Is this restaurant a good purchase?

[BGC180]

Hello

My partner and I are tempted to buy an established restaurant in our hometown and wanted some opinions as we are fairly new to the business. We both are fans of the restaurant and know it has an excellent reputation both locally and online including a 5 star tripadvisor rating.

Anyway the deal is detailed below and your input would be greatly appreciated, anything you can help with would be very welcome.

Headline figures are it costs £125k for the business with a 12 year lease signed in 2012 and with the business and all its fixings and brand included and basically sold as a going concern. The ad says it is making £55k a year profit with a £197k turnover but that excludes vat. More details are below so what do you think?

PRICE & TENURE (VAT may be chargeable in addition if appropriate) Offers invited on £125,000 for the valuable leasehold interest as a going concern business and full trade inventory. Wet and dry stocks to be additional at valuation. Vacant possession upon completion. The business is held on a 12 year private lease which commenced in 2012 at a current rent of £17,500 pa with rent reviews every 3 years, on full repairing and insuring terms. Full details available on request.

Trading Information – Accounts for the year ending 30 April 2015 show sales of £197,581 net of VAT and a net profit in excess of £55,000 being achieved. Full detailed accounting information can be made available to interested parties following a formal viewing appointment.

 

[Bob]

Just a few questions/thoughts:
1. Is it a limited company or sole trader?
2. If the former is the net profit after remuneration to the owner?
3. If it's a full repairing lease, read up and beware of dilapidations
4. Is the vendor the chef?
5. If he is, do you have the skillset to take over?
6. What experience do you have?
7. Why is he selling and where is he moving to?

 

[Funding for Communities]

1. Is it a limited company or sole trader?
2. If the former is the net profit after remuneration to the owner?
3. If it's a full repairing lease, read up and beware of dilapidations
4. Is the vendor the chef?
5. If he is, do you have the skillset to take over?
6. What experience do you have?
7. Why is he selling and where is he moving to?

Not a lot to add to Bob's list apart from is the owmer prepared to sign an agreement saying he will not open another restaurant withing a certain radius?

 

[john1989]

The numbers for me don't stack up for a restaurant business.
I'd want to drill into the accounts and see how the profit has been calculated.

 

[The Byre]

+1 on Bob's list.

Also, I posted the following elsewhere, but it all applies to your query -

The price for a company should be a multiple of the real net profit after depreciation, taxes, etc., etc., etc. and your income as manager has to come off revenue. The size of that multiple depends on the ROI you expect and the level of risk involved (restaurant = high risk!!!)
Remember to include such factors as length of lease (if any), rent reviews, existing staff and all obligations to staff and anything else you can think of, when calculating risk.
Also please remember that a one-man show is never a company, as it depends entirely on the skills and labour of that one man. Any company that depends on the skills of one person, even if it has many employees, is not a real company, but the values and results of that one person's skills.

But here are some questions for you to answer to yourself -

1. What reason are these people giving for selling the business?

2. Now, why are these people really selling the business?

3. Have you any experience in running a café or restaurant?

4. How much will it cost to fix all the things that they have been getting wrong?

5. How much will it cost to replace all the defunct and old equipment and redecorate the place?

Sometimes a café is a real business and you can calculate a buying price, based on profit and sometimes it's just a place of work. i.e. you are buying a job! There is nothing wrong with buying a job, but you do have to be aware of the reality, if that is what you are doing!

When you look at the books, don't be fobbed off with vague talk of "Well, we do so much trouser money business, so it's not really all there in black and white!"

If it ain't there, it ain't there!

But also remember the old German saying 'Paper is patient!' In other words, the books can be made to say what ever we want them to say.

REMEMBER - If you are working in the place, busting tables or smashing covers, your income has to come off any bottom line. You can get a job busting tables any day of the week!

Also remember, if there is a resident chef, chefs come and go (or as P.G.Wodehouse put it "She was a good cook, as cooks go and as cooks go, she went.") so keep the tel.no. of a couple of decent agencies ready and to hand!

Once you have worked out the real costs involved, inc. water, rates etc., and you know how much risk and return on investment you want, you will have a figure to offer the vendor. You calculate all by yourself YOUR PRICE and if that is higher than their price, all is sweetness and light. If they want more, don't be put off - just name your price and leave it at that.

