Questions About Buying a Daytime Restaurant.

[UptownKevin]

I have been in the bar business and been in the restaurant business, but because of the lifestyle, it's something that I will not pursue any further. However, I love the business and it is something that I am good at (running an operation). One aspect of the industry that I am attracted to is the daytime plate lunch/ deli /catering business. It offers a chance to be in the food service industry, while not taking up my weekends and major holidays. However, starting a new operation is a risky investment and at this time I don't have the means to do it. An option that I have been exploring is buying an exisiting operation, but there are some things I would like to know while writing the business plan. Hopefully some of you here can offer some insight (I have read older threads on similar subjects).

How do you value an ongoing operation?
The only criteria I can see as a valuation is ongoing cash flow and equipment. Since I could buy used equipment anywhere, the real value seems to be in the cash flow, name and clientele. I have found several small mom/pop lunch places for sale in the $100K range, with promises of a net income of around $45k. My only question - why would I pay $100k to only clear $45k a year? More on this in the next section.

What is the potential?
Some of the businesses I have found for sale have been cafe's located in office buildings. Seems like a pretty limited deal to me, since while working in office buildings, I can't ever recall going to another office building for the sole purpose of having lunch. Unless it was REALLY good (one place comes to mind). A freestanding business seems like the best bet. Also, I would use the business as a store-front for more lucrative and more profitable catering jobs. Fortunately, I am a pretty good sales guy and know how to go get business. I think that's where my biggest potential will be. If I could buy a business that already generates a profit, I can use it as a launching pad to venture into other markets.

One last question (edited to add) - Why are the current owners selling? Burned out? Don't like the business? Getting too old? Or is the place a dead end? By the way some of these places are advertised, I'd be willing to bet that some are being sold because of a dead end. The best piece of advice I found about the topic was from Justacook -

"If your business cannot pay you for the work that you do, you are simply buying a job. This is a very large mistake many small business owners make. "

Some of these businesses are being marketed to a person that can work in the business and make about $45k a year. I can make more than that right now, without the headaches.

Once I get some input, I should be able to form a better direction and future goals to write the plans. Unfortunately I don't have tremendous assets and will need financing, but I have been in the banking business and have excellent credit - I'll figure that out when the time comes. I will likely also be married in the next year and a half (yes, I already have a girl to marry) and she has a very stable income and job. She will not be working in the business or directly involved, but like a marriage, she's got to be 100% in this venture and we have been discussing it.

Thanks for the help.

-Kevin

[Scratchman]

Kevin,
Here is the best advice you could possibly get. Don't do it.
Why the heck would you put 100K on the line to buy a 45k a year job. So, I'm sure thats the advice that you have recieved so far, and apparently you've completely ignored it.
Now, lets try to sort this out. ?#1 Is that net 45K include the owners hourly or salery rate. If so that starts off pretty
tight. But oh well thats how the others ran it, could you do it better. Remember, a burnt owner is probably running around 50 % efficiency and micro managing. It turns into a miserable situation for all involved. Next when you find a couple of potential properties do a swot analysis for all
. Swot (strenths, weakness, opportunities, threats)i.e.
Strengths . Clientelle, steady income, good recipes etc....

Weakness. off the beaten path, poor hood, facillities problems

Opps. Marketing, franchise, positioned for corperate accounts. (this is where you turn the 45K into 145k)

Threats. Panera bread next door, on the threshold of urban sprawl. Al queda cell next door............you get the picture.

there is net worth and potential net worth. That potential is the only reason that you would buy a lower middle class job :>

?#2 do/will you have the capital to make the place all it could be.

A GREAT LUNCH PLACE IS A CULT CLASSIC. THAT IS YOUR GOAL.

[Scratchman]

WHOOPS,

anyway I used to work BBQ joint on Anna Maria Island. And places don't get much cultier than that. They have been going
strong for about 20 years, and most of what the owners do is sit at the front desk and seat people. Good gig for them.
You should check it out. Great ribs.

