BAR

Here they are, my ten top considerations that a buyer should have when thinking of buying a restaurant or bar. I know there are actually many more and any list can vary according to the needs, financial capability and experience of the buyer but you gotta start somewhere, so here we go.
1. THE LEASE - Many areas to check but start with the length of the term. You need no less than five years. Check the rent and other charges. Do sales projections and remember that all charges should never exceed 10% of your projected sales. You better check the rent increases too. Make sure you have the right to assign the lease which may be critical to your exit strategy.
Check what aspects of the premise you will be responsible for maintaining and replacing.
2. SALES TRENDS - Even if you are participating in a pure asset sale and are going to change the concept, it is still a good idea to have an idea of what the location has produced for sales. Get annual numbers and at least the last 12 months of monthly sales to track seasonal trends.
3. FINANCIAL RECORDS - If you are buying an operating business, it is probably a good idea to get up to three years of P and L's and Tax Returns plus a reasonable number of prior monthly P and L's. You might also ask for any contracts that the business has and sales tax returns to verify the numbers on the P and L's.
4. SELLER'S DISCRETIONARY EARNINGS (SDE) - SDE is profit or loss plus depreciation, amortization, interest expense, owner's salary, taxes and benefits, personal expenses and unique or one time expenses. Most small business owners do not want to pay taxes so this number tells what level of "earnings" is available and then this number should be a key figure in creating a sales price agreeable to you and to show you what level of income might be available to you.
5. FURNITURE, TRADE FIXTURES AND EQUIPMENT - These are the hard assets that you are buying. Inspect, inspect, inspect. Everything should be in good working order and the allocation of the purchase price to FF and E should be reasonably close to realistic value.
6. INVENTORY - The inventory of food, beverages and supplies is not normally included in the purchase price and it purchased separately at the close of escrow. Depending on the size and complexity of the restaurant or bar this can run from several thousand to many thousands of dollars. As far as you are concerned, this is part of the purchase price and you need to know what the amount is going to be.
7. ALLOCATION OF THE PURCHASE PRICE - The allocation can include the value of hard assets, intellectual assets, a non compete clause, training and consulting by the Seller, trade name and goodwill. If you are about to buy a restaurant or bar, it is time for you to get a good understanding of these items and how they will affect you from a tax standpoint and also how they affect the asking and purchase price.
8. VITAL STATISTICS - Might be a good idea to know the size of the space, the number of seats, food to alcohol mix, average check per person, the age of the building, number of employees and employee wages buy position, the menu and menu mix, lunch vs dinner guest counts and average checks and then get trends for any of these items that you can.
9. TERMS OF THE SALE - Is this to be an all cash deal? Will the owner finance the deal and if so how much will the down payment be and what are the terms of the Note? How fast can the deal be closed. What will the contingencies be and how long will the contingency removal period be?
10. AREA DYNAMICS - What are the neighborhood dynamics and demographics, business generators and traffic counts, access and egress, parking situation, competitors and competitor growth or decline, local population growth or decline, availability of labor, availability of suppliers and whatever else you feel you need to know.
11. BONUS - Please use a broker so that you are dealing with someone who knows the market and the process, can get you sales comps and help to structure your deal. I am obviously a fan of using brokers and also of using brokers that specialize in an area of business brokerage. I only sell restaurants, bars and liquor licenses. Do you think I might just know a little more than the broker that has never been involved in buying or selling a restaurant or bar? Sometimes. I even know more than an attorney or a CPA!

Brian Harron is an Arizona and California licensed real estate broker who exclusively sells restaurants, bars and liquor licenses. He can be reached at Sunbelt Business Brokers, Prescott, AZ, 928-541-0890 or at brian@arizonabizsales.com