Question three is the big one. In ANY and EVERY business, the outsider is at a huge disadvantage. They don't know where to buy goods, food and equipment, they don't know how to negotiate a rent-to-buy deal on kitchen equipment and what equipment to use. They often end up buying old tat on ebay that is right at the end of its useful life (that's why it's there!) and nasty, cheap, tinned and frozen 'food' from somewhere like Brakes or the local cash-n-carry. They also don't realise it, when the staff are ripping them off!

So ask yourself "Do I know where to buy live lobsters wholesale, can I spot a phantom till-roll and do I know why I have to fire a waiter who is counting straws?"

Most importantly, they don't know how to 'tweak' a café or restaurant, so that it pulls those all important 30-somethings that buy up-market snacks and drinks that turn a profit.

Each location has a specific angle for a café or restaurant. A provincial late-night 'hot-spot' calls for all that caviar on toast, imported German beer and shrimp cocktails and all that BS. An industrial estate calls for day-time fast food, such as burgers, mini-pizzas and chunky sandwiches. And so on. It takes experience to know precisely what works where!

You only have to get it slightly wrong, to be staring at empty tables and a dusty floor!

 

[The Byre]

P.S. As I know which restaurant it is, I would recommend great caution. The place needs complete redecoration and completely new fittings. At the moment, it looks as if it received bad news around 1978 and has never really recovered!

Given that it is 100% vegetarian, is only open five days a week and in a retirement town, I find the T.O. figure somewhat optimistic and the net profit figure of c.a. 27% suggests (as @john1989 stated) that somebody does not know how to calculate net profit (see 'busting tables' comment above!)

Those figures imply that they are doing about 20 covers a day and given the specs for the kitchen, one wonders what would happen, if they ever got busy! One oven, six hobs and two Salamanders? Where's the rest???

Well, of course they don't need the rest, because Monsieur Chef de Microwave is in full attendance! Three of those to warm up the contents of two freezer units and a dry goods store! So the bottom line is, this place looks as if it is selling tinned and frozen vegetables to OAPs!

But the place does have a flat attached which you could rent out, or otherwise utilise, conditions for which are not listed.

So the bottom line is, you have to come up with a new direction for the place, so that it appeals to the core, money-spending demographic of the town (which you have to find out). Based on your research, you should then find a new and profitable direction for the place and then work out the additional costs of re-equipping, so that you can offer real food.

Don't be fooled by the positive reviews for any vegan or vegetarian restaurant, as they cater to people who are 'on a mission'! Read the more honest 'average' reviews - slow service, reheated food, tired décor, same menu year-after-year. Warming up frozen rubbish may have worked up to about 1970, but people's expectations have changed since then!

Tip - rent-to-buy is cheaper than buying used!

 

[john1989]

@The Byre I’m intrigued to know the restaurant now!

I would want to see last 5 years accounts. If profit has suddenly jumped prior to putting it up for sale, don’t walk away, run.

Based on the industry average of 60-70% gross profit, and staff costs being approx. 30% of turnover, you almost get to their advertised net profit by just having cost of sales, staffing costs and rent with no other expenses.

Another thing to consider is cashflow. VAT can be a killer on cashflow for this type of industry because a lot of your purchases are zero rated, but your sales are fully taxable.

 

[Clinton]

Can't add much to what The Byre and john1989 have said. I wouldn't take all TripAdvisor reviews at face value but, if you are fans of the restaurant yourself, at least some of those reviews are probably genuine.

It may well be that you're buying yourself a job and, as covered already, there's no harm in that. But if you're going ahead with the purchase it's worth bearing in mind that the price needs to reflect that you're buying a job and not a business. That starts with recalculating the real profit here and getting the owners to appreciate that the value of their time needs to be deducted from the profit - often not an easy task!

From the wording in your OP this sounds like a broker-led sale. You'll possibly be up against some unrealistic expectations the owners were given on price.

 

[MOIC]

Has the rent review taken place yet for this year?

The stand out question is your experience in this field.

 

[Andrew Chambers]

Going by what The Byrne has said I'd forget this restaurant and start afresh. As it is you're basically paying £125,000 for a eight year lease, add that to the £140,000 for rent and without even starting on the other costs this business is costing you £275,000. Will you make that back in eight years (I'm presuming the quoted net profit is excluding the owners wages, so it's not net profit)?