Peace,
Scratch

[Derek Cooks]

I am attracted to is the daytime plate lunch/ deli /catering business. It offers a chance to be in the food service industry, while not taking up my weekends and major holidays

Kevin, have you ever been self-employed? There are two kinds of jobs out there in the big wide world; the "do you want fries with that?" 9-to-5 don't give a damn kind, and; the "I love what I'm doing so much, I don't care that it takes me 36 hours 8 days a week" kind.

So my first suggestion is to make sure you know what kind of job you really want. When YOU are the boss, or when YOU want to "make good" - then it is 36/8. So make darn sure that it is something you really, really want and enjoy doing.

why would I pay $100k to only clear $45k a year?

Great question. Why indeed? Well, if you are really looking to not work nights, weekends and holidays, you too can earn $45k @ year on your $100k investment. By the way, I may be off here, but I think that's a 45% return on investment. How can you possibly question that? Multiply that out for, oh, 3 years, and in just 3 years you've made your $100k into $235k. But I digress...

The point is that unless you are wildly happy with the biz "as is", you will want to grow and improve it so that it returns more. In your business plan, contemplate ways that you could do that, how you would do it, what it will cost to do it, and what the return is on that added investment. Yes? So....

I am a pretty good sales guy and know how to go get business.

So write up how, who, when, where, and what business you are going after. That is how you calculate the potential.

Why are the current owners selling?

That is for them to know and you to find out. This is called due dilligence. It is digging and scratching and discovering everything you possibly can about the business, BEFORE you own it.

Good luck!

[UptownKevin]

I appreciate the feedback (most of it, anyway). You may want to re-read my post, or perhaps I just didn't explain well enough. I hope everyone realizes that I am exploring opportunities and building a business plan. I am not running out and buying a restaurant tomorrow. That is why I asked for feedback.

Here is the best advice you could possibly get. Don't do it.

Don't do what? Don't buy a business? Don't buy a restaurant? Don't buy a daytime restaurant? Don't buy, but instead, open my own? Please elaborate.

Why the heck would you put 100K on the line to buy a 45k a year job. So, I'm sure thats the advice that you have recieved so far, and apparently you've completely ignored it.

Ummm, I wouldn't put $100k on the line to buy a job. I also stated that it would be a pretty stupid thing to do. I haven't recieved any advice yet (only what I have read in previous threads), so there's nothing to ignore. I think you are jumping the gun; no need to act like I am a moron. However, I do appreciate the rest of your post - it is full of good advice. I am approaching this decision just as if I were buying a car wash, a dry-cleaners or a retail store. It's a business. I just happen to be good at the food business (and have little interest for the former types of places).

A GREAT LUNCH PLACE IS A CULT CLASSIC. THAT IS YOUR GOAL.

That's good advice. Thank you.

Kevin, have you ever been self-employed? There are two kinds of jobs out there in the big wide world; the "do you want fries with that?" 9-to-5 don't give a damn kind, and; the "I love what I'm doing so much, I don't care that it takes me 36 hours 8 days a week" kind.

I have been self-emplyed, so I understand the commitment. I probably gave off the wrong impression by stating that I enjoy the restaurant business but not the lifestyle. What I mean is that I don't want to be committed to nights and weekends while my (future) wife and kids have a different schedule. It doesn't mean that I want to cruise in at 8 and leave at 5. Just because it is a lunch place doesn't mean it isn't hard work or consumes a lot of time. It's just merely the time that it takes place. If I work 15 hour days, I still have the option of playing in a volleyball tournament on a sunny Saturday, or spending Thanksgiving day with my family. Being in the restaurant/bar business in the past has not always given me that freedom.

Well, if you are really looking to not work nights, weekends and holidays, you too can earn $45k @ year on your $100k investment. By the way, I may be off here, but I think that's a 45% return on investment. How can you possibly question that? Multiply that out for, oh, 3 years, and in just 3 years you've made your $100k into $235k. But I digress...

