Chapter 2: Basics Of Buying Or Leasing A Restaurant
The real estate property of a restaurant can be its most valuable feature. In many cases the land is a bigger attraction to the buyer than the business itself. Conversely, restaurants may be bought and sold without the property being part of the operation.
The restaurant owner may lease its property from a landlord who has no involvement in the business itself. “Real estate” is a reversion asset, which means it is expected to retain most or all of its value, regardless of whether the business on it is successful. The value of real estate is one of the major assets that needs to be calculated when determining a food-service operation’s value. There are three procedures for determining the value of a restaurant: market approach, cost approach, and income approach.
DETERMINING THE RESTAURANT’S VALUE
MARKET APPROACH
The market approach is based on the idea of substitution. The value of a property is determined by comparing it to like pieces of property in similar areas. Because these comparable properties are not exactly the same as the property you are trying to value, you will need to make adjustments to place an accurate market value. Determining these adjustments is a subjective process at best, and at worst it is impossible because owners of similar properties are unlikely to tell you the details of their businesses. For these reasons the market approach is generally not used to estimate the value of a restaurant’s real estate. However, if you are selling land only, the market approach can be an accurate determiner of value, since there are considerably fewer adjustments to make.
COST APPROACH
The cost approach is based on the idea of replacement. The property is valued on what it would cost to replace it completely. To determine this value you must add the replacement costs of all the assets in your establishment. Obtain purchase prices for new equipment and assets that exactly match your existing ones. With equipment that is no longer made, add the price of a new piece of equipment. Include all taxes, freight, and installation in your quotes, and factor in depreciation. The cost approach is not widely used to estimate the value of a restaurant’s real estate but is used by insurance companies for processing claims.
INCOME APPROACH
The income approach is preferred because the basis of its valuation is the anticipated income to be derived from the property, so that the real estate value is the present value of the estimated future net income, plus the present value of the estimated profit to be earned when the property is sold. Investors are concerned with the amount of income they can earn while using a property’s assets, not with what it would cost to replace those assets.
There are other approaches to value as well. If your property was recently assessed for tax purposes, the assessed value may be a useful estimate to you, even if the valuation does not match current market conditions. The book value approach is based on the initial purchase price for the property, minus accrued depreciation. This value will no doubt have very little to do with current market conditions, but it can be useful if you want to compute a low estimate of value for other reasons. The underwriter approach is used by lenders to determine the amount of loan proceeds an income property can support. This amount is determined by multiplying the debt-service-coverage ratio, DSC, (the amount of income available for debt service, divided by the annual amount of debt-service payment demanded by the lender) by the loan constant, then dividing this sum by the annual income available for debt service.
You may use several valuation procedures to determine the most likely sales price because establishments may have separate aspects of business that can be valued separately. A bar may have its real property as well as its tavern license. The real estate may be valued through the income approach and the license through the market approach.
THE VALUE OF OTHER ASSETS
A restaurant’s assets are often broken down into three categories: real estate, other reversion assets, and the business. A reversion asset is one that retains its value regardless of the success or failure of the business. These are assets like the real estate, equipment, inventories, receivables, prepaid expenses (deposits, taxes, advertising), lease-hold interest, antiques, licenses, franchises, and exclusive distributorships like lottery ticket sales. These assets keep their value even if a business goes under, and they can be sold at market value. Therefore, it is in an owner’s best interest to own as many reversion assets as possible, because these assets increase the business’s value to sellers.
The business itself consists of everything the owner wishes to sell: furniture, fixtures, equipment, and leasehold improvements. It may also include tax credits, favorable operating expenses, customer lists, and name recognition. The price for a food-service business is usually 40 to 70 percent of the operation’s 12-month food-and-beverage sales volume. The seller usually sets the sale price at the high end of this percentage, and the prospective buyer sets it at the low end.
Setting a sales price is not, of course, a straightforward process, and there are many other factors that need to be considered. Here are a few:
• Profitability. The most common way to determine profitability is to examine the net operating income figure. If it is average in the market, the sales price equals 50 percent of the previous 12 months’ food-and-beverage sales. The net income should be compared to the industry standard and the regional standard for that type of operation.
• Leasehold terms and conditions. The term remaining on the property lease and the monthly payment will affect the sales price greatly. Buyers normally want five-year leases, and a seller should be prepared to assign the existing lease or help in negotiating a new lease with the landlord. Buyers who cannot get a minimum five-year lease are usually not interested in buying a restaurant unless it is very profitable or priced very low. In addition to a five-year lease, most buyers also need a reasonable monthly payment and a reasonable common area maintenance payment, not exceeding 6 percent to 8 percent of the monthly food-and-beverage sales.
• Track record. Businesses need to show acceptable track records to entice buyers. The business must be at least a year old. The track record will be used to project the business’s future prospects. A business dependent on the work of highly skilled employees, such as a well-known chef, makes the business more difficult to expand and more expensive to operate, affecting price.
• Other income. Most restaurants do not earn much other income, usually less than 2 percent, but there may be rebates; interest on bank deposits; vending machines; and salvage from aluminum, grease, and cardboard. All of these can make an impact, particularly vending machines, and need to be taken into consideration when valuing a restaurant.
• Below-market financing. When a restaurant is sold, the buyer puts up a small down payment and the seller then carries back the remainder of the sales price at favorable terms. Seller financing is usually below market, and the buyer avoids the fees associated with bank loans.
• Personal goodwill. If a restaurant’s business depends on the personal relationships between staff and management who will not be staying, the sales price will probably decrease.
• Franchise affiliation. If a restaurant is part of a franchise, the sale price will increase significantly, truer of the larger national franchises than the regional ones.
• Number of buyers and sellers. A seller should plan to market his business when there are as many potential buyers as possible meaning early spring and summer, especially if it is a tourist business, or after legislation limiting construction has passed, or taxes are lowered.
• Contingent liabilities. Contingent liabilities reduce a restaurant’s net income. These may be coupons issued by the previous owner, dining club memberships, or pension plans that eat into the net profit margin. If a buyer cannot eliminate these expenses, they most likely represent a negative value that should be factored into the offering price.
• Grandfather clauses. New owners are expected to meet fire, health, and safety codes that the previous owner may have been able to avoid because of being “grandfathered in” when the regulations were passed. Grandfather clauses usually expire when a business changes hands. The seller or buyer may need to bring the building up to code. If the buyer may ask that the expense be deducted from the sale price. If the cost is very high, it could affect the salability of the business altogether.
GOODWILL
The IRS determines goodwill as the amount of money paid for a restaurant in excess of the current book value of the physical assets. Most investors look at excess earnings as attributable to positive goodwill and deficient earnings to negative goodwill.
To compute the goodwill value, the restaurant’s income statement from the past 12 months must be reconstructed. The idea is to develop a financial statement that reflects what could have happened if a wise and knowledgeable restaurateur had been running the business. The best model to use for this process is the National Restaurant Association’s Annual Restaurant Industry Operations Report, which itemizes in detail the following income and expense areas:
• Food sales
• Beverage sales
• Other income
• Cost of sales
• Payroll
• Employee benefits
• Direct operating expenses
• Music and entertainment
• Advertising and promotion
• Utilities
• Administrative and general
• Maintenance and repairs
• Occupation costs
• Interest expense
• Depreciation
Sales volume is most critical because the sales price is tied into the previous 12 months’ net food-and-beverage sales volume. The sales volume is important because a seller will have to adhere to the figure supported in the sales reports. Buyers generally are not interested in hearing about phantom buried income or optimistic forecasts of future sales. In some cases net sales increase is good, but usually a buyer will not allow a seller to profit from something the seller did not create.
