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what are some important probing questions to ask when buying a local restaurant besides standard realestate

I am looking at two restaurants in Northern Mich this weekend with realestate agent, I have requested the P&L information and will sit down with both owners. One is a lease building the other is buy to own. I have researched the standard questions, but I am sure I have missed something important to ask the owner. Looking for probing questions that are not normaly asked if there are any. ie: I asked for food receits

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Answers (7)
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owner / operator

Jonah is a wee wrong. I can understand the figures equated to food cost being 33% but is a wee high. Food cost should be no more than 33%, but is better formulated at 24% - 34%; it all depends on type of business and if alcohol is being sold. A good example is a pizza shop. Food costs can run as high as 40% because the overall cost to produce a pie and the low selling cost of the pie to stay competitive; you should be able to run labour costs at 21-23% pretty much for most restaurants.

Nov 18, 2013
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Coastline Window
Orange County, CA

You need to look at the ratios of food and labor to sales. Food should be no more than 33% of sales, so an $8 steak is sold for $24. For labor check daily sales versus daily labor costs, again use 33%. After that make sure you understand the non-controlable costs, e.g. rent, utilities, cleaning services, credit card fees, phone/internet.

This gives a good start to understanding how strong the business has been running and usually where it can be improved.

Dec 22, 2009
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Try a deli and/or diner. It's hard work, but good rewards and fun. Plus in the right area it is an excellent investment that will grow. And you can do this anywhere there are people. We doesn't like to eat great food? Also, know of 2 possible locations in Florida under a different name that may be available together or separate.

Nov 8, 2009
Janelle Peralt
JP Business Brokers
Kerr County, TX

As a broker and former restaurant owner, I would ask for the daily guest counts. It's a number separate from profit/loss reports and most operators have it. It will give you insight to the trends of the business. Also have you CPA audit their financials against bank statements. This will show if they are running short any particular months. And as I do with selling businesses in all industries, find out who their vendors are and visit with them. Without disclosing the particular business, vendors will give you the best idea of what's happening in the industry and how strong the orders are from which businesses. Good luck!

Jul 1, 2009
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The BAF Group LLC

While I agree with both writers, one of the issues - examining the P&Ls - is almost meaningless, in many restaurants in the same manner other, more less cash-intensive businesses can be . Yes, you should ask for Food Receipts, but many, many restaurants do not report all Revenue. The key is to make certain the Food Receipts match the COG on the P&L, then determine the percentage of Revenue that the COG represents. Is it in line with their prices, and the COG you have verified? If the percentage is higher than it should be, the Seller is obviously not reporting all of his/her sales. That is not a terrible issue, but then you need to decide whether you want to pay a price based on what he/she is reporting, or what he/she might tell you it is worth, based on those non-reported sales. And if you pay that higher price, don't expect the bank to support the purchase0.

Moreover, sit and watch what is going on. Be a customer. And do it without warning and without identifying yourself to the staff. There is nothing like being an anonymous shopper in ANY business, to give you an idea of the company's culture.

Jun 27, 2009
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I would ask to see the lease on the building that is rented to see how long until the rent is hiked up on you. Other than that, you should ask operational, P&L and Balance sheet specific questions and really understand each line item of the P&L. For each line, ask your self: "how would this change (if at all) if I were the owner." For example, often "debt issuance costs" as an asset on their balance sheet. Well what if you are buying that business? What is that asset worth to you? Well... Nothing.

In short, you have to understand how the operations of the Company now.... and how they are reflected in their financials. Only then can you understand what this same business might look like if you owned it.

Jun 26, 2009
David Collins
Glentyde Capital Advisors, Inc.
CEO / Owner
Mecklenburg County, NC

Difficult to answer specifically re any questions that still should be asked, without knowing what questions have been asked to this point.

From a general level, though, the scope and extent of your questions will be driven in part by the strength of the P&L(s) you've been furnished, in terms of their credibility. E.g., your due diligence work should be much MORE extensive if those financials were just cobbled together by the seller's brother-in-law / accountant; quite a bit LESS extensive if the P&Ls were audited by an experienced CPA firm.

Also, the deal's structure will influence some of your due diligence work: Are you buying assets, or buying the entity (say, an LLC) which owns the assets? Although there's a lot of due diligence questions that'd be common to all deals, each type of deal structure also has its own specific questions to ask.

Keep in mind that these are actually two deals in one package--a real estate transaction, and a business acquisition. A real estate agent will be knowledgeable about the former, but biz valuations and buyouts are not normally their forte.

Best of luck!

Jun 3, 2009