Buying a Restaurant Business
Discussion
This post is on behalf of a friend (I seem to always be turning to PH nowadays to help mates out due to the wealth of knowledge on here!)
So around 6 months ago he began discussions around buying a long established family run restaurant business but things did not work out as he was not sure how to proceed at the time. Probably a good thing as Covid-19 hit so not the best time to have taken over a business I guess. He is now looking to begin discussions again and feels that he may have more bargaining power this time due to the current situation we are in.
Couple of things about the business:
1) Family run dine in Chinese established over 30 years ago
2) He and I and many of our friends have been customers there for years
3) That place is always packed out - Lunch time is full and dinner time there are queues outside waiting to get in
4) They are currently doing takeaways and it's the same - people are lining up outside waiting for their food
5) The premises is on lease which expires in 2023 so not that long to go
6) The owners are looking to sell the brand name, lease, fixtures and fittings and the staff and machinery to be taken on by the new owner too
Now things that came to my mind were
1) What happens in 2023 if the landlord decides not to renew the lease? He would be left with the brand name and goodwill but no where to run the place!?
2) The seller is asking for circa £300k for goodwill
3) We can see that the place does really really well but the accounts don't really seem to reflect this
4) The owners explanation is that they do a lot of non credit card sales - you probably get what I am saying
5) The long established LTD company was recently dissolved like 3 years ago and a new company was opened - it is this new company being sold.
6) Seller could not really explain why a new company was opened and old one closed
7) Seller is selling as he would like to retire - kids not interested in the business as they work in the city as bankers
So what is exactly my mate buying?
The goodwill, the brand name but I don't get how this sale should be structured?
Should he be buying the new LTD company by checking out the accounts, liabilities etc or should he be paying for the goodwill only and do a deal on taking over the lease, buying the machinery and striking a new deal with the employees?
How does one approach the landlord to figure out if the lease can be extended before a deal is struck?
Any feedback would be appreciated. I'm sure we are missing a few basis here.
So around 6 months ago he began discussions around buying a long established family run restaurant business but things did not work out as he was not sure how to proceed at the time. Probably a good thing as Covid-19 hit so not the best time to have taken over a business I guess. He is now looking to begin discussions again and feels that he may have more bargaining power this time due to the current situation we are in.
Couple of things about the business:
1) Family run dine in Chinese established over 30 years ago
2) He and I and many of our friends have been customers there for years
3) That place is always packed out - Lunch time is full and dinner time there are queues outside waiting to get in
4) They are currently doing takeaways and it's the same - people are lining up outside waiting for their food
5) The premises is on lease which expires in 2023 so not that long to go
6) The owners are looking to sell the brand name, lease, fixtures and fittings and the staff and machinery to be taken on by the new owner too
Now things that came to my mind were
1) What happens in 2023 if the landlord decides not to renew the lease? He would be left with the brand name and goodwill but no where to run the place!?
2) The seller is asking for circa £300k for goodwill
3) We can see that the place does really really well but the accounts don't really seem to reflect this
4) The owners explanation is that they do a lot of non credit card sales - you probably get what I am saying
5) The long established LTD company was recently dissolved like 3 years ago and a new company was opened - it is this new company being sold.
6) Seller could not really explain why a new company was opened and old one closed
7) Seller is selling as he would like to retire - kids not interested in the business as they work in the city as bankers
So what is exactly my mate buying?
The goodwill, the brand name but I don't get how this sale should be structured?
Should he be buying the new LTD company by checking out the accounts, liabilities etc or should he be paying for the goodwill only and do a deal on taking over the lease, buying the machinery and striking a new deal with the employees?
How does one approach the landlord to figure out if the lease can be extended before a deal is struck?
Any feedback would be appreciated. I'm sure we are missing a few basis here.
Has anyone read the lease. If no right of renewal it's game over.
Talk to Landlord
Typically you'd start a new company and tip the assets into it. It's a 'business' being sold. Brand, knowhow, menu, certain assets. If you buy the company shares you don't know about undisclosed liabilities or unrecorded assets e.g., sorry the name of the restaurant is owned by another guy and he wants 50k a year to use it.
Id want to see their last 3 years VAT returns and compare these to the restaurants receipts/records.