To arrive at a credible goodwill value, a seller needs to work with the existing income/expense figures and only make changes that can be supported. In most cases sales volume figures cannot be supported, but expense adjustments can as they include the expenses owners usually list on their tax returns, travel, cars, supplies, and unwarranted employee benefits that are unrelated to the business. The flip side is that a seller may increase payroll and benefits if they are artificially low because the owner took salaries directly from profits.
A buyer may be willing to pay for goodwill, but a seller should expect the buyer to downplay its value to lower the sale price as much as possible. A few other complications with goodwill can arise:
• There is a difference between personal goodwill and goodwill attributable to the business itself. Unless the appropriate staff has agreed to stay on, personal goodwill is not transferable to the next owner. It is up to the buyer to distinguish between transferable goodwill and goodwill that vanishes with the previous owner.
• Sellers must be able to convince the buyer that the excess net income that is positive goodwill will not decrease after the business changes hands. It is in the sellers’ interest to prove that positive goodwill is due to something like a great location and to point out that the new owner should generally operate according to established standards and practices that generated or supported that positive goodwill.
• The IRS does not allow the buyer to depreciate goodwill. In most cases a buyer will assign the value of the goodwill to a non-competition agreement with the seller, and thereby be able to rescue the goodwill amount in a tax shelter.
• If the restaurant is less than one year old, it is very difficult to project a stabilized annual net income. Reasonable estimates are the best thing here. A buyer will not want to talk about goodwill unless the numbers are based on reasonable projections of revenues and expenses.
• If a restaurant has negative goodwill, the seller is in the difficult position of making a convincing argument that the buyer should purchase a marginally profitable business. The best argument here is to point out the existing reversion assets that are part of the sale price. If there are no reversion assets, it is very difficult to point out the potential of future earnings without questioning why the seller did not capitalize on that potential. Pointing out the elimination of excessive start-up costs by purchasing an already running business is the only option. This option only works if there is a reasonable expectation the business’s net income will improve significantly.
• It can be difficult for restaurateurs to receive fair compensation for their investment. Judges and arbitrators usually do not consider goodwill only the book value of tangible assets.
TERMS, CONDITIONS, AND PRICE
Generally, sellers will determine likely sales price, terms, and conditions, and then pad them somewhat to create room for negotiation and compromise. Sellers should prepare a pragmatic and well documented solicitation and then search for buyers who will appreciate these considerations.
Anticipating every potential problem that may arise during negotiations will put sellers in a good position to offer solutions to a buyer’s objections. It is a good idea for a seller to hire an attorney, accountant, or business broker when preparing a preferred sales price, terms, and conditions. Savvy buyers and sellers also incorporate their transaction costs brokerage fees, lawyers into the price asked or offered. In most cases there are higher transaction fees for the seller. It is a good practice for the seller to enumerate all the assets that are included in the sale of the restaurant. Doing so will garner respect from potential buyers, and it may give the seller an advantage during initial negotiations.
TERMS
The terms of sale are the procedures used by the buyer to pay the seller. A buyer is willing to accept a proposed sales price if the seller will accept the buyer’s terms. Sellers receive a minimal down payment and the remainder of the purchase price over a three- to five-year period. “All cash” offers are rare, and seller financing is usually necessary to attract buyers. It is in the seller’s interest to receive a large down payment because it signifies the buyer’s commitment. Sellers are also more likely to grant favorable terms to a buyer making a substantial down payment because the financial risk is lessened.
Sometimes buyers will want to pay with property or corporate stock instead of cash, a good move from a tax perspective; however, stock can decrease in value, and usually the stock used for this type of deal cannot be sold for a year or more, often only in small amounts.
Seller financing is the most desirable aspect of the investment in a restaurant, and buyers want to assume favorable loans. Sellers offering favorable terms must be sure they receive adequate compensation in the form of a higher sales price. Seller financing is negotiable, but the marketplace suggests typical loan amounts and terms. The loan payments should not be tied into sales volume or any other performance measures, because the seller does not want to suffer if a new owner drives the business under. The only instance where loan payments should be tied into performance measures is in an “earn-out agreement,” where the premium part of the sales price is contingent on its future performance.
CONDITIONS
There are several conditions the seller and buyer will attach to sales contracts. Sometimes they are separate agreements, but most of the time they are part of the sales contract. The following lists are the conditions of greatest concern to a seller:
• Conclusion of sale. Sellers want to finish the transaction as fast as possible because delays give buyers time to second-guess.
• Buyer access. Sellers want minimal contact with the buyer while waiting for the transaction to close, and they do not want the buyer spending time with the restaurant staff. It is good for a seller to provide assistance for the ownership transition, but it should only be after the buyer has taken possession of the business.
• Guarantees. Sellers usually have to guarantee the condition of assets. Sometimes sellers have to guarantee that buyers can assume some of the restaurant’s current contracts. Sellers should never guarantee things they do not have total control over. Imprecise language should also be avoided here. If the seller is making guarantees, buying the relevant insurance to back up these claims is prudent.
• Indemnification. Sellers will want to be compensated if a buyer backs out of the deal. Sellers should also be protected for expenses paid to fix code violations or for legal expenses if the seller needs to sue the buyer to uphold an agreement.
• Escrow agent. Independent escrow agents are usually hired to supervise transactions. They see that all terms and conditions are met and afterwards ownership can be transferred. The seller should insist that the buyer agree to an independent third-party escrow agent, ensuring the myriad details of this transaction are handled efficiently and legally.
• Legal requirements. Seller and buyer must agree to comply with all pertinent laws and statutes. Escrow agents ensure that all current creditors are notified of the restaurant’s sale and that all legal requirements are met, ensuring that the buyer can begin with a clean slate without any of the seller’s responsibilities to creditors.
• Buyer’s credit history. Before agreeing to seller financing, the seller must investigate the buyer’s credit history. It is standard for buyers to give personal financial statements, resumes, references, and permission to run a credit report. Serious buyers have no problem submitting this information because doing so assures the seller’s respect.
• Security for seller financing. Many deals go bad because buyer and seller cannot agree on financing. If a seller agrees to hold paper, the buyer must sign a promissory note and security agreement. The note represents the buyer’s promise to pay. The security agreement is the collateral pledged to secure the loan. If the seller is the only lender, a clause should be added that requires his approval before the new owner can obtain additional financing. The promissory note should contain a default provision that the lender can foreclose if loan payments are not met in addition to other specific provisions pertinent to the business, such as a provision that the seller can foreclose if the new owner does not maintain a required balance sheet or does not produce previously agreed upon menu items.
• Assumable loans and leases. Buyers will want to assume any contract that calls for below-market payments. Sellers should do everything possible to ensure a favorable transition because many deals rest on buyers’ being able to assume outstanding contracts.
• Life and disability insurance. If the seller carries the paper, the buyer should be required to purchase the appropriate insurance naming the seller as beneficiary. If the buyer refuses to purchase this insurance, the seller should do so. If the new owner dies or becomes ill without insurance, the previous owner would lose his investment.
• Collection of receivables. It is reasonable for the owner to receive a modest fee for the collection of receivables. This fee can be for business booked prior to the change of ownership.
