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Texas Restaurant Law

How To Spot Good Restaurant Investments

Posted in Acquisitions, Contracts, Franchises, Negotiation, News, Recent Law Trends

By all accounts, 2013 should be a great year for the Texas restaurant industry. For just one example, click on this link, which is an article by Teresa Gubbins from austin.culturemap.com. According to the article:

A report by the National Restaurant Association says that the Texas restaurant industry will lead the country in sales growth this year. According to the 2013 Restaurant Industry Forecast, sales at Texas restaurants will hit $40.8 billion, a 5 percent increase over 2012, and will employ 1,074,200 people. Employment gains will continue into the next decade, with an expected increase to 1,245,000 employees, or nearly 16 percent.

With great opportunities, it is important to keep the right perspective. The winners in times like these jump on true opportunities, but avoid the all too common “too good to be true” traps.

With that in mind, here are some factors that might indicate a restaurant opportunity is too good to be true:

  1. The owner can’t easily locate his or her corporate, tax, alcohol, financial, or other paperwork needed to run a restaurant;
  2. Lawsuits or liens affect the restaurant, but the owner tells you they are “no big deal”;
  3. The owner(s) provide complimentary meals to their friends or family on any ongoing or regular basis;
  4. The owner does not already have a good accountant and lawyer (note the label “good” – good is not a friend from college with an accounting degree but is not a CPA or a divorce lawyer pretending to know something about restaurants);
  5. The owner has a silent partner (or a partner who is otherwise not disclosed to the IRS, the TABC, or any other governmental regulatory body);
  6. The owner or operator has never examined each item on the menu to make sure all (or at least most) make a profit; or
  7. The owner characterizes himself or herself as “not a detail person”.

The above list shows just a few of the many items that may stand out to paint a bad picture for potential investors. No one item on this list should completely turn you away from an investment. However, the existence of multiple items on this list or any one item of any magnitude could be a good indicator that the restaurant has some underlying issues.

On the other hand, here is a list of factors that may point to a good restaurant opportunity:

  1. The owner has had other successful restaurants;
  2. The owner may have a lawsuit or a lien, but the list is not long and there are valid and verified reasons;
  3. The owner is detail oriented, has good paperwork, and conducts regular quality and profitability analyses of the operation; or
  4. When confronted with an issue, the owner tends to want to “do it the right way” or find the best solution instead of just the most expedient or least costly alternative.

Again, not all of these factors guaranty that an opportunity is good, but they are still great indicators.

Have you had any successes or failures based on these criteria? If so, please share!

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.