It sounds like a lot of cash went into some pockets. How can he show this.
I assume you are saying that the vendor officially reports X revenue and X1 earnings but is trying to say actually it's twice that. It's a pretty dodgy thing to do and rather stupid if you intended to sell a business.
How can he prove the revenue and profitability
Talk to Landlord
Typically you'd start a new company and tip the assets into it. It's a 'business' being sold. Brand, knowhow, menu, certain assets. If you buy the company shares you don't know about undisclosed liabilities or unrecorded assets e.g., sorry the name of the restaurant is owned by another guy and he wants 50k a year to use it.
Id want to see their last 3 years VAT returns and compare these to the restaurants receipts/records.
It sounds like a lot of cash went into some pockets. How can he show this.
I assume you are saying that the vendor officially reports X revenue and X1 earnings but is trying to say actually it's twice that. It's a pretty dodgy thing to do and rather stupid if you intended to sell a business.
How can he prove the revenue and profitability
Edited by Burwood on Friday 22 May 16:22
You wouldn't want to throw 300k into a business which has 3 years (maybe less) to run on the lease. You would want the current seller to renegotiate a longer lease for the business to be worth that. If the landlord were to chuck him out after 3 years, indeed there is little value in the business because the trade name might not be worth as much as the location (e.g. footfall, known to regular customers, parking etc.)
The new lease rental costs will go into the calculations to work out how much the business is worth. For example, if the lease goes up by 10k p.a. then the business might be worth 100k less.
Is your friend already in the catering business? Does he understand the ins and outs of a restaurant business? He would do well to do a few random visits to the restaurant on (say) Tuesday evening and Friday evening to compare the variation of business.
He would have to sit there and view for a few hours in the evening with the owner's permission to get a feel of the business.
The new lease rental costs will go into the calculations to work out how much the business is worth. For example, if the lease goes up by 10k p.a. then the business might be worth 100k less.
Is your friend already in the catering business? Does he understand the ins and outs of a restaurant business? He would do well to do a few random visits to the restaurant on (say) Tuesday evening and Friday evening to compare the variation of business.
He would have to sit there and view for a few hours in the evening with the owner's permission to get a feel of the business.
abzmike said:
Not in the restaurant trade but I’d have thought there are some major questions to ask about that lease, the actual turnover given the cash not being counted properly, outstanding or wrongly assessed taxes, etc. There has to be a safer way to invest £300K.
The lease is easy. Is it renewable or not and what are the terms. Taxes and the cash is not a concern, if you can establish it. You’re not buying the going concerns issues. But what is an issue is you can’t fiddle but want a PE based on not fiddling. My opinion, walk away. You’d think there would be many ‘family’ members who know the value and would take it on. I wouldn’t touch a business that trades in any cultural influence for decades only to want to cash out. The secret sauce will walk out the door. Contracts don’t mean shift. Start your own place. 
PrancingHorses said:
...
5) The premises is on lease which expires in 2023 so not that long to go
Now things that came to my mind were
...
2) The seller is asking for circa £300k for goodwill
3) We can see that the place does really really well but the accounts don't really seem to reflect this
4) The owners explanation is that they do a lot of non credit card sales - you probably get what I am saying
5) The long established LTD company was recently dissolved like 3 years ago and a new company was opened - it is this new company being sold.
6) Seller could not really explain why a new company was opened and old one closed
...
What's the calculation to build up an entirely new restaurant business with a capital of 300k from day one? Compare to see if that opportunity is good value. Talk to the landlord before closing a deal.5) The premises is on lease which expires in 2023 so not that long to go
Now things that came to my mind were
...
2) The seller is asking for circa £300k for goodwill
3) We can see that the place does really really well but the accounts don't really seem to reflect this
4) The owners explanation is that they do a lot of non credit card sales - you probably get what I am saying
5) The long established LTD company was recently dissolved like 3 years ago and a new company was opened - it is this new company being sold.
6) Seller could not really explain why a new company was opened and old one closed
...
Gweeds said:
Of all the times to get into a notoriously difficult business area, now would be possibly the worst ever.
Run, don’t walk, away from this sector right now.