 

[The Byre]

I'd forget this restaurant and start afresh.

The only problem there, is that this place (town centre, 125,000 pop, 200,000 catchment area, university, tech industry) should be doing £1m T.O. p.a. minimum!

This is a 50-seater that should be doing an average of at least 100 covers per day, seven days a week, plus drinks, as it is fully licensed.

To open a restaurant that only caters to the 3% of the population that are vegetarian is bonkers! It's Southend-on-Sea (two stops past Barking!) To top that, by serving mostly tinned and frozen food, is to ensure that normal people just stay away. Add to that, they are shut on Sunday and Monday and that tells me that this is just not being run as a business, but as a life-style-statement!

This place could be turned into a see-and-be-seen singles bar with real ale, cocktails and snacks (scallops on toast for £4.50, onion soup £5 - that sort of thing).

But as a going concern, it ain't going! Crunch the numbers properly and, as John has pointed out, net profit is £0 or even less!

In other words, the goodwill as a vegetarian restaurant is worth precisely nothing, as is the entire décor and fittings. I would just find out who the landlord is (possibly by playing along as a potential buyer) and make the landlord the offer of a decent rent more in keeping with the possibilities of the location.

 

[MOIC]

A classic case of the "heart" ruling the "head.

Also a classic case where forum professionals have given advice which has probably ( . . . no, definitely) saved the OP of looking out for the Spongebob Plan in a couple of years.

 

[Andrew Chambers]

The only problem there, is that this place (town centre, 125,000 pop, 200,000 catchment area, university, tech industry) should be doing £1m T.O. p.a. minimum!

This is a 50-seater that should be doing an average of at least 100 covers per day, seven days a week, plus drinks, as it is fully licensed.

To open a restaurant that only caters to the 3% of the population that are vegetarian is bonkers! It's Southend-on-Sea (two stops past Barking!) To top that, by serving mostly tinned and frozen food, is to ensure that normal people just stay away. Add to that, they are shut on Sunday and Monday and that tells me that this is just not being run as a business, but as a life-style-statement!

This place could be turned into a see-and-be-seen singles bar with real ale, cocktails and snacks (scallops on toast for £4.50, onion soup £5 - that sort of thing).

But as a going concern, it ain't going! Crunch the numbers properly and, as John has pointed out, net profit is £0 or even less!

In other words, the goodwill as a vegetarian restaurant is worth precisely nothing, as is the entire décor and fittings. I would just find out who the landlord is (possibly by playing along as a potential buyer) and make the landlord the offer of a decent rent more in keeping with the possibilities of the location.

In that case I agree the premises have a value. Let's just hope, as China said, the op realises he's not experienced enough to make what you describe happen.

Don't suppose you could post a link to the Trip Advisor reviews? I'm also curious to see this place! Thanks.

 

[Clinton]

To open a restaurant that only caters to the 3% of the population that are vegetarian is bonkers!

Or it's an opportunity for a buyer

This is an existing, A3 approved premise, with licence, and a long lease that's catering for only 3% of the population and which a person with the right skills can convert to catering for all 100% (it has the capacity).

Add Sunday and Monday trading and there's potential for a nice uptick in turnover / profit. Possibly (I haven't done any research into this particular business).

This is all provided the purchase price is based on what's there now rather than what the buyer can do with it, especially bearing in mind the upfront additional capital needed to upgrade kitchen, menus etc.

 

[The Byre]

In that case I agree the premises have a value. Let's just hope, as China said, the op realises he's not experienced enough to make what you describe happen.

If I were the OP, I would get my friend Scot onto this. He is about the same age as the OP (mid 30s) and is a brilliant rescue and start-up chef. He's the guy agencies send in, when some rank outsider realises (at last) that they don't know enough and need a professional to either turn the place around, or to get a new place going with the right food and equipment.

He has started and/or rescued places and services from Dubai to LA and from Leeds to Liverpool. He is trained in the three main French cuisine styles and also in classical English and Highland food. He is a good motivator and can teach the greatest numpty a solid menu - as long as they are prepared to learn.

The only downside to Scot is the fact that he is very good looking and usually ends up shagging the help. He was star chef on a new Dubai luxury airline with in-flight haute cuisine and ended up going through most of the female flight crew!