• Inventory sale. This sale is usually handled at the close of escrow. Physical inventory of all food, beverages, and supplies should be taken by an independent service and a separate bill of sale prepared for the price agreed upon.
• Non-compete clause. This clause is quite common in the sale of an ongoing business, because the new owner does not want the seller to open up a competing business nearby. Smart sellers make sure the agreement covers only the same type of food operation; therefore, if they are selling a pizza parlor, they are not prohibited from opening a five-star bistro.
• Repurchase agreement. Sellers often include agreements that grant them the option to buy the restaurant back within a certain time. This agreement usually notes the purchase price and terms of the sale. If the restaurant becomes incredibly valuable all of a sudden, the former owner can buy it back or sell the repurchase agreement to someone else.
• Employment contract. If a seller agrees to remain as an employee of the new restaurant, a very specific contract should be drafted. Most sellers have no interest in these contracts and just want out. Offering to stay on may increase the potential of selling the restaurant.
• Consulting contract. This contract may be a more acceptable type of employment, giving the new owner a tax-deductible expense without burdening the former owner.
• Conditions not met. Often buyers cannot meet every sales condition. Sellers can use this agreement as a way to cancel the deal. However, the seller should also reserve the right to proceed with the sale even if certain conditions are not met.
DETERMINING PRICE FROM A BUYER’S PERSPECTIVE
Potential buyers must do a thorough financial analysis of the restaurant, carefully studying its current profitability to determine its potential capacity for generating revenue. Because there is a very close relationship between a restaurant’s current profitability and its likely sales price, the buyer should examine this income very carefully. Understandably, sellers are not eager to divulge their financial records to buyers. However, if a seller is forthcoming with this information it can signal the buyer that he has nothing to hide.
The buyer should hire an accountant to assist in this financial analysis. An accountant’s analysis will help determine whether the deal meets the buyer’s investment requirements. Buyers should also hire other specialists to work with contracts, unemployment compensation, insurance, and banking. If the buyer qualifies, Small Business Development Centers (SBDC) throughout the country offer free consulting services to businesses with fewer than 500 employees.
Buyers should complete a rough market and competition survey before performing a financial evaluation. Doing so ensures familiarity with the restaurant’s location and helps when calculating estimated future revenues and expenses. If the buyer is unfamiliar with the area, an independent consulting service can be hired to provide a useful survey.
A seller expects a written offer with price, terms, conditions, and an earnest money deposit before allowing a potential buyer to review confidential financial information. It must be agreed that the buyer can withdraw after reviewing the financial records. The earnest deposit is at risk unless the right to retract the offer is in place. When reviewing the sellers’ financial records, buyers should expect that an independent CPA has never audited them because auditing is a costly process that most small businesses cannot afford.
The buyer needs to reconstruct historical financial statements as they would have been had the buyer been operating the business. This reconstruction is usually done from the previous year’s statement and is time-consuming. If it contains errors, the estimate of the restaurant’s sales price may be inaccurate. Sellers tend to overestimate customer counts and check averages and underestimate utilities and other expenses. The inexperienced buyer should be wary when evaluating these numbers and may want to hire professional counsel.
Be aware that sellers include only the financial details they initially want to reveal. These numbers are optimistic. The typical listing agreement contains the asking price, financing possibilities, current sales volume, current expenses, age, and size of the restaurant. Buyers should evaluate this information carefully, giving attention to the apparent net cash flow before spending time and money on a detailed analysis.
During this analysis, note that the typical restaurant purchase will not appear to generate enough money to provide sufficient cash flow, give the buyer an appropriate salary, and ensure a return on the initial investment. As a buyer, do not be put off too quickly. Solid analysis often reveals that a change in ownership can considerably enhance a restaurant’s profitability.
The buyer’s analysis should examine all relevant tax filings to determine the most likely annual sales volume that the restaurant will generate. Profit figures included in these filings will be used to determine an accurate sales price. Payroll costs will be used to predict future personnel and payroll requirements and minimal tax liabilities. Personnel records are crucial in determining whether there have been any Department of Labor judgments against the current owner or if there are any pending judgments that could impede the transfer of ownership. Meet with a DOL representative to find out whether the restaurant is currently under investigation.
Cost of food, beverages, and supplies are a restaurant’s biggest expense. The buyer should take a random sample of canceled invoices and check their consistency with the cost of goods sold and direct operating expenses (supplies) listed on the current income statement. If these numbers match, the buyer has a good idea of what product and supply expenses the restaurant will incur if no organizational and operational changes are made. The canceled invoices are also a good test of the current owner’s purchasing skills. If invoices show higher prices than those of competing suppliers, the buyer can expect to decrease those expenses.
Most lenders require a cash budget prepared by buyers. This budget will point out the operation’s daily cash requirements and the times of year when short-term money must be borrowed to cover brief shortages.
Buyers should analyze balance sheets and income statements carefully. Balance sheets can reveal the anxiety level of a seller and indicate the current management’s abilities. If ability is in question, it could predict greater earnings under sound management. Income statements are used by the buyer to determine whether the restaurant could have satisfied salary demands and provided a return on the initial investment, had it been under the buyer’s management for the previous 12 months. Most sellers require a pro forma income statement for the coming year as part of the loan application process. Because a buyer is basing the offer on current income but purchasing the operation’s future revenue-making ability, this income statement is the most critical tasks the buyer will perform.
INITIAL INVESTMENT
Buyers must estimate as accurately as possible the total initial investment needed. An appealing aspect of purchasing an existing restaurant is that many start-up costs are avoided. Here are a number of start-up costs to be aware of:
• Investigation costs. Buyers must be willing to spend time and money to examine opportunities available. Typical buyers want to begin running their new establishment as soon as possible and do not want to be bothered with extensive analyses. By contrast, restaurant developers or chain-restaurant companies spend time and effort before investing in a property. Many investors falsely believe that once initial development work is complete, start-up costs are eliminated. While they are reduced considerably, the costs still exist, and wise investors calculate them in their analysis.
• Down payment. Standard down payment is around a quarter of the sales price. Buyers who offer this down payment usually can expect the seller to provide below-market financing for the remainder of the sales price. The down payment can affect the sales price, and in many cases sellers will accept a lower sales price with a larger down payment and vice versa.
• Transaction costs. Escrow agents will prorate insurance, payroll, vacation pay, license renewal fees, and advertising costs on the close-of-escrow date. The buyer will have a debit balance that the escrow agent will transfer to the seller. Fees paid to the escrow company and for creating documents needed to close the transaction constitute the closing costs.
• Working capital. Buyers must budget for sufficient supplies to run the restaurant.
• Deposits. Most creditors require cash deposits as assurance they will be paid for their products and services. Utility, telephone, sales-tax, payroll-tax, and lease deposits must be set aside.
• Licenses and permits. Most restaurants must have retail, health, and government permits. All required operating licenses and permits should be budgeted for as start-up expenses.
• Legal fees. Competent legal advice is a very good idea for buyers. Escrow agents should not be counted on to draw papers correctly and to make sure that the interests of various parties have been represented. An attorney for the buyer should look out for the buyer’s interests solely.
• Renovations and utensils. There may be building code violations to rectify or large renovations necessary to bring the restaurant into a competitive position. It may also be necessary to purchase new china, glass, silver, and utensils to replace worn older ones.
• Advertising. Promoting an opening or reopening, rebuilding, and promotional discounts or other incentives are good ways to build patronage for a new establishment.
