Owning a restaurant is an understandable dream. Who doesn’t want to be the brains behind one of your area’s hottest eateries, delivering joy in the form of delicious dinners or buzzy cocktails?
On the other hand, getting a restaurant started is a difficult endeavor: A little more than half of all hospitality businesses fail within the first three years. Whether you’re opening a brewery or a little taco joint, you are certain to face obstacles in your endeavors. So maybe the move is to identify a hit restaurant and make them an offer they can’t refuse.
If you want to buy a restaurant and make it your own, you may need to consider help in the form of financing. Taking out a loan to help cover the cost of the purchase, as well as for working capital, renovations, or expansion is a common maneuver—but it does require thoughtful planning and consideration.
Here are nine things to consider before you move ahead with business financing to buy a restaurant:
Do I have a business plan?
When you’re starting or buying a restaurant, you need a business plan that outlines your objectives and how you plan to get there.
Not only will this document help you strategize your way towards paying down your loan and creating an economically viable restaurant, but in many cases, a written business plan is required when applying for funds. Get ahead of the curve and make this your first step before you even seek financing.
Why is this restaurant for sale?
Taking out a loan to start your own business can be scary—but at least you’re doing so with a near-complete understanding of the situation. You want to open this kind of restaurant, in this location, for this reason.
Taking out a loan to assume the responsibilities, and risks, of someone else’s creation, means you need to do your due diligence and understand why the owners will sell. Unless you’re making the owners a ridiculous offer, they’ll have their own reasons for wanting to get out of the business. Those reasons might be personal—family obligations, burnout—or they might be related to the health of the business. If it’s the latter, decide whether you have the skills to transform the restaurant before you buy.
Is the restaurant in a good location?
A restaurant’s location is typically the single biggest reason why it succeeds or fails. If the restaurant is doing well, do some research to see just how much of the restaurant’s success might be due to factors other than location. If the restaurant is coasting off of discounts, deals, or recent media exposure, rather than building a sustainable loyal customer base, your reign might be a short one.
Opening a restaurant of your own is a dream. Make it a reality and start with help from our Restaurant Licenses and Permits Guide.
How much financing will you need?
The cost of buying a restaurant is a huge question. Even if we assume that the price is reasonable to you and you’re willing to take out financing to help pay for it, the exact amount will help dictate what kind of loan you need to apply for and what the terms will be.
What’s the cash flow situation?
You need a true understanding of the restaurant’s finances before you buy, which means examining its cash flow. Restaurants are known for having low margins, but are those margins, at the very least, consistent? Will you eventually find yourself taking out additional financing to cover payroll if you have a slow month?
The cash flow picture for a restaurant should include overhead costs, such as rent, utilities, insurance, and taxes, as well as labor costs, food costs, check averages, and food and beverage sales. If the current owner is reticent to show you the books, that’s a red flag.
Also be sure to investigate any lingering liabilities attached to the business, such as health code violations or unpaid sales tax. You don’t need to inherit any outstanding debts on top of what you’ll owe yourself.
Is the equipment in good condition?
A restaurant’s equipment is the heart of the business. Not only are assets like refrigerators, commercial ovens, and food preparation equipment vital to the success of a restaurant, they’re also typically quite expensive and difficult to replace or fix on the fly.
Before agreeing to buy a restaurant, have an expert inspect the equipment. You may need to replace vital components on your own, which means either increased initial financing or equipment-specific financing at a later date.
Is this restaurant a franchise?
Is the restaurant you want to buy a franchise or an independent business? Obviously, you’ll be entering much different legal and structural waters depending on the answer, but you’ll also want to explore different financing options as well.
For example, specific lenders specialize in financing for buying an existing restaurant. If you’re interested in an SBA loan (more on that below), note that you can only use an SBA loan to purchase franchises listed on their pre-approved registry (some restaurant chains on that list include Blaze Pizza, Burger King, and Ruth’s Chris Steak House, among many others).
What kind of financing can I qualify for?
As you might know, your ability to get a loan to buy a business is based on more than just the history of that business. You will be under review as well, and your financial history will play a huge role in determining what kind of financing you can qualify for.
For example, if you don’t know either your personal credit score or business credit score (or whether you even have one), now is the time to pull those numbers and figure out what you can do to boost them, if necessary. Your credit scores can affect what loan options are available to you, as well as what rates lenders will offer you if you are approved. Your financing will be much more affordable if you have high credit scores than if you don’t.
What’s the best financing option for this situation?
Not all loan options are created equal, and some will be more affordable or useful than others for acquiring an existing business. The most common options include:
- Traditional term loans: Loans with a fixed interest rate, paid back over a fixed time period, are what we typically think of when we think of loans. You’ll have to make a compelling case to convince a traditional lender to extend you a term loan.
- SBA loans: The Small Business Administration partners with traditional lenders to help extend affordable financing to borrowers. The SBA’s biggest loan program is the 7(a) program, which guarantees up to $5 million for working capital, equipment purchases, real estate purchases, and basic startup costs.
- Startup loans: These are term loans specifically built for new business owners. The SBA has a microloan program for new businesses, but other lenders extend this sort of financing as well, typically assuming you can stand up to personal scrutiny.
- Equipment financing: If you just need help to purchase new equipment, equipment financing may be a great choice for you. A lender extends you the cost of the equipment, which you pay back over time plus interest. This type of financing can be easier for new business owners to obtain because the equipment itself acting as collateral.
Understanding how much you’ll need, and how much time you’ll need to pay it back will affect what kind of financing you should apply for.
Taking out a loan is a major decision that should never be taken lightly. Take your time considering all of the points above, and ensure this is a financial decision that makes sense for you, your potential business partners, and even the current owners of the restaurant.