 

[The Byre]

Don't suppose you could post a link to the Trip Advisor reviews?

"My desert was the brownie with vanilla ice cream. The brownie was dry and overly chewy, standard supermarket ice cream. I did however see another persons pudding being cooked, this seemed to involve the "chef" putting a plastic (pre-sealed so obviously bought in) pudding in the microwave for 30 seconds and plonking it on a plate."

"Well if that`s what you think of your customers, you can keep your food!"

" I can cook far better myself."

" the food was edible"

 

[Clinton]

This is getting close to outing the identity of a business that may not want the public to know that they are for sale.

 

[John Austin]

Some restaurants to succeed need a big ebullient personality as Manager / maitre d' to welcome people in. It's not a game for everyone.

 

[ThePublisher]

Where's Southend come from? OPs several previous posts on opening a cafe/restaurant business have mentioned Bristol

 

[Ian J]

"My desert was the brownie with vanilla ice cream. The brownie was dry and overly chewy, standard supermarket ice cream. I did however see another persons pudding being cooked, this seemed to involve the "chef" putting a plastic (pre-sealed so obviously bought in) pudding in the microwave for 30 seconds and plonking it on a plate."

"Well if that`s what you think of your customers, you can keep your food!"

" I can cook far better myself."

" the food was edible"

There is nothing wrong with buying in precooked food and using microwaves or other means to reheat it. Many years ago I owned a restaurant and some of the dishes on our menu were bought in and precooked and they all tasted good as we only bought in quality products.

Even Gordon Ramsay does it as he was outed last year for not cooking to order on the premises but bussing in precooked meals

 

[John Austin]

IanJ said:
"There is nothing wrong with buying in precooked food and using microwaves or other means to reheat it. Many years ago I owned a restaurant and some of the dishes on our menu were bought in and precooked and they all tasted good as we only bought in quality products."

At least pre-cooked food is cooked properly! Better than under-cooked food at any rate!

 

[Paul Kelly ICHYB]

Is it Southend or Exeter?

 

[The Byre]

Southend-on-Sea was a joke - two stops past Barking! Get it? Two stops past Barking!

No, Bark . . .

Oh never mind!

This is getting close to outing the identity of a business that may not want the public to know that they are for sale.

Then they shouldn't have given it to an agency/broker who plasters it all over every catering business opportunity website.

Even Gordon Ramsay does it as he was outed last year for not cooking to order on the premises but bussing in precooked meals

2009 was last year? I must be getting ahead of myself!

(And he was only moving food from one of his kitchens to another. Not quite the same as buying vacuum-packed rubbish from Brakes!)

There is nothing wrong with buying in precooked food

except the taste!

 

[john1989]

Agree regarding the taste of pre cooked food.

I don't go to a restaurant to buy pre cooked food. If I wanted to do that, I'd buy a cheap ready meal from M&S.

 

[Ian J]

Agree regarding the taste of pre cooked food.

I don't go to a restaurant to buy pre cooked food. If I wanted to do that, I'd buy a cheap ready meal from M&S.

I'm willing to bet that if you eat out you've probably eaten pre cooked food loads of time without knowing it. As I have already said it depends on the quality of the ingredients used as it isn't all cheap pub grub and as an example you only have to look at food that you have cooked at home then frozen to see what I mean

 

[Ian J]

2009 was last year? I must be getting ahead of myself!

What was it that Oscar Wilde said about sarcasm?

 

[john1989]

I'm willing to bet that if you eat out you've probably eaten pre cooked food loads of time without knowing it. As I have already said it depends on the quality of the ingredients used as it isn't all cheap pub grub and as an example you only have to look at food that you have cooked at home then frozen to see what I mean

Possibly.

But I have been to a few places that have had good reviews and could tell that it was 'ping' food.

I think it's a cheek to charge £20+ for a main that's a microwave meal.

 

[myfairworld]

Oh dear the anti-vegetarians seem to be out in force! I'd just say that I like to cook - don't have a lot of time for it but squeeze it in when I can - and I'm a veggie. At home I do eat mainly fresh cooked food but, for practical reasons, I make soups and various other dishes to freeze away in portions and then take to my shop for lunch, inevitably they have to be re-heated in a microwave as that is all our tiny kitchen has room for + a toaster and a kettle.