• Fictitious name registration. If the name of a restaurant is fictitious, the name must be registered at the local courthouse or County Recorder’s Office.
• Loan fees. Buyers who are not acquiring seller financing will accrue loan fees from the lending parties.
• Equity fees. Buyers who want to sell common stock to a few investors will incur attorney, document preparation, and registration fees.
• Insurance. A lender will require a borrower to have appropriate life and disability insurance and that the lender be named sole beneficiary.
• Franchise fees. Buyers acquiring an existing franchise will be required to pay the franchiser a transfer-of-ownership fee for the costs of evaluating the prospective owner. It is paid in up front in cash before the new franchise begins operations.
• Distributorship fees. Buyers who assume exclusive distributorship licenses or who want to discontinue a current license agreement may incur costs similar to franchise fees. Exclusive distributorships are usually granted to individuals, but some are given to business locations, and in this instance a buyer can assume the license with little out-of-pocket expense.
• Pre-opening labor. This expense is greatly minimized by purchasing an existing operation. Buyers usually plan to make some personnel changes, and a portion of current staff members should be expected to leave during the change of management.
• Accounting fees. Fees for assistance in the evaluation of a restaurant purchase need to be budgeted.
• Other consulting fees. A restaurant owner’s primary consultants are an attorney and an accountant, but others are graphic artists, labor-relations specialists, and computer consultants.
• Other prepaid expenses. When new owners take over an existing business, it is common for creditors to demand a form of prepayment.
• Sales taxes. Property may be subject to a transfer tax, and non-food supplies are often subject to sales tax.
• Locksmith. Most buyers will change all the locks on a restaurant after the sale is final.
• Security. A buyer will transfer the current security service or else contract for a new one.
• Contingency. Successful restaurateurs suggest having a contingency fund large enough for the first six months’ operating expenses. Among other things, it is often necessary to over-hire and over-schedule employees before an effective sales distribution pattern emerges, so that operators incur higher expenses during the first six months of operation. Financing options appears in more detail in Chapter 4.
LEASING AS AN OPTION TO GET STARTED
LEASE AND THE START-UP OWNER
There are a number of potential problems attendant to leases. As a restaurant owner who is looking to lease space where the current owner is considering moving to a new location, you want to do the following:
• Check any current leases before you begin searching for a new one. If you are already leasing space for your restaurant and are looking to change locations, be sure to check the lease you already have before looking for a new one so that you time your new lease to avoid double rent payments. Start looking several months in advance. You do not want to wait until your current lease ends before beginning your search because your landlord might require you to sign a new lease to stay put. Plan to start a new lease close to the termination date of your current lease.
• Check out subletting options. If your current lease gives you the option to sublet the property, you may actually be able to hold on to the current property and sublet it for a profit. This profit, in turn, can be used to help pay the expenses on your new, better restaurant location. Have your attorney check the fine details before making a decision.
• Ask about a buyout. If you cannot or do not want to sublet the property and must leave before your current lease expires, ask your landlord about a buyout amount. The buyout is a negotiated or set amount of money that the landlord will take to let you out of your lease. It should be a smaller amount than you would pay for the remaining time on your lease.
• Consider signing a long-term lease. When shopping around for new space, you should plan to sign a long-term lease that will protect the new landlord and you; most landlords will be open to the idea. A long-term lease is a smart option.
• Make your list; check it twice. You decide to opt for a lease; now make a list of “wants” and “needs.” When buying a restaurant, you are actually paying for its future profitability. Will this location still be good for you five years from now? Make sure all your interior and exterior needs are on the list. What about security, the neighborhood, pending road construction, and parking? Make sure your list covers everything.
• Try to have the landlord pay the broker’s fees as part of the lease agreement. Many landlords will pick up the tab for the broker’s fees even if you hired the broker. If you come down to two properties that you like, check out the landlord’s position on broker’s fees. If one will pay the fee while the other will not, that point may make your decision easier.
ASK YOURSELF THE QUESTION “WHY LEASE?”
Before disrupting and moving your business to a totally new location, ask yourself why you are making this move. Some reasons are not valid in light of losses incurred during the move.
Consider the following possibilities:
• Constant change is not good for your business. Bear in mind that if you sign short-term leases, you will be moving several times not good for business. People who enjoy your eatery will come for the familiarity as well as the food. They do not want changes every year, so neither should you.
• Talk to your customers. If you really feel you must move your restaurant, consider talking with some of your regular customers about it. If moving to a particular area would cause you to lose half your current customers, it would not be worth the change.
• Put your cash into your restaurant instead. Moving a restaurant is expensive and time consuming. If you are distracted from your work every few years to look for space, your business will suffer.
• Ask your landlord for help. Sometimes your reasons for leaving involve things that your landlord can change. Some concerns may even be covered in your current lease. If the building needs updating, your landlord may be responsible for maintenance of the building. Check your lease and talk to your landlord. Chances are he would rather put out a little cash in some paint than to begin the lease process again.
• Ask your landlord for more space. If you have outgrown your current location, your landlord may be able to help. If there is an adjacent space available, you may be able to add this square footage to your current location. Some lease agreements may give you first option on the space. Check the possibilities before you pick up and move somewhere else.
USING A LEASE BROKER
Make sure you hire a commercial broker who specializes in commercial leases. Find a broker who works with commercial leases every day. Consider the following:
• Check out references before you retain a broker. Find out whether other clients of this broker were satisfied. The best question to ask is this: “Would you use this broker again?”
• Have everything in writing. If you hire a broker with less than pure motives, avoid problems by having the broker sign a very detailed contract that covers all obligations to you. Have your attorney look over the contract before you present it to the broker.
• “Listing brokers.” In the same way that some brokers are paid by the buyer in a restaurant-buy situation, brokers can also used by the landlord in a lease situation. These brokers are called listing brokers because the landlord has listed the property with the broker. Restaurant owners who are looking for property should beware of listing brokers because they work for the landlord.
• Hire your own broker. Rather than working through a broker who is representing the landlord’s interests, it is better to hire your own broker. True, it will add some expense to the whole lease process, but you will have the confidence of knowing that the broker’s loyalties are with you.
• Stay away from dual agents. Some states allow brokers to work for both the landlord and the tenant in which case the broker agrees to be neutral. This situation is good in the sense that you know the broker will not be working against you. It is not good because he cannot give you professional advice. If you are going to use a broker, you might as well get all the professional benefits that go with a broker’s service. Skip the dual agent agreement. It is not in your best interest.
WHAT ARE THE BENEFITS OF HIRING A BROKER?
Now that you know the kinds of brokers to hire, examine the benefits of hiring a broker who is working to find your perfect restaurant space.
• A broker will save you time. A broker who knows the geographic area you work in can save you time by weeding out lease spaces and showing you only the places that fit your business plan.
• Brokers will do the legwork. A broker who is working for you will take care of details, freeing you to focus on your business. The broker contacts all professionals needed, such as property inspectors and space planners, as well as gathering other operating data for you.
• Acts as your negotiator. Many details are involved in a restaurant lease. Make sure your broker acts as your negotiator.
• Explains the lease to you. A business lease can be a lengthy and detailed legal contract. Your broker has the expertise to explain the lease to you in terms you can understand. If you do not understand something, ask your broker before you sign.
