Should you buy a restaurant? To some people, the answer is always, no. Too risky. They cite statistics saying that 9 out of 10 restaurants fail in the first year.
In reality, a study found that the actual failure rate is 17% for startups, 2% better than the other service-providing startups. (Others found a higher rate of 26%). Restaurants also last a median of 4.5 years.
While that’s a lot less than the 9 out of 10 statistic people commonly cite, those numbers are still high enough to give pause. Before you buy a restaurant you should take the time to consider your finances. Beyond just, “does this restaurant have good food,” you should ask, “Do I have enough money to afford this restaurant?”
How Much Do Restaurants Cost to Buy?
The restaurants on our website all list the prices. At the moment, we have listings that cost up to $5 million. If you don’t know the price of a restaurant, however, there are ways to work it out.
According to Investopedia, restaurants sold for a median cost of $150,000 in 2014. According to their article, “Restaurant investors and owners will aim to sell their restaurant for 25-40% of their yearly operating income… [I]f the business is making $1 million in sales a year, they would decide a sales price, but it would be around $250,000-$400,000.”
This may sound like you’ll make your money back in less than 6 months, but this doesn’t take operating expenses into account. A restaurant may make $1 million in a year but cost about as much to run.
Typically, a restaurant will sell for about the amount of money it will earn in 1-3 years after expenses, according to Investopedia. So if a restaurant has an SDE (essentially, it’s net income, how much it makes after expenses) of $100,000, it will sell for around $100,000-$300,000.
Many of the restaurants listed on our site will send you their financial information if you fill out a form.
How Much Do Restaurants Cost to Run?
This is difficult to calculate and would vary a lot by restaurant. Consider the size and the style. A fine dining restaurant that waits on each table will require more staff than a self-serve one. According to Entrepreneur magazine, your payroll should be 25-35% of total gross sales. Therefore, if you make a million in a year, you should be paying $250-300,000 per year for staff, which is probably more than you paid to purchase the restaurant.
The article also lists all the other types of staff you may need: a manager, chefs, cooks, dishwashers, serving staff, hosting staff, bus persons, and bartenders. Inc Magazine lists some other costs including food, insurance, permits and licenses, accounting, marketing, and advertising. And you’ll pay even more if you’re redesigning the restaurant, ordering new tables, decorations, etc.
In another blog post, we said, “You must have adequate capital to buy the restaurant and to make necessary improvements. Maintaining sufficient reserves to offset a slow start is critical…”
How Much Money Do Restaurants Make?
Every restaurant is different, but, according to the Huston Chronicle, “What’s clear… when you look at various estimates for restaurants of every kind, from fast food to fine dining, is that profits in the restaurant industry are unusually thin.” They estimate an average net profit margin of 2.4% for fast food, and 6% for other types of restaurants.
This article from Thrillist gives quotes from owners of actual restaurants. One said, “If you do not know how to work hard for free, then I would suggest you do not get involved in this business.”
Try asking a restaurant for its financial information before buying. Ask them what their net profits are.
A Final Concern
Beyond the cost, another question to ask yourself is how much time you can give to give to the restaurant. If you have a family, how much time are you willing to be away from them. A study from Cornell University found:
“Successful restaurateurs attributed their success to their ability to concurrently manage the family life cycle and the business cycle. In contrast, most of the failed restaurateurs attributed their failure partly to family demands (e.g., divorce, ill health, retirement). Family sacrifice was mentioned by both successful and failed owners, but the successful owners were either good at balancing their family and work lives or they were not married. On the other hand, five of the failed owners said that they closed when they were no longer willing to make those family sacrifices.”
Don’t sacrifice your family on the altar of your restaurant.
If you can afford a restaurant and have a passion for the business, check out our restaurants for sale. We list dozens of types of restaurants from across the country. Our site is perfect for buying, selling, and leasing restaurants.
As one of the restaurant owners in the Thrillist article above said, “There’s a lot of downsides. But at the end of the day, I wouldn’t trade it for anything. I’m also crazy. Anyone who does it, really loves it. It’s a different breed.”