Buying a Restaurant? Here Are 4 Red Flags to Watch Out For
Are you considering acquiring or investing in a restaurant but wondering if it’s a wise decision?
Unfortunately, not all business decisions are good ones.
And over the years, we have come across restaurant purchases that we would have advised against.
At U-Nique Accounting, we’ve been in the restaurant, bar, and brewery industry for quite some time now, and it has given us a lot of valuable knowledge.
We know what makes a business successful, and alternatively, the signs that show a business might be headed for trouble.
Here are four red flags to consider when contemplating opening a restaurant:
- You plan to invest and let other people run it
- You have no experience in running a restaurant
- You’re buying a business that’s trending downwards
- Businesses have failed in the same location
Let’s dive a bit deeper into each point.
Buying a Restaurant Red Flag #1: You Plan to Let Other People Run It
This is a common scenario we see time and time again:
You have some spare cash (or maybe you don’t!) and think buying a restaurant is a great way to make money long term.
So, you decide to invest your money into a restaurant business, maybe even partnering up with someone else, and hire a general manager – someone who knows the industry – to do all of the hard work.
It’s. Probably. Not. Going. To. Turn. Out. Well.
In fact, you might as well flush all of your money down the drain instead. It will be quicker and less painful this way.
One of the biggest mistakes we see is business owners hiring GMs to run and manage the entire business for them.
A general manager’s role is to run and manage the day-to-day operations of the business. Now, while they are supposed to be controlling costs around your purchasing and labor management, many supposed GMs really don’t. Their end goal is not to make you millions.
Read: Their skill-set is not in making money.
They aren’t going to be watching your margins, or make the financial decisions that will serve your business long term.
That’s YOUR job. And the job of your experienced accountant.
You must be hands on in the financial aspects of your business if you want to see it succeed.
Buying a Restaurant Red Flag #2: You Don’t Have Any Experience in the Industry
This next point can really apply to any business – not just restaurants and bars.
As a general rule, don’t go into business in an area that you know nothing about.
Just like Warren Buffett doesn’t buy stocks in companies he doesn’t understand… you shouldn’t put your hard-earned cash into a complex and grueling industry that you know nothing about.
The very best business owners already know what they’re doing.
Instead of hiring a general manager who knows the industry to teach them how things work, successful restaurant owners are the ones doing the teaching.
Train others beneath you and expand with your own blueprint on the business.
Never trust or rely on other people with your money. Especially when you don’t understand.
Buying a Restaurant Red Flag #3: The Restaurant Financials Are Trending Downwards
When buying an existing restaurant, it can be tempting to want to “resurrect” a restaurant from its dying days.
The restaurant’s cash flow may be under major stress, and the P&L hasn’t looked positive in months but hey!.. you’re going to be the one that saves it.
This isn’t typically a winning scenario.
Now, that’s not to say that it can’t happen. There may be glaring aspects of the business that you can change and improve, such as pricing, food costs, or employee structure.
But we strongly recommend working with an experienced accountant before signing on the dotted line.
Here at U-Nique Accounting, we’ve advised dozens of businesses about their pre-purchase decisions and saved restaurant owners tens of thousands of dollars in bad decision making.
Work with an experienced restaurant accountant you trust to go over every detail of the financials before you buy.
Buying a bad business is oftentimes… well, bad business.
Buying a Restaurant Red Flag #4: The Location Has Failed Before
Last but not least, think twice before buying a location in a failed location.
Similar to our previous point, it’s easy to convince yourself that things are going to be different with your restaurant.
“They just didn’t know what they were doing.”
“Their food was just terrible.”
“There was a reason theirs failed and ours won’t.”
And you may be completely right.
But we encourage you to step back before you buy and look at all scenarios through an unbiased lens.
Yes, the location’s rent is more affordable and you probably don’t need to invest as much in your build out as you would in a different location, but…
Sometimes a bad location is simply a bad location.
No amount of delicious food is going to change that. In fact, the previous business probably knew this as well but chose the location because the rent was more affordable than the location they really wanted.
After all, the previous business owner had the same starry eyes as you! And they still went out of business.
While this red flag may not put a stop to your acquisition or investment, it should give you pause before signing your funds away.
Need Help Before Buying a Restaurant?
We hope you found this blog useful!
If you need extra help making financial decisions with your restaurant – either before or after purchase – we’re always here to help.
It’s what we do!
You can book a complimentary call down below or reach out to us via our Getting Started page.
Until next time, stay U-Nique!