GETTING YOURSELF READY TO LEASE
Just as there are preparatory steps to take when you plan to buy a restaurant, you must also position yourself to get a good lease. If you are a landlord who is looking to lease your restaurant space, you will want to secure the best possible tenant. Bear in mind the following issues:
• Get your financial records in order. The landlord will want to know that your business generates enough income to pay the rent on his lease space. You will need to be prepared to show the landlord current and historical financial records including bank statements. Do not make him have to ask for them; have them organized and ready.
• Clean up your credit report. If your personal credit has any blemishes, you want to clean them up. Obtain a copy of your credit report and begin working to improve it up today. The three major credit reporting agencies include:
Equifax — www.equifax.com — 800-685-1111
Experian — www.experian.com — 888-397-3742
Trans Union — www.transunion.com — 800-888-4213
• Have a copy of your credit report handy. Make it easy for the landlord to get the information he needs to expedite this lease.
• Add a letter of reference to your file. While you are setting up a file, go ahead and acquire a letter of reference from your current and past landlords. It always puts a landlord at ease to see a reference from someone in his position.
• Keep a list of past landlords and their phone numbers in your file. A landlord will want to know where you have leased in the past and how to get in touch with those landlords. Have that information available when asked.
• Business tax returns. You need to have copies of the restaurant’s tax returns for the last two or three years available. Add them to your file.
• Personal tax returns. Your tax returns will also come under scrutiny. When copying the restaurant’s tax returns, do not forget to include your personal returns.
• Put a copy of your business plan in the file for good measure. Be sure to include the plan in your file. It helps the landlord understand your vision and long-term plans.
• If you’ve got it, flaunt it. A landlord is always looking for lessors who will bring goods or services to other tenants in the same building, shopping center, or area. As a restaurant owner, you are in a strong position, so flaunt it. It really does not matter who leases the spaces in the shopping center around you. Everyone needs to eat!
THE POWER OF WORDS
Words can get us into trouble in every situation imaginable. When dealing with real estate issues, our words are especially powerful. Think carefully about the words you use with regard to lease letters of intent as well as during the lease negotiating process.
• Weigh the pros and cons of writing a letter of intent. A letter of intent is composed after you and a landlord decide to form a working relationship that benefits both of you. A letter of intent puts into writing the ideas and terms that the two of you agree to, at least in theory. It can be written by you and your lawyer or by the landlord.
• A letter of intent can be seen as legally binding. Although a letter of intent can be positive and beneficial in that it can set the stage for smooth negotiations, it can be very negative if it is seen as binding: You do not want to be bound to anything yet. If you choose to write the letter yourself, make sure your attorney reviews it before you give it to the landlord. If your attorney writes it for you, read it carefully.
• Avoid any language that says you have agreed to something. You may want to confirm that the landlord remembers what he or she has agreed to, but make sure you avoid phrases like “We agreed to” and “As we agreed on in our conversation.”
• Read letters of intent from the landlord/attorney carefully. Go through any letter from the landlord carefully. If there is language implying an agreement, take action to ensure that everyone knows that you have not yet agreed to any specific terms. Send a letter of your own to that effect. State that you do not feel that a letter of intent is appropriate at this time and that, for the time being, you prefer to continue with further informal negotiations. Make sure your language states that you have not agreed to anything and avoid being confrontational.
• Make sure you can change terms in any lease. Sometimes a letter of intent will specify that the landlord/attorney will draft the lease. Do not agree to anything that says the landlord will draft the lease. You want to be able to add and delete from any lease until you are comfortable with its contents and language.
• Never let yourself get boxed in. It is advisable that an attorney or experienced broker help you through this process. What seems like nothing to you might be a costly, legally binding statement.
• Talk to other restaurant owners who lease their property. Find out details about their personal lease situations. They may have stumbled upon problems with lease wordings or sections that they did not see before they signed. Sharing their information with you before you sign might save you headaches later.
• Talk to other restaurant and business owners who lease from this particular landlord. Other business owners may share with you important facts about this particular landlord to prevent problems.
• Go over every single point in the lease with your lawyer. It should go without saying that you need a lawyer when leasing space for your restaurant.
• Talk to your lawyer early on in the process. Do not wait until the night before you are to meet with the landlord to select a lawyer. Many new restaurant owners want to do the entire preliminary work on a lease themselves and just have a lawyer glance at it and say it is fine right before signing, but that is inadvisable. Involve your lawyer early in the process.
CHANGING THE FACE OF YOUR SPACE
It is unlikely that you will find a property and building that appears exactly as you would like it to look. Before you lease anything, be very clear on who will be responsible for alterations and improvements to the property. Investigate the following:
• First, get any agreements about alterations and improvements written into the lease. Make sure the language is clear enough that you will not have to prove your case at a later date. It should be self-explanatory.
• Keeping what belongs to you. Trade fixtures are additions to the leased building that you have purchased and have used as a part of your business. If you have added anything to the structure that has become an integral part of the building or would damage the premises to remove, the landlord can force you to leave it when you terminate your lease. Although there are some exceptions to this rule, the only way to protect your property is to write a very detailed clause about trade fixtures. Be sure to consult a lawyer.
• Consider drafting a separate agreement regarding alterations and improvements. Although it may be possible to add all alterations to the lease if extensive changes to the property are required, you may want to consider drafting a separate document to cover these changes.
• Do not take anything labeled “as is.” If a lease agreement lists the building or space in these terms, you need to be wary. “As is” indicates the landlord knows about problems with the structure. He is likely trying to have you pay the costs of those repairs. You would be accepting the property in an unlawful state, meaning it would be your financial responsibility to bring it up to standards.
• Make sure franchise requirements are covered in the lease. If your restaurant is a franchise, keep in mind that the franchiser will have very specific requirements on how your restaurant must look. Some franchisers even have their franchises laid out down to where filing cabinets will go. You must make sure that the requirements that bind you are covered in your lease agreement as well. I will discuss restaurant layout, design and remodeling in more detail in Chapter 6.
CLEARLY DEFINE WHO DOES WHAT
Make sure that “who is responsible for what” is very clearly defined in the lease agreement. Even if conversations have been very clear, commit everything to writing to avoid unexpected expenses.
• You should expect the landlord to pay for all capital improvements. Capital improvements are those that will forever change the property and increase its market value. Because the landlord would benefit from such improvements long after you are gone, she should incur the cost of such a change.
• You should expect to pay for all non-capital improvements. There will be alterations and improvements that you make solely for your restaurant, which no future tenant would benefit from or want. These are called non-capital improvements and you will be expected to cover their cost.
• Planning for the cost of insurance is a smart move. Many landlords require that you carry several different types of insurance including liability. Even if the landlord does not require it, insurance is a smart move. It is highly recommended that a restaurant owner carry workers’ compensation and liability as well as other kinds of insurance policies. Talk to your insurance agent and attorney about the minimum amount of insurance you should carry.
• The landlord should pay for any structural work done on a new building. If the place you are leasing is brand new and construction is going on when you sign the lease, make sure that you do not pay for part of normal construction. The landlord pays the cost of constructing his building. Do not let him slip some of these costs in as disguised alterations.
• Consider adding a “liquidated damages” clause to your lease. When a landlord is late in completing alterations and improvements, causing your opening date to be pushed back, you should be entitled to compensation. You must make sure that your choice of compensation is included in your lease agreement. The liquidated damages clause defines a specific, predetermined sum of money to be paid to you if the landlord is late. There are some variations and some risks as well. Consult your attorney about what is right for your individual situation.