Can you explain? I don't know any legal ways to make a 45% annual return. If I did, I would borrow the money from the bank at 9% and invest it there. I think I am probably misunderstanding your statement.

The point is that unless you are wildly happy with the biz "as is", you will want to grow and improve it so that it returns more.

Exactly. I wouldn't buy a business for status quo. Otherwise I could just work for someone else (or buy a franchise). The business is a means to an end. Owning a business is different than working for someone else - that's the whole point. Having the ability to control your destiny and make your own decisions is a great feeling.

-Kevin

[Derek Cooks]

pay $100k to only clear $45k a year

If you meant "clear" clear - then I would pay that $100k all day every day.

Kevin, you know what you are doing. Check it out, check it again. Double expenses, half income. If it still makes sense, then go for it.

[Patchouli]

Is there a specific place you're looking at? If so, ask for the books, and scrutinize them, see if they make sense. I've always understood a restaurant has a few sets of books (not that they admit to, of course).. i)the real deal; ii)the one for the bank when you're asking for money; iii)the one you show potential buyers when you want to sell the biz; iv)the one you base your income taxes on;

Was the $45000/yr net earned by one family member working there every day, or two, or more (kids?)? What part of the $45,000, if any, would have to be replaced by paying other staff? How many?

Is it in an area where you could expand the hours, IF you wanted/needed to in the future?

Is the food they serve conducive to the establishment being well received as a potential caterer? Do they do any catering now? What kind of prices are they charging? Are they reasonable?

There is a lot to be said for owning your own biz.. one being that unlike a regular job, where everything you buy is paid for 'after tax', you can get some of your needs met 'before' tax.. so in effect, your earnings don't necessarily need to be as great as they would need to be in a regular paycheque.

I have the same type of place as you are considering, and it is a TON of hard work and long hours.. but you're right, the hours don't necessarily have to be at a certain time of day (unless there's a particular catering job); lots of times I'm out in the middle of the night or very early morning, doing stuff so that I can also meet my family obligations on their time; I guess the thing is that when you love it and you're committed, it doesn't feel like prison.. whereas with a job, it would.. or something like that?

Another thing to consider.. about that $45,000 net.. that is their 'pay' (the owners), right? Or is that 'after' paying themselves a wage? If it is considered their earnings.. and you have to take out however many thousands of dollars in loans.. how much of that will be eaten up in interest and repaying the loan?.. how much will you actually end up with in the end, if things remained status quo.. so you can compare apples to apples..

[jonesg]

""If your business cannot pay you for the work that you do, you are simply buying a job. This is a very large mistake many small business owners make. "

Its a mistake many small biz owners are WILLING to make.
If you can't see the upside , its not for you.
But seeing as you don't have money, its all moot.

[Scratchman]

Whoa Kevo,
Relax I think you read me wrong. You'll have to forgive me I am a little sarcastic. You should here me talk about that guy in the mirror. I said don't do it because there is nothig like restaurant ownership to drive a man or woman(or most likly both at the same time) insane. It destroys relationships, credit, and trust in mankind. So, again that being said. If you continue it's most likly because you are stuborn and driven. Any succesful restaurant owner is.
you are going to need these traits. Give us more details.By the way the whole nights and weekends thing, your talking to a group of people here that gave those up a long time ago.
By the way what kind of food, do you have cooking experience. If not you'll need to buy a restaurant with an established menu and clear recipes.
Peace,
Scratch

[firechef37]

We moved into what had always been a M-F 6 to 2 kinda place and started out the same just with a whole lot different of a menu. Where others only lasted weeks to months we are pushing one year and going into bigger and better thanks to the catering. A few caterings with top notch dinners and the lunch crowd starts begging for a chance to enjoy the same kinda meal their friends and neighbors have talked about.