Agreed - I would also be wary of the cash in hand situation, when you buy the company you will probably be buying the liabilities as well - that could well mean a visit from HMRC.. could be flagged if revenue and ebit improves too rapidly.. or a staff member gets pissed off by the transaction for whatever reason and whistle blows. You can ask for a warranty from the seller, however they may be unwilling.Run, don’t walk, away from this sector right now.
500 Miles said:
Gweeds said:
Of all the times to get into a notoriously difficult business area, now would be possibly the worst ever.
Run, don’t walk, away from this sector right now.
Agreed - I would also be wary of the cash in hand situation, when you buy the company you will probably be buying the liabilities as well - that could well mean a visit from HMRC.. could be flagged if revenue and ebit improves too rapidly.. or a staff member gets pissed off by the transaction for whatever reason and whistle blows. You can ask for a warranty from the seller, however they may be unwilling.Run, don’t walk, away from this sector right now.
Run away
This maybe completely irrelevant from me as I've never ran a business.
I would be very wary about taking over a Chinese restaurant. To me it is somewhat specialised compared to being a franchisee for something like McDonalds, Subway etc. You can hire just about anyone to run those stores, long perfected processes that make the business very efficient. For something like a Chinese you are usually relying on traditional cooking. Every Chinese I have been to has had exclusively Chinese staff. If these people were to leave I can imagine it would be very difficult to find someone of the same quality.
I would be looking into some guarantee that the staff are there for the long term. If standards do slip, even briefly, it can be very hard for a restaurant to restore their reputation as there is so much competition.
I would be very wary about taking over a Chinese restaurant. To me it is somewhat specialised compared to being a franchisee for something like McDonalds, Subway etc. You can hire just about anyone to run those stores, long perfected processes that make the business very efficient. For something like a Chinese you are usually relying on traditional cooking. Every Chinese I have been to has had exclusively Chinese staff. If these people were to leave I can imagine it would be very difficult to find someone of the same quality.
I would be looking into some guarantee that the staff are there for the long term. If standards do slip, even briefly, it can be very hard for a restaurant to restore their reputation as there is so much competition.
I was involved in a deal just like this around 6 months ago.
The landlord and the new owners discussed the rental terms as well a the lease renewal making sure in that when the lease was over they couldn't get f
ked over. So your friend will essentially be buying the leasehold. A contract with the leasehold will need to be signed and one with the business owner for the transfer of intelectual property, equipment etc.
It would be best to see if the name of the establishment is trademarked and if this will be transferred in the deal. If not, you need to make sure your solicitor has the brand protected in terms of "exclusivity" and include terms about opening another branch within a certain distance. This will probably be an important factor in protecting your investment as many of these guys that sell up end up regretting and opening under the same name or by adding "2" to the name. It happens a lot.
With regards to the Ltd company. Again this is common practice, for tax reasons or maybe accumulated debts. Many restaurant owners will close and open Ltd companies. It's part of the game and recommended by many accountants, which is why you will open your own Ltd to protect yourself.
Having a good solicitor that has dealt with all the above is a must and be warned things like this can drag on for a long time. 6 months or longer at times. Also, find a good accountant that deals with restaurants and takeaways,
Lastly some advice for your mate, from someone that's been in the industry for a few decades. Make sure this isn't your first rodeo, especially if you're taking over a place with a long history. It can ruin your life, friendship and family and be prepared to put in long hours. If you're willing to take the risk and going for it the most important thing is to stay on friendly terms with the previous owner. This is by far the most important factor as it can make or break things, trust me!
Spend a lot of time getting to know the guy, his suppliers and the way he works etc.
Good luck
The landlord and the new owners discussed the rental terms as well a the lease renewal making sure in that when the lease was over they couldn't get f
ked over. So your friend will essentially be buying the leasehold. A contract with the leasehold will need to be signed and one with the business owner for the transfer of intelectual property, equipment etc.It would be best to see if the name of the establishment is trademarked and if this will be transferred in the deal. If not, you need to make sure your solicitor has the brand protected in terms of "exclusivity" and include terms about opening another branch within a certain distance. This will probably be an important factor in protecting your investment as many of these guys that sell up end up regretting and opening under the same name or by adding "2" to the name. It happens a lot.