• Another franchise concern. If you are legally bound by a franchiser to open your restaurant on a specified date, you should ensure that the landlord is legally bound to that date also, especially if the landlord is responsible for some or all of the improvements or alterations to the property. If a landlord causes you to miss a date specified by the franchise, you should have the legal compensation already named in writing.
• Plan for the future. Improvements may be needed in the future in the form of maintenance and repairs. Be sure that you and the landlord come to some kind of agreement regarding whose responsibility maintenance and repairs will be. Have these agreements included in writing as part of the lease agreement.
UNDERSTANDING YOUR LEASE AGREEMENT
In the lease agreement you sign, there will be numerous sections or clauses. Some of them are as simple as the names of the people entering into the agreement and the amount of rent that will be paid. The following list is some of the common clauses that you may see in your lease agreement.
• Alterations and Repairs. If alterations and improvements are significant, you may want to draft a separate document to outline all of the details in this section.
• Term. The clause defines the actual term of the contract. It will define when the lease begins and when it ends. Make sure you understand when you will begin paying rent, especially if repairs or construction is unfinished.
• Parking. A restaurant should always have adequate parking. If your food is awesome, but parking is a major issue, customers may choose an eatery where parking is easier. Make sure adequate parking is outlined in detail in the lease agreement.
• Insurance. Always check with your attorney and your insurance agent, as it may be wise to take out more insurance than your landlord requires.
• Utilities. This clause should explain how the utility cost is figured and whether the landlord is responsible for any of these costs.
• Subletting. This clause defines whether you are allowed to sublet the space you are leasing. If you believe you may desire to sublet in the future, you may push for the right to do so as a provision in the lease.
• Condemnation. This clause explains your rights should the building you are leasing be condemned by local, state, or federal government agencies. You may think this could never happen, but make sure this clause is intact and protects you in the event of condemnation.
• Defaults and Remedies. The consequences if either you or the landlord defaults on the lease agreement should be covered in this section. Read it carefully and make sure the penalty for a landlord’s defaulting is enough to cover your losses in such an incident.
• Destruction. This part explains what will happen to your lease agreement if part or all of the building is destroyed. If you live in an area that is prone to floods, tornadoes, hurricanes, earthquakes, or other devastating natural events, you will want coverage in writing.
• Deposit. This section lists the deposit(s) required by the landlord.
• Hold Over. If you get to the end of your lease and decide not to leave, this section will cover all the details of what happens next.
• Use of Premises. Read this section very carefully. It defines the parameters of how you can use your rented space, and you must make certain that the restrictions listed here do not interfere with the operation of your business. If the lease states that no alcoholic beverages may be sold on the premises, yet your bar tab is a large portion of your income, you must renegotiate this issue before signing the lease.
• Taxes. This section defines, in detail, taxes due with regard to the property and who pays them.
• Ongoing Maintenance and Repairs. If you sign a long-term lease, repairs and maintenance are inevitable. It is vital that they are laid out ahead of time, including who will be financially responsible for them.
• Options. If you outgrow your current space, an options clause can prove to be very important. It can cover everything from an option to buy down to an option to expand. Make sure it is worded to your advantage now.
• Guaranty. Some landlords may request that you have a guarantor who will agree to cover financial obligations should you falter. If the landlord requires a guarantor, the guarantor must sign the lease.
• Dispute Resolution. This section outlines how disputes between you and the landlord will be resolved. This section is set up with the intention of keeping disputes out of the courtroom.
LEASE VERSUS OWN
Leasing a building involves less expense up front. There may be certain tax advantages to leasing, and if the time comes to move, it is easier to do so, avoiding a costly selling process. If you decide to go for a commercial lease, look at the following:
• Length of lease. Many commercial leases run for 5 or 10 years rather than one year.
• Rent and rent increase. Investigate whether the rent includes insurance, property taxes, and maintenance costs (called a gross lease), or whether you will be charged for these items separately (called a net lease).
• The security deposit and conditions for its return.
• The square footage of the space you are renting.
• How improvements and modifications will be handled. Who, for example, will pay for them?
• Who will maintain and repair the premises?
• Is there an option to renew the lease or possibly expand the space at a later date?
• How the lease may be terminated, including notice requirements and penalties for early termination.
• Whether disputes must be mediated or arbitrated as an alternative to court.
• Commercial leases are different from residential leases in that they do not fall under most consumer protection laws. There are no caps on security deposits or rules protecting a tenant’s privacy. Commercial leases are customized to the landlord’s needs, but they can also be subject to much more negotiation between business owners and the landlord as well. Because there is no standard format, be sure to read each lease agreement you consider. Unlike residential leases where breaking the lease simply forfeits the security deposit, commercial leases are contracts. If you break such a contract, more than your security deposit is at stake.
• Think before you enter into a lease agreement and make sure it fits your business needs now and in the future. Consider where you think your business will be in the future if you are entering into a long-term lease agreement. Make sure the lease covers your ability to make the necessary modifications your building may need now or five years down the road.
• Make sure you are allowed to put up a sign. If you are leasing in a large commercial complex, make sure the lease includes some competition safeguards for you. You do not want to open your coffee shop and see the landlord rent the space next door to another coffee shop two months later.
• Consider engaging a leasing broker to help you locate business leases. Leasing brokers work much the same way as real estate brokers, doing a lot of the legwork for a fee.
• Have a lawyer review any lease before you sign it.
VARIOUS SITE CONSIDERATIONS BEFORE BUYING OR LEASING
FRANCHISE
If you are uncertain as to the type of operation you want to own, you may want to look into franchise opportunities. A franchise allows you to buy an existing business with an existing system in place for a fee. For a fee which can run several thousand dollars, you get the right to use the company’s name and the franchiser assists in setting up and running your business. The franchiser may find a location and provide training and marketing advice. Consider the following:
• By buying a franchise, you can limit up front costs in buying a business, but bear in mind that you are also required to give up some control because you will be obligated to follow the franchiser’s rules.
• If you are opening a restaurant because you love to be creative, a franchise is not the best option for you. If you know little about the restaurant industry and you are simply looking for a business, it may be a good option.
• Many of the costs you incur taking on a franchise are similar to those you incur opening an independent business: rental or purchase, equipment, operating, and insurance. You may also incur these fees: grand opening, royalties, and advertising.
• The Web site www.franchiseopportunities.com can link you to franchise opportunities across the country. Check your local paper as well; franchise opportunities are often listed in the classified section.
Franchiser control
Because all franchises are operating under the same name, the franchiser will want to have some control and be sure that the customer is getting a consistent product and service at every location. Some controls franchisers may have in place include:
• Site approval
• Site design or appearance standards
• Periodic renovations or seasonal design changes
• Restrictions on goods and services offered for sale
• Pre-approved signs
• Employee uniforms
• Mixed advertisements
• Particular accounting or bookkeeping procedures
• Purchasing supplies from approved suppliers only
• Limiting your business to a specific territory
• Franchise contracts are for a limited time, usually 15 to 20 years. When that time is up, you are not guaranteed renewal on your franchise license.
• Franchise advice. To help you evaluate whether owning a franchise is right for you, the Federal Trade Commission has a booklet and online information regarding purchasing a franchise business. You can reach them at 877-FTC-HELP or www.ftc.gov.
• Several states also regulate the sale of franchises. Check with your state division of securities or office of the attorney general for more information.
EXISTING OPERATIONS
There are also numerous opportunities for buying existing operations. Points to consider include:
• Buying an existing operation requires less capital at the start. When someone sells an existing operation, the transaction includes all the equipment.
