Things to consider before buying a restaurant

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Kafka
Posts: 47
Joined: Thu Jul 04, 2013 4:41 pm

Things to consider before buying a restaurant

Post by Kafka »

Good afternoon,

I’m from Longreach and I work as the manager of a popular restaurant here. After four months of consideration, the board members and I have finally come with an agreement to open a branch in Jericho. I’ve taken the responsibility to find a suitable restaurant that’s up for sale and looking into the loan process as well.

Last week, I came across a pretty decent restaurant. It looks to be in good shape and is getting a decent lot of customers. I’m starting to wonder why the restaurant is being sold. I’m meeting the owner in two weeks time.

What things should I consider before moving ahead with the purchase?

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Otto Dargan
Mortgage Specialist
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Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Things to consider before buying a restaurant

Post by Otto Dargan »

Hi and welcome to the forums Kafka,

Before applying for a restaurant loan, you should make sure that you figure out the reason why the restaurant is being sold in the first place.

To do this, you may ask a broker for the restaurant’s business bank statements for the previous three years and go over them with your accountant. Please ensure that these are not profit and loss statements as they may not be as reliable as bank statements.

It is recommended that you speak with the owner of the restaurant directly and get a better feel of the establishment rather than go over it with a broker.

While enquiring about the establishment, certain things may help you get a better grasp of the situation, such as:
  • Thinking like a customer - What is so unique about the restaurant? You may consider the service, ambience, furniture and comfort, and the food.
  • Management is key - A good management team with the understanding of business at a patron level may be key to running a successful establishment.
  • The current suppliers - You may need to renew certain contracts when you take over the leasehold. However, you may consider switching to suppliers located closer, a logistically better option, or for cheaper suppliers.
  • Holiday destination - You may need to consider how the current owners generate business during off peak periods.
  • Vacancy rates on tables - You may need to consider the type of establishment it is. For instance, do customers come for more that just the food?
  • Staff members - You may have to check the terms and conditions of the old staff and their areas of responsibility if you are considering to keep them.
  • Developmental plans - Please make sure to check with your local council for future development projects such as a new road or building and find out if it will be good for business or vice versa.
  • Inspection - You may consider making sure the restaurant has a good reputation for meeting the hygiene and safety regulations.
  • Financial situation - You may request to see business records and check for any outstanding debts and revenue. You may reconsider buying with the owner if he seems reluctant in letting you look at the business accounts.
  • Rival businesses - You may consider arranging a non-compete clause in the Contract of Sale or Heads of Agreement in order to prevent the opening of a competing business for a given period of time.
Please note that having the right industry experience and business skills may help you turn even a bad restaurant into a decent one.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Kafka
Posts: 47
Joined: Thu Jul 04, 2013 4:41 pm

Re: Things to consider before buying a restaurant

Post by Kafka »

Thanks for the descriptive response, mate. It seems you’ve managed to clarify some of my other concerns as well :)

Now as I’m also taking care of the loan portion, I’d like to know how much I’ll be able to borrow. Also, are there any other things that I need to consider besides all that?

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Otto Dargan
Mortgage Specialist
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Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
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Re: Things to consider before buying a restaurant

Post by Otto Dargan »

Hi Kafka,

By applying for a restaurant loan, you may be able to borrow up to:
  • 80% of the property value for a freehold going concern if the loan size is under $1 million.
  • 70% of the purchase price for a freehold going concern for loan sizes over $1 million.
  • 50% of the property value for a leasehold.
Please keep in mind that the maximum loan term may differ depending on whether you apply for a principal and interest (P&I) or interest only loan. The loan term is usually five years for P&I and three years for interest only.

A business plan including business forecasting for the property may be required. If you lack certain income statements then you may consider a low doc loan. You may also be eligible for interest discounts which may vary depending on the lender and the strength of your application.

You can have a look at our website to find out more about taking out a restaurant loan. You can also call one of our mortgage brokers on 1300 889 743 or fill in our free assessment form so that they can help you with your loan process.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Kafka
Posts: 47
Joined: Thu Jul 04, 2013 4:41 pm

Re: Things to consider before buying a restaurant

Post by Kafka »

I’m really grateful for your help, Otto. Thank you so much for taking the time to respond to my queries. I’d be more than delighted to take help from one of your brokers. I’ll give you a call in the arvo tomorrow to discuss about the loan process. Have a great evening :)

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Otto Dargan
Mortgage Specialist
Posts: 7730
Joined: Sat Sep 06, 2008 5:55 pm
Location: Sydney, Australia
Contact:

Re: Things to consider before buying a restaurant

Post by Otto Dargan »

Hi kenny,

If you are taking out a restaurant loan then you may come across two going concern valuation types, namely:
  • Real property and business value, and
  • Lessee’s interest value.
Valuations may be dependent upon the owner of the freehold and the one who runs the business. However, some lenders may also take into account things like:
  • Net gaming takings.
  • Gaming machine commissions.
  • Total revenue.
  • Gross margin.
  • Wages for revenue figures.
Please note that lenders may also consider the asset quality position, financial performance of each aspect, how they impact industry and business environment, and competition in the area.

To learn more about restaurant loans, you can check out our website.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

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