With regards to the Ltd company. Again this is common practice, for tax reasons or maybe accumulated debts. Many restaurant owners will close and open Ltd companies. It's part of the game and recommended by many accountants, which is why you will open your own Ltd to protect yourself.
Having a good solicitor that has dealt with all the above is a must and be warned things like this can drag on for a long time. 6 months or longer at times. Also, find a good accountant that deals with restaurants and takeaways,
Lastly some advice for your mate, from someone that's been in the industry for a few decades. Make sure this isn't your first rodeo, especially if you're taking over a place with a long history. It can ruin your life, friendship and family and be prepared to put in long hours. If you're willing to take the risk and going for it the most important thing is to stay on friendly terms with the previous owner. This is by far the most important factor as it can make or break things, trust me!
Spend a lot of time getting to know the guy, his suppliers and the way he works etc.
Good luck
Edited by Motoring12345 on Saturday 23 May 00:38
500 Miles said:
Gweeds said:
Of all the times to get into a notoriously difficult business area, now would be possibly the worst ever.
Run, don’t walk, away from this sector right now.
Agreed - I would also be wary of the cash in hand situation, when you buy the company you will probably be buying the liabilities as well - that could well mean a visit from HMRC.. could be flagged if revenue and ebit improves too rapidly.. or a staff member gets pissed off by the transaction for whatever reason and whistle blows. You can ask for a warranty from the seller, however they may be unwilling.Run, don’t walk, away from this sector right now.
I’ve looked at this sector and Chinese restaurants.
Be very careful.
Sounds like the food is good in this place. Can you lock the chef or chefs in.
No point buying if they are not LOCKED IN.
Chinese accountant probably involved currently. Important to check on this and understand the internals....
Someone already mentioned Chinese staff. Important for authenticity but are they part of any deal.
Avoid a situation where current owners can sell pinch key staff and open across the road in 6 months...
Etc Etc.
Be very careful.
Sounds like the food is good in this place. Can you lock the chef or chefs in.
No point buying if they are not LOCKED IN.
Chinese accountant probably involved currently. Important to check on this and understand the internals....
Someone already mentioned Chinese staff. Important for authenticity but are they part of any deal.
Avoid a situation where current owners can sell pinch key staff and open across the road in 6 months...
Etc Etc.
A more fundamental issue is, for me, he seeing a busy business that he thinks will earn him loads and is overlooking the hard work that goes into it? Is he seeing the icing on the cake but not the dull/hard work of making the cake?
Plus, does he realise he'll be working at all the unsocial hours of the the week? Friday or Saturday night off? Unlikely!
Plus, does he realise he'll be working at all the unsocial hours of the the week? Friday or Saturday night off? Unlikely!
PrancingHorses said:
3) We can see that the place does really really well but the accounts don't really seem to reflect this
4) The owners explanation is that they do a lot of non credit card sales - you probably get what I am saying
5) The long established LTD company was recently dissolved like 3 years ago and a new company was opened - it is this new company being sold.
6) Seller could not really explain why a new company was opened and old one closed
7) Seller is selling as he would like to retire - kids not interested in the business as they work in the city as bankers
4. There's no reason why non-card sales cant be included in the Accounts.
5. It makes it harder for HMRC to go too far back if/when they investigate the company. the directors of the current company cant be held liable for any fraud that happened in the previous company.
6. It was to minimise backwards liability. Pound to a penny the Directors are related to the previous Directors.
7. Might be true.
I bought a restaurant. I paid half what the previous owner had paid, and he paid half the previous owners purchase price.
£300K "goodwill". Sheer lunacy. Absolute insanity. Custom in restaurants is transient based on food trends and quality.
There is NO good will in a restaurant unless its a McDonalds.
Location, yes, that's about it.
Section58 54 protects most leases.
The above cost me about £100K to learn.
£300K "goodwill". Sheer lunacy. Absolute insanity. Custom in restaurants is transient based on food trends and quality.
There is NO good will in a restaurant unless its a McDonalds.
Location, yes, that's about it.
Section
The above cost me about £100K to learn.
Edited by 21TonyK on Wednesday 27th May 11:09
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