As of April 1st we're doing late afternoon and carryout of our current menu for the on the way home crowd. As of May 1st we are doing a dinner service on a couple of nights. Once our addition is done and all is in place we're going 7 days a week with dinner menus and weekend brunch menus. We're moving the catering kitchen to a new location in a local golf country club and looking to expand into a larger market to be able to get into a "classier" cuisine once again.

We are the odd lot out as we are looking at a small profit after the first year and have yet to take out any personal or business loans. Now that the bankers and lenders have seen us in operation they are seeing a much bigger potential and are a lot more willing to loan us $$$$. Heck, we don't even have a company credit card yet.

Its your future...if you want it bad enough you'll fight, scrap and dig to make it work. My original kitchen staff was me and a dishwasher along with a very talented foh gal that had done both foh and boh managment before coming my way.

[BistroOwner1]

I don't know Kevin - I'm trying hard to find anything in your posts that says your passionate about the food business. As mentioned earlier - most of us on this site have long ago given up our nights and weekends, and we do it because we love the business and have CHOSEN to work in the trenches.

Buying a business for 100K and netting 45K a year - hmmm. Does this include paying the owner, paying the bank and everyone else first?? If so, thats a great take for a lunch only business. Most of us who take the leap don't expect to get paid more than a salary for a while until our debt is taken care of. It's after several years that you usually start to reap the benefits as an owner. (other than those that you can get by purchasing things through the business like food etc.)

I would suggest that if you want to make a ton of money - it will be hard to do it with a lunch only business unless you are in the exact right location. On the other hand, if you want to work 'reasonable' hours, have your nights and weekends off to play golf and find a wife, you can hardly complain about the money or time spent making it.

If your not willing to expand the business, pick up some off hours catering or do something more with the business, perhaps thats all you can and should expect. From my read, I think perhaps you should keep your cushy job where you are "already making more money" and leave the crazy hours, high stress, super satisfying rush filled work to those who want to do it. The restaurant business is never conveient - but it's what we live for - whether you just work it or you own it.

[UptownKevin]

But seeing as you don't have money, its all moot.

Jonesg, I respect your opinion, so I hope you will elaborate. I'm not sure what you mean. Most people don't have money. They have assets and they have credit. I think the statement that I quoted about buying a job is important. Why would I buy a biz for $100k and work in it, when it would only provide me a $45k income. Senseless if you ask me, since I could make the same amount working for someone else (without the headaches). The smart businesspeople buy/start/create businesses that can run without them, therefore creating income without working full-time in the biz. Or, in my case, they buy an existing business to limit the risk of failure. That existing business can be a starting point or launch pad for expansion, better opportunities or bigger and better things.

Whoa Kevo, Relax I think you read me wrong.

No doubt. Things translate funny into type on a message board. I'm just holding my ground

I said don't do it because there is nothig like restaurant ownership to drive a man or woman(or most likly both at the same time) insane.

Yea, well I've got that masochistic quality about me. I don't plan to be working for someone else the rest of my life.

Give us more details.By the way the whole nights and weekends thing, your talking to a group of people here that gave those up a long time ago.

I think you are generalizing. There are a ton of cooks and chefs who become personal chefs, corporate chefs or test-kitchen chefs. They love the business but not the lifestyle. Perfectly acceptable (as far as I am concerned). I love the business, but I got out of the restaurant/bar management business because I don't like the lifestyle.

Is there a specific place you're looking at?

No, I am currently doing research and looking at listings, as well as working on a business plan. I'm still a year away from this. I'm not going to jump into anything unless I am sure I can make it work.

Was the $45000/yr net earned by one family member working there every day, or two, or more (kids?)? What part of the $45,000, if any, would have to be replaced by paying other staff? How many?