• You need to be careful if you are considering buying an existing operation that it is not failing. Take a look at the company’s financial records over the past several years to get an indication of its financial health. While you may be able to breathe some life back into the business, do not expect miracles.
• Be on site for a few days and see what happens at the operation to make sure the location is a good one for your operation.
• Find existing operations for sale in the classified section of newspapers. Try trade publications.
NEW BUILDINGS VERSUS EXISTING BUILDINGS
There are pros and cons to both new and existing buildings. Review the differences carefully to determine what will work best for your restaurant.
• New buildings. The good thing about new buildings is that you should not have to carry out lengthy renovations, remodeling, or updating before you can start operating.
• New buildings will also be up to code.
• If you are buying a site to build a structure, you may find this Web address useful: www.CMDFirstSource.com/means/index.asp. After registering as a user, you can enter information on the type of structure you want to build, the gross square feet you need and the ZIP code. The program will provide you with an itemized cost estimate. You can find a database for building codes for most major cities on this Web site.
• Existing buildings. Older buildings often have more character than new buildings.
• You may also be able to benefit from a tax break with some older buildings. Since 1976 there have been provisions in the federal tax code to benefit taxpayers who own historic commercial buildings. These buildings are structures that are listed on the National Register of Historic Places or are in national historic districts or local historic districts or are national historic landmarks. This tax credit has gone a long way toward helping cities revitalize historic areas. Currently the tax benefit to the owner is a 20 percent tax credit. For further information on this tax credit, visit the Internal Revenue Service’s Web site at www.irs.gov, or write to Federal Historic Preservation Tax Incentives, Heritage Preservation Services (2255), National Park Service, 1849 C St. NW, Washington, D.C. 20240. They can be reached by e-mail at hpsinfo@nps.gov or by phone at 202-343-9594.
LOCATION REQUIREMENTS
Consider whether you want the restaurant to be a freestanding structure or part of a strip mall or shopping center. Will tourists be a significant part of your business? You may want to consider locating in a theme/historical shopping area. Here are some additional considerations:
• Freestanding location. Freestanding locations have their good and bad points. If you are located in such a facility, you may not have the benefit of business created by nearby stores; however, you have more flexibility with how you use your space. You also have greater scope for expansion compared with operations in a mall or part of a strip mall. Further, you do not have to worry about regulations that might govern what type of sign you can use, and you do not have to share your parking spaces.
• If you choose to be part of a shopping area, you are likely to attract customers from the other business areas, although there may be more competition in such an area, compared to a freestanding location.
• Consider whether to locate in the urban center or the suburbs of the community. If your customer profile reveals that your customers are business people, obviously you want to be located in a business district.
STRIP MALL LOCATIONS
If you decide to locate in a strip mall, there are three positions your restaurant can be in:
• Detached from the other buildings
• Attached to the other stores in the strip mall
• At one end of a line of attached buildings.
Here are some tips for choosing the best strip mall location for your operation:
• Freestanding. In general, the freestanding building may be the best and most visible option.
• Attached. Of all the attached premises, the ones at the ends produce more sales than those in the middle. Usually, one end of the strip mall has higher visibility.
• Many lessors will have restrictions on signage, so that you may not be able to differentiate yourself with your restaurant’s sign. There may be other ways to distinguish your restaurant, depending on your lease agreement. Put tables outside or a sandwich board listing specials. Consider using piped-out music to attract customers, or put one of your servers on the sidewalk with samples.
• If your restaurant is located in the center, you may have greater visibility due to the architecture of the building. Be sure to pay attention to any anchor stores in a mall. You will have higher visibility located next to such buildings.
• If you decide to locate in a strip mall location, pay attention to other shopping venues in the area. Generally, where there is one strip mall, there is another. Be sure that you are not locating your restaurant in a secondary location. Pay attention to how visible your location will be to passersby. Can they pick you out of all the other storefronts?
• Find out from the owner if there are plans to build in front of your strip mall, thus obscuring your future visibility.
• Think about where you want to take your operation in the future. If you are planning to expand in five years, a strip mall location may not be the best choice because it could limit, or eliminate, your expansion plans.
SHOPPING MALL LOCATIONS
If you decide to look at shopping mall locations, you will also want to do your homework. Visit the mall and find out what stores are already there and what new stores are planned. Investigate the potential:
• Square footage. Find out about available square footage and the going rates.
• Pay attention to peak shopping hours. Note the customer mix.
• Location of major stores. As in the strip mall location, make a note of where the larger stores, such as department stores, are located. A location near one of these gives you an advantage.
• Stay away from dead end corridors. Customers tend to avoid exploring in a mall if they do not see much activity down the corridor.
• Consider locating your restaurant in a food court. Operations in food courts are typically small, so you may have to serve a limited menu because of the space and equipment constraints, affecting your sales and ability to make profits.
FACILITY REQUIREMENTS
You need to think about space and design requirements for your site. Break up the operation between front of the house and back of the house and figure out what you need in both areas:
• According to facility experts, dining will take up the majority of your space, followed by kitchen and prep space and then by storage space. Space breaks down as follows:
o 40 percent to 60 percent of total facility for dining space
o About 30 percent for kitchen
o About 12 percent for actual food preparation with the remainder being production space allocated to dishwashing, trash, and receiving
o Storage and administrative office fill the remainder
• Design consultant. If you are starting from scratch, you may want to engage the services of an architect or restaurant design consultant.
• How much room do you need for dining? Your sales forecast information can provide you with some information on how much dining space you will need. Let’s say your sales forecast tells you that you have the potential to make $20,000 a week serving 800 people. You plan to be open six days a week and you estimate you can turn your tables once a night, so you need to be able to fit about 70 patrons at a time. (800 people/6 days = 133.33 people; 133.33 people/2 table turns = 66.66) For dining you will need about 15-18 square feet per customer per table. Therefore, you will need approximately 1,300 square feet for dining. Remember, this square footage does not take into consideration the bar, lobby, hostess area, coatroom, or restrooms.
• If you have a bar you should have one bar seat for every three dining seats. Allow 2 square feet for bar stools and chairs and about 10 square feet per customer at a table.
EXAMPLE OF SPACE REQUIREMENTS
Here are the typical space requirements for several types of food service operations:
• Pizzeria. For the production area in a neighborhood pizzeria, there must be room for a steam table, a cold food table, pizza ovens, sandwich ovens, and a fryer. If it is a carryout establishment, a counter and cash register are necessary for the front area; a dine-in pizzeria requires a dining area, customer restrooms, possibly a jukebox, and a place for coats. Most pizzerias do not have a large seating area because they are designed primarily as carryout and home-delivery operations. They require between 800 and 1,500 square feet. For a larger facility with a dining area, about 2,500 to 4,000 square feet is necessary.
• Sandwich shop. Between 500 and 3,000 square feet.
• Coffeehouse. Between 800 and 3,000 square feet.
• Bakery. If your customers do not eat on site, 1,000 to 1,500 square feet; if they do, 3,000 square feet.
SITE CHARACTERISTICS
In a restaurant, the site may determine whether you can draw in the customers. Here are some considerations when choosing a site:
• Visibility. How easy is it for the customer to see the location? Maximum visibility is at the far corner of a main road intersecting a secondary road.
• Try to avoid dead end and one-way streets.
