Buying or selling a restaurant is a serious business, so we find out the proper way to get it done...

In 1975, I finished my brief Naval career and re-entered civilian life. Clutching my discharge papers and a small end-of-service bonus, I set out to find myself a shiny new career.  Owning my own business appeared to be a great way to make a living and granted me as much freedom as I wanted. A restaurant owner seemed to fit my extrovert nature, and of course, I could cook like an angel (even if only I thought so).

So, I headed off to find a restaurant that I could buy. As luck would have it, I located a perfect, inexpensive, bistro-style establishment right by the oceanside. It looked to be just ideal for my needs. Enthusiastic and motivated to close a deal, I rapidly arranged to meet with the owner of the restaurant. She turned out to be a BMW-driving lady who was svelte and sharply dressed.

Things looked good, except that according to her accounts, she had worked for ten years for just about minimum wage – certainly not enough to fund her clothes, let alone the almost new and very expensive BMW parked outside.

Bemused, I checked in with a friendly accountant, who patiently explained that the books I had seen were “official.” The real income from the place would have to be estimated from the numbers of “covers” and other factors such as average “table turn,” etc., because none of the cash receipts were recorded.

I promptly gave up and went in another direction with my life. You might feel that it was a lucky day for the restaurant industry, as I was about as qualified to run a restaurant as Michael Richards would be to teach classes on being politically correct - but thankfully, that’s not the point.

What is the point, however, is that today we are not talking about investing a few thousand dollars, it’s more like a million or so. Given that the stakes are so high, no one would trust buying a restaurant to luck alone. So who do you trust to help you?

Charlie Perkins is a well-known restaurant consultant who helps potential buyers and sellers sort out the complex process surrounding restaurant purchase with an approachable and understandable to-do list. We recently sat down with Charlie to find out, not only how I could have done better, but how anyone approaching such a transaction can ensure it doesn’t become one of life’s biggest mistakes.

Q Charlie, what do I need to consider when selecting a site?

Location is very important. What a buyer has to do is figure out the right concept for a specific location. I think the most important thing is demographics. If you’re going to do a breakfast and lunch restaurant, you’ll want be in an area where there’s a lot of office workers. If you’re going to do a fine dining restaurant, you want to be in a fairly affluent area, with a lot of hotels, residential housing and condo owners.

Next, you’ve got to look at your competition. If you go out in the area on a Friday night and all the restaurants are full, then that means that there’s probably a need for another restaurant there. If they’re only half full, then maybe the market’s saturated.

You also have to look at activity generators. People don’t go to a destination restaurant anymore, that’s a thing of the past. There’s so much competition that your customers will stop off at an Applebee’s or an Outback Steakhouse before they get to your restaurant.

The last thing about location is zoning ordinances. We’re working on a project right now with a potential tenant who is going in a new space, and we’ve come to find out that the property isn’t zoned to be a restaurant. Site selection criteria is very important and local zoning is critical.

Q What information can I expect to get from the current owners?

Usually, if you’re buying a restaurant, you’ll be working with a broker, but sometimes, you’ll be dealing directly with the seller. You’re probably better off dealing through an attorney or a broker, because they’re going to make sure that your interests are protected.

There are a number of things that you need to obtain from a seller. Number one is a copy of the current lease. Number two is a copy of the tax returns for the last three years to show reported sales.

The third thing you need is a copy of the financial statement, which gives you specific costs for gas, water, and electricity. Number four is an equipment list. You want to make sure that you know exactly what you’re buying.

Lastly, one of the most important actions is to source a copy of the latest health inspection report. Say the current owner has owned the restaurant for 20 years. They will have a good relationship with the health inspector who may have let certain things slide, but the codes may be much more rigidly applied to you, as a new operator. So it’s really vital that you see the latest health inspector’s report. Before the closing, you should go down and introduce yourself to the health inspector as a courtesy.

Q How much importance should you attach to the financial statement? How much is that a predictor of the future? Because, presumably, if you’re changing the concept or the team you shouldn’t rely on it too much.

In terms of financial statements, restaurants are probably one of the few businesses where the value is not based on past performance. If you take Tom Brady out of the lineup, what happened last year is no guarantee of what’s happening in the future.

Q What other factors should be taken into account when valuing a restaurant?

In some of the older cities, it has gotten so expensive to open a restaurant. We used to talk about opening a 5,000 square foot restaurant ten years ago at about $200 a square foot or a million dollars. Today, that same restaurant is going to cost you $300 a foot plus. So, in cities like Boston and places like the North End, you’re better off buying an existing business, rather than building one from scratch because you enjoy what are called grandfather rights.

You want to make sure the business has the potential for sales growth. If you’re buying a coffee shop, and there’s a Dunkin’ Donuts opening across the street, your chances of sales growth are pretty limited.

If I’m doing an appraisal, I’ll very often go into the restaurant and sit unannounced as a customer. I’m looking to see what’s being done and what could be done. If the service is bad, the place is dirty, the menu isn’t very contemporary, then there’s probably a lot of potential for growth.

I also look at the potential for cash flow growth. We don’t talk about profits in the hospitality industry. We talk about cash flow or earnings before interest, taxes, and depreciation. So, what’s the potential for increasing your sales and the potential for making it more profitable? I look at the condition of leasehold improvements, furniture, pictures, equipment, and the length of the lease. What you look at is what’s referred to as the “cost to create.”

