Conversions vs. Start Ups

A prospective restaurant owner has three options:

  1. Buy an operating restaurant and keep the current concept
  2. Open a new restaurant to carry out a new concept
  3. Buy an operating restaurant and gradually implement changes to establish a new concept

The option selected could determine the success or failure of the business.

  1. When you buy an established restaurant with a proven concept, a recognized trade name, and a solid customer base, you opt for the least financial risk. Sales, expenses, and profits can be verified during the due diligence (inspection). Cash flows are usually sufficient to service normal debt and provide the new owner with a reasonable managerial return. Buying a successful restaurant generally requires the smallest capital outlay and the smallest amount of operating capital. It usually produces the fastest return on investment. The investment should pay for itself from cash flow.
  2. However, many creative restaurateurs want to open a new facility to introduce their own concept, menus, recipes, and décor. This can be costly. Recent changes in building, traffic, and health codes have resulted in skyrocketing site, planning, and approval costs – even before up-fitting expenses, which can run from $125 to $200 per square foot for heating and air conditioning, plumbing, décor, signage, electrical systems, and furniture, fixtures and equipment.
  3. Combining these two options – buying an established restaurant and converting it to a new concept and menu – can greatly reduce costs. Often marginal restaurant operations suffer from weak management and poor concept, not bad locations. A smart restaurateur can usually fix an underperforming restaurant through creative menus and outstanding décor.

Before you decide which direction to take – opening a new restaurant or purchasing a pre-existing one – consider the following:

  • Location: Will demographic traffic patterns and traffic generators support a proposed new concept?
  • Leasehold Improvement: Can you minimize capital requirements by purchasing an ongoing restaurant and making a few cosmetic changes? Is current signage adequate for a new name? Do mechanical systems work?
  • Furniture, Fixtures and Equipment: Is the equipment working properly? Will it pass inspections? Does the furniture have to be replaced?
  • Approval from Governing Authorities: Will any deviations from current zoning requirements be “grandfathered”?
  • Leases: Is the lease favorable? Does it provide operating savings?
  • Time: Can you wait from four to twelve months to open a new operation? Start ups take time.
  • Cash Flow: An existing restaurant generates immediate cash flow; operating capital requirements can be reduced. Start ups can take up to two years before becoming profitable.

Before you decide between purchasing an operating restaurant or starting a new operation, investigate all your options. Recently a client, after carefully considering all options, decided to purchase an operating restaurant with lackluster sales, but a great location. The down payment was reasonable, the seller financed the balance, and the terms were attractive. The new owner continued to operate the restaurant, gradually changing the concept, menu, and décor – initiating the changes during weekends and off hours. Within the first year, sales increased from $240,000 a year to more than $1 million annually.