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Texas Restaurant Law

The Top 5 Considerations Before Buying A Restaurant

Posted in Acquisitions, Commentary, Franchises, Franchising, Liability, Negotiation

Despite the “Great Recession”, the restaurant industry continues to thrive. One of the latest great examples of this is the expansion of Asian cuisine. For instance, a new franchise concept called Mama Fu’s is set to open 14 new restaurants in the Dallas area alone over the next several years, according to this article from Lauren Drewes Daniels at the Dallas Observer.

So the question becomes: “Is it time to buy your own restaurant?” The answer depends on several factors, and I have listed here what we consider to be your top 5 biggest considerations before you buy that first restaurant.

Do you have any prior restaurant experience?

The single, biggest mistake that people make when opening a restaurant is their failure to have any prior experience in restaurants. Many of us believe that it can’t be that hard. After all, you’re just serving food, and we all do that at home, right? Wrong!

I have talked more of my clients out of owning a restaurant for this reason than any other. It’s a lot more complicated than what you do at home, and you need restaurant experience  before owning your own restaurant. Not only is it just a darn good idea, but without that experience, many franchisors won’t sell to you, banks won’t lend to you, and landlords won’t lease to you without that vital experience.

So is it game over if you have no restaurant experience? Absolutely not. Instead, consider working in a restaurant or partnering with a restaurant operator. This could help you to avoid tremendous headaches later, and it may even save your restaurant from complete failure.

Do you have any prior experience owning or operating a business?

While not vital, like the prior issue, it is extremely helpful to have some prior experience in owning a business, managing a project, or being a manager of any kind before you own your own restaurant. Being the boss is hard. It’s not the same as being an employee because your neck is on the line if it fails. Your employees will count on you for their income. Your vendors and lenders will insist on being paid. And, your customers will expect good food and prompt service. For these reasons, many people find the transition from employee to owner very difficult, and prior experience being the leader is only a close second to the biggest consideration before buying a restaurant.

Do you want a franchise or do you want your own concept?

The next thing to consider is whether to start your own concept or to buy a franchise. You can always consider buying a franchise from a franchisor, like the great folks at Mama Fu’s. This is better if you want a solid concept that has already shown its success. On the other hand, if you think your restaurant concept is the next McDonald’s, Chili’s, or Del Frisco’s and you are willing to take the additional risks with it, that works too. For more on this topic, see our prior post, called “Is A Restaurant Franchise Right For You?”

Have you completed your homework?

Like any decision that involves even some risk, it’s a good idea to do your homework. Have you researched other, similar concepts or franchises before buying or starting this one? Have you researched the area that you plan to start your concept or franchise? Have you analyzed your revenue and expenses and developed a worst case scenario in case you fail? Have you looked for all of the needed advisers for your restaurant, like attorneys, accountants, real estate brokers, vendors, and permit companies? All of these considerations and more are needed before you start your first restaurant or franchise.

Do you have the capital?

Finally, the last consideration (or possibly much higher in priority) is capital. Do you have the money to open your restaurant or buy your franchise? This may seem obvious because of the costs to open and/or acquire your restaurant, but the lack of adequate capital is also the biggest reason for failure among restaurants that are already open. The reason is that many people believe that their restaurant will “cash flow” (meaning make a profit) from day one. This is wrong. Except for a very few, the vast majority of all businesses, especially restaurants, have one to three years of losses before they start making money. There are many causes, like name recognition and bugs to be worked out, but it is universally true. Therefore, you need to plan and acquire sufficient capital to survive the initial lean times as you grow your restaurant.

What mistakes have you already made? What questions do you have? Please share them here for everyone’s benefit! We want to hear them!

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.