Q Presumably, you need advisors to help you with a serious purchase like this. What does a typical team helping a buyer look like?

First and most importantly, utilize the services of an attorney who is knowledgeable about the restaurant business.

The second person is an accountant. Use an accountant who will not just look at, but recast your numbers. Look for an accountant who will interpret the numbers and work with you as an advisor. I mean, a financial statement’s like taking your blood pressure or temperature. It’s the health of your business.

The third person you need is an insurance agent. Get them involved from the very beginning of the process so you know your limits of liability.

And if you’re working with an architect or a contractor, make sure they’re knowledgeable about all the zoning issues, and that they’re up to speed with all the codes.

Q If we get through that, it’s time now to sit down and actually negotiate, particularly the lease. I would say that’s very important. So how does that work? What are the big issues there?

In terms of lease negotiation, first have the lease reviewed by an attorney. Make sure that you get at least ten years, or at the end of your first five-year term, have an automatic renewal if the landlord’s happy. Next, try and keep your rent at six percent of sales. You need to have the right to an assignment, options to extend, and limitation on the personal guarantee.

As far as the personal guarantee, you want what’s referred to as a burn-off clause. In other words, personally guarantee it for five years, but every year, the guarantee goes from a hundred percent to 80 percent or 60 percent. You want to have a very limited personal guarantee. If you’re not working with an attorney who’s knowledgeable about that, they’ll totally overlook it.

Q You talked about food and beverage costs varying from concept to concept. How do the food and beverage cost percentages work out?

Typically, costs do depend on the concept. A lot of sports bars where 60 percent is beverage and 40 percent is food will sell the food at a loss, and then they’ll run a very high food cost to get the people in there. But food costs should be in a 29 to 32 [of overall costs] percent range.

Your beer costs, depending on the mix between bottled and tap, should be between 22 and 25 percent. Your wine depends on the number of bottles, and whether you sell more by the bottle or glass. Typically, your wine runs at between 29 and 32 percent. Liquor should be between 22 and 25 percent. Those are good targets to shoot for.

Q Earlier, you mentioned business plans, and for a lot of people, a business plan is scribbling on a napkin, “I want to own a restaurant. I want to make lots of money.” How do you recommend people go about developing a business plan?

Utilize the services of a consultant. Very often, your accountant can help you with it.

A business plan is really going to evolve into your policy manual. I see so many business plans written to appeal to a bank to get financing. But those are not really business plans that are going to help you run your business.

I think the core part of a business plan is an executive summary stating who you are, what you’re going to do, how you’re going to do it, and when you’re going to do it.

Secondly comes the company concept description. I see a lot of restaurants that don’t connect with the public. Names like The Roadkill Café. The name of a restaurant should say to the passerby what you are, bar and grill or whatever.

Get a professional to do an industry analysis. What do you have that’s going to make you stand out from your competition? Discuss your management in terms of organization. Include the resumé of your chef and other people involved.

But again, the most important thing is the old mantra: location, location, location. Today, it’s the right location, with the right concept at that location, and the right sales to investment ratio.

Q Let’s talk about money. A lot of people use relatives, friends, and other people as investors. Do you have any views on the whole notion of investors, and how best to manage them? Is there an approach that people should take?

For most first-timers, it’s friends, family, and credit cards, quite honestly. But I’d say if the buyer has some credentials, there are several accountants that are very good. Let’s say the project is worth $500,000. If the buyer can come up with $150,000 in unencumbered funds, there’s a pretty good chance he can get SBA financing for the balance, as long as he’s got a good resumé.

But most people can’t walk into a bank and get financing from the SBA. They’ve got to have an advocate, somebody who’s knowledgeable about the system. The paperwork is intense and a lot of the chefs don’t have time for that.

Q So if I came to you and said, “I’d like to buy a restaurant” – just like I did 25 years ago – what would you say by way of advice?

Make sure you know exactly what your concept is. Get a professional that you can work with, so you can bounce things off of them. Make sure that you use the right attorney and the right accountant. Write a business plan and find out where the funds are coming from.

Work with people who are basically going to tell you what’s right, and not necessarily what you want to hear. Get with somebody who will actually critique your menu and say, “This isn’t good” or “I don’t think I like that.”

Don’t be in love with your concept. Ask other people, get their input and solicit their advice.

Don’t try and be a pioneer - the learning curve can be very expensive.

If you’re going to open a restaurant, you’ve got to be a lot like Tom Brady. You’ve got to get your people motivated, and you’ve got to be enthusiastic.

There are four reasons buyers fail: firstly, the concept is flawed, secondly, the buyer doesn’t have the background, training, or leadership skills necessary, thirdly, they under-capitalize, and lastly, the buyer doesn’t have the self-discipline. It’s a 24-hour job and you’re working when everybody else is partying.

There you have it. Charlie is a genuine expert in this field and much respected by the other professionals who work with restaurant buyers and sellers. He is a very pleasant guy, willing to share his expertise without hesitation. If you are looking for a way to begin down the road to owning your own dream restaurant, then a visit with Charlie would not be a bad place to start.

If you are wondering about my previous restaurateur aspirations, rest assured that there’s absolutely no danger of me ruining the entire restaurant industry by buying and running a restaurant. Although my culinary aspirations faded years ago, I retrospectively appreciate the hard work and effort that comes along with restaurant ownership.

About The Boston Restaurant Group, Inc.