That's the million dollar question. Here's my thinking. If I buy a business for $100k that requires me to work full time, and pays me nothing, but I net $45k, then that is essentially my salary. I am buying a job. It's the same as a business I buy that pays me 45k and breaks even. The only potential is what I can bring to the table (expansion, longer hours, greater revenue, etc.). I just brought up this subject because of the way that business brokers seem to be marketing this type of business. I actually saw one listing that said that an office building cafe was great for a "husband and wife team." This basically told me that it would take the team to work in the restaurant in order to realize the net profit listed.

Of course, I am in the exploratory stages. I really do appreciate all of the input.

-Kevin

[UptownKevin]

I'm trying hard to find anything in your posts that says your passionate about the food business.

Mistake #1 - Making business decision solely based on passion.

I haven't said a word about passion, primarily because it has nothing to do with the discussion. People that know me know my passion for food. I don't want to open a business based on passion. Those same people are the ones who tell me I need to open a restaurant because I am passionate about food (I am a little more realistic than that) I want to open a business that is viable, provides for my family and is somthing that I love.

most of us on this site have long ago given up our nights and weekends, and we do it because we love the business and have CHOSEN to work in the trenches.

Fortunately we live in America, and we all have choices. There are plenty of guys who choose to make $100k as a corporate chef, working regular hours. I don't really see how it is relevant in this situation.

If your not willing to expand the business, pick up some off hours catering or do something more with the business, perhaps thats all you can and should expect.

Seriously, I asked for advice. If you would have read anything I have written, you wouldn't be asking that question. In my first post I said that I was looking for a starting point to venture into other operations.

I think perhaps I asked this question in the wrong forum to the wrong crowd. Do I really need the negativity? Nope. However, I do need the critical thinkers who can find every whole in my plan or let me know where I am going wrong or what I need to look for when making these decisions. I know this is a viable business idea, because other people have done it; there are even a few here. I don't need anyone to tell me I am a wus because I don't want to work " restaurant" hours. I want people to give me advice on the pitfalls of this type of operation. firechef37 - I appreciate the input; it's all been absorbed. Thanks agin.

-Kevin

[UptownKevin]

From my read, I think perhaps you should keep your cushy job where you are "already making more money" and leave the crazy hours, high stress, super satisfying rush filled work to those who want to do it. The restaurant business is never conveient - but it's what we live for - whether you just work it or you own it.

Ha! Pretty arrogant statement. Especially since you've derived it from knowing little or nothing about what I do. "Cushy Job?" Yea, well, nevermind. That satement doesn't even warrant the respect of a proper response Keep doing what you are doing.

-Kevin

[bbally]

How do you value an ongoing operation?

Well you are going to value it as low as it possible and still close the deal if you want it.

So asset purchase as liquidation pricing.

If you are going to pay on cash flow it would only be after I saw five years tax returns. Don't want to hear about extra books, etc. Show the tax forms lets look at the average cash flow per year, and the growth or shrink of the biz per year. Good solid growth I might go assets plus 50 cash flow if they will carry paper on the cash flow. Last I need to see the real estate market and the lease. If the lease is on its last year with no options, and real estate has been going up at 20 percent per year, forget it. Now if you have 10 years left on the lease and it is real attractive, might be a hidden asset in that.

How do you value an ongoing operation?

You have to be the one to answer this, and if you can see it good for you. But this is a keep your mouth shut issue. The idea is the get it cheap as possible.

What they are taking out is really moot.

This is a straight return on investment calculation. So what are you risking, and what does it produce per year. 45K per year for a one time 100K investment is pretty easy to take. But if you see no growth and no future than you might as will invest the 100K in the stock market and keep your job. But if you see how to take it to 55 the 65K per year easily, that would be worth chasing if you like the chase.

So realize the 100K is a one time deal, while the 45K or whatever is a purpetual deal. I would take 45 percent return anyday of the week.

Now if you have to put in 100K every year and get 45K back and like that I have some ocean front here in Colorado we need to talk about you investing in.

Buy it cheap as you can. Risk as little as possible!

And congrats on the soon to be misses.