• Parking. The Urban Land Institute www.uli.org and International Council of Shopping Centers www.icsc.org lists standard ratios of parking needed for shopping centers. They suggest that there should be at least 2.2 square feet of parking for every square foot of shopping center space. For supermarkets they suggest at least three square feet of parking for every square foot of supermarket space. In areas with little parking or areas with higher crime rates, you may want to consider using valet parking. A level parking lot increases visibility and easy entry/exit in cold weather, and traffic lights may pose a hazard.
• Accessibility. How easy is it for your customers to get to the location from their homes or businesses during the times you expect the most customers?
• Retail synergy. How does the presence or absence of other retailers affect consumer traffic? Synergism means increased business because of proximity to other businesses. If yours is a French restaurant and there are a steak house, a Japanese restaurant, a furniture store and a shopping mall on the same block, you will see increased sales because of the increased exposure you are gaining to potential customers. Fast food restaurants seem to be an exception to the synergism rule; the fact that another fast food restaurant is nearby does not appear to impact sales negatively.
• Security. How safe is the location? Check with the local police department to see what types of problems are going on in the neighborhood. Be sure to make your specific site safe with outside lighting.
SITE VISIT
Now that you have made a list of the site characteristics that are important for your operation, take this list with you when you conduct site visits at your potential locations. Make a worksheet you can use to compare the sites on which you are focusing.
Take a look at the following examples:
|
LOCATION ANALYSIS CHART |
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Address: 3217 Jefferson, Cincinnati, OH 45219 |
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|
Visibility |
Parking |
Ingress |
Access |
Synergy |
Security |
|
|
Excellent |
X |
X |
||||
|
Good |
X |
|||||
|
Average |
X |
X |
||||
|
Poor |
X |
|||||
|
Comments: Building is new, looks like little remodeling to be done. |
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Address: 316 Ludlow, Cincinnati, OH 45220 |
||||||
|
Visibility |
Parking |
Ingress |
Access |
Synergy |
Security |
|
|
Excellent |
X |
X |
||||
|
Good |
X |
|||||
|
Average |
X |
X |
X |
|||
|
Poor |
||||||
|
Comments: Building was a flower shop, will need remodeling. |
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Address: 16 Corry St., Cincinnati, OH 45219 |
||||||
|
Visibility |
Parking |
Ingress |
Access |
Synergy |
Security |
|
|
Excellent |
X |
X |
X |
|||
|
Good |
X |
|||||
|
Average |
X |
|||||
|
Poor |
X |
|||||
|
Comments: Seller flexible on price due to poor parking situation. |
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|
LOCATION COMPARISON Chart |
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|
3217 Jefferson |
316 Ludlow, |
16 Corry St. |
|
|
Visibility |
Good |
Good |
Excellent |
|
Parking |
Excellent |
Excellent |
Poor |
|
Ingress |
Poor |
Average |
Good |
|
Access |
Average |
Average |
Average |
|
Synergy |
Average |
Excellent |
Excellent |
|
Security |
Excellent |
Average |
Excellent |
• Enter this information into a database or spreadsheet application. Doing so enables you to compare pros and cons easily.
• No site will be 100 percent perfect. At this point you have some decisions to make. In the example above, none is a perfect choice but of the three sites, 316 Ludlow will probably be best. Using the information gathered from the site visits described in the previous chapter, investigate further:
• Compare cost per square footage. You can obtain square footage measurements from your realtor, the multiple listing services, and the county auditor’s Web page.
Let’s set up another table for square foot measurements and cost:
|
Square Foot Measurements and Cost |
|||
|
3217 Jefferson |
316 Ludlow, |
16 Corry St. |
|
|
Selling price |
$85,000 |
$120,000 |
$175,000 |
|
square feet |
2,400 |
3,000 |
3,800 |
|
cost per square foot |
$35.82 |
$40.00 |
$46.05 |
• Check with your realtor about the average cost per square foot in the area and compare this with your table so that you do not overpay!
If you do not have access to the building you are interested in, you can still find out size and required improvements.
• Sanborn Fire Insurance Maps were created for insurance underwriters who used them to determine risks and establish premiums. Today, these maps are used by researchers into history, urban geography, architectural changes, and preservation. You can also check with your local library or historical society. These maps can provide you with information on building size and layout and are helpful if you are looking at locations where you do not have access to the building to do any measuring for yourself.
• Auditors’ website. Many county auditors have websites that you can use to look up information about specific properties. By searching the address, you can obtain information about building size, price of the sale, former owners, and improvements. Most of them include information on commercial buildings as well as residential ones.
• Neighborhood. Take a look at the neighborhood of the proposed location. How old is it? Is the neighborhood in decline or is there new construction going on? Notice if there are many vacant lots and properties for sale. Are there parks, schools, businesses, hospitals, places of entertainment such as movie theaters or ballparks? All of these factors can be a detriment or a plus to you depending upon your chosen type of operation.
• Demographics. Just as with your larger search, neighborhood demographics are an important research tool. Who lives and works in your neighborhood? Are there enough people in the neighborhood who fit your customer profile to make your restaurant profitable?
TRAFFIC COUNT
One of the considerations in selecting the location is the traffic count, which is available from the state or local government and may be found online.
|
TRAFFICE COUNT Chart |
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Address: |
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HOUR ENDING |
Number of CARS |
|
7 a.m. |
|
|
8 a.m. |
|
|
9 a.m. |
|
|
10 a.m. |
|
|
11 a.m. |
|
|
12 p.m. |
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Competition
Here are some tips for sizing up the competition:
• Count the number of competing restaurants by checking online. Make a mental or actual map of their locations. Visit them and take note of their pluses and minuses.
• Categorize competitors. Place each competitor in one of two categories: direct or indirect competition. The direct competitors’ category refers to restaurants with the same concept. Indirect competitors are all the other restaurants.
• The proximity factor. Your bottom line may be adversely affected if the competition is close to your location.
• Other factors. If the competition offers a unique dining concept and attracts customers simply for its unparalleled menu, your menu is critical.
• Take a look at this example of the competition. The establishments in the next chart represent all the restaurants in your trade area. By creating a database with this information, you can compare your direct and indirect competition. The information will help you determine the size of facility that you need and the weekly sales income you can expect from your new establishment.
• Optimum space. You can see from the table that your direct competitors are using 750 and 8,000 square feet of space. It is safe to assume you will need a facility in a similar size range. If you anticipate higher sales like Pablito’s or even one of your indirect competitors, look for a larger building.
A Competition Comparison Chart to follow.
For additional information, check The Food Service Professional Guide to Buying & Selling a Restaurant Business (Item # FS2-01) and The Food Service Professional Guide to Restaurant Site Location (Item # FS1-01). Both books are available from Atlantic Publishing www.atlantic-pub.com.
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COMPETITION COMPARISON Chart |
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NAME |
DIRECT/INDIRECT |
LOCATION |
SIZE (sq feet) |
WEEKLY SALES |
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Pablito’s |
D |
5th & Market St. |
8,000 |
$30,000 |
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Bob’s Steakhouse |
I |
1600 Blue Street |
7,500 |
$25,000 |
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Joe’s Surf and Turf |
I |
14688 HWY 35 |
8,000 |
$15,000 |
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Vincent’s Pizza |
D |
6th & Main Street |
750 |
$5,500 |
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Silas’ Slow Cooked BBQ |
I |
7th & May Blvd |
1,000 |
$8,500 |
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Spaghetti Shop |
I |
829 August Lane |
1,050 |
$10,000 |