I so often laugh when meat eating friends and colleagues who express astonishment that anyone could survive on a vegetarian diet start sniffing and saying 'Wow that smells good!' when I come out with my de-frosted and re-heated soup or stew or bake or whatever and look positively envious about the food I'm tucking into.

I'd make two points:

good quality food, well prepared food, imaginatively conceived food is still pretty good even after it has been frozen and re-heated, while very boring and sub-quality food can be prepared from fresh. I don't personally want to go into a restaurant to eat re-heated meals from the usual major suspects and containing goodness knows what, but I also accept that you'd have to pay very, very high prices these days to have everything cooked from fresh on the premises - unless you want a traditional UK greasy fry up breakfast type meal. If a restaurant made a really good soup to start with and then froze it away in portions, I'm not going to argue with paying for the same good product to be re-heated and presented to me unless the prices are absolutely OTT;

vegetarian food in non-vegetarian restaurants is often pretty awful - not always but often. There is also a problem with vegetarian restaurants that so often they seem to be run by very earnest people with very stodgy ideas! Vegetarian food can be so delicious that even confirmed meat eaters will salivate just at the aroma but someone taking over a veggie restaurant (if a veggie restaurant it is) needs to be imaginative and up to date in veggie cooking - by all means continue to provide an old school dish or two for the existing regulars but start providing new and imaginative stuff to attract in new customers and to turn them into regulars too.

Thinking of buying any business the issue is not just 'what does it make now' but 'what can we do with this business to pull in the crowds'.

 

[Ian J]

I have been to a few places that have had good reviews and could tell that it was 'ping' food.

I think it's a cheek to charge £20+ for a main that's a microwave meal.

That's one of the problems with reviews as many of the reviewers are clueless.

When I go on holiday I tend to use the best known review website for hints and tips about where to go and invariably the top rated restaurants are always curry houses or tea shops.

Most well reviewed restaurants also have a smattering of reviews containing the phrase "the best (insert menu item) that I have ever tasted which to me implies that they don't actually eat out very often but like leaving reviews

 

[Mark T Jones]

Bearing in mind that this is a business forum, not TripAdvisor, the only commercial distinction I'd make between quality local ingredients and Ping food would relate to costings and market research. From a funding perspective I'd be marginally more concerned by obsessive attention to detail than by generic sourcing.

I would think that most communities can support a vegetarian/vegan restaurant - again market research should give a clue

I glossed over the boring stuff, but have we established what the OP is really buying and what they intend to do with it?

 

[ThePublisher]

I glossed over the boring stuff, but have we established what the OP is really buying and what they intend to do with it?

No idea, the OP raised the question and hasn't returned

 

[marshallkohl]

Going by what The Byrne has said I'd forget this restaurant and start afresh. As it is you're basically paying £125,000 for a eight year lease, add that to the £140,000 for rent and without even starting on the other costs this business is costing you £275,000. Will you make that back in eight years (I'm presuming the quoted net profit is excluding the owners wages, so it's not net profit)?

+1

 

[BGC180]

Hello All,

Firstly my apologies for not reporting back sooner. Secondly what wonderful feedback we recieved about the potential business. I kept getting alerts on my phone and reading the responses and doing more research but crucially and very rudely i never came back here to express my gratitude and of course provide an update.

i must say you are not only a generous lot with your time but also detectives having pinned down the area fairly well. No it isn't in Southend but it is the other but I didn't think it was fair to the seller to out the whole concern. It seems you might have done that anyway but all the information given has been of great help.

In the end we went with your advice and decided the numbers just didn't stack up. Yes we were looking into ventures a while back in Bristol and then the commitment of the lease and the time consumption of a business was off putting and it turns out that with your words of wisdom we realised that it is no different now with this venture a couple of years later. I guess we're just not the types that look for decades of commitment and hard graft

We have now pulled any interest in the business and will move on with smaller ventures which suit our commitment averse nature. Thanks again to all.

 

[Bob]

Thanks for feeding back. It's great to know what decisions make. Good luck with whatever you decide to do in the future

 

[The Byre]

No it isn't in Southend but it is the other.

Southend on Sea means that someone is two stops past Barking, as in barking mad.

Good luck with you endevours anyway - perhaps a sexy singles bar selling up-market snacks would be a better bet for a first-timer!

 

[japancool]

Vegetables have feelings too, and they can't run away.