To buy or to build: A very good question

By Marjorie Borell

If you're planning to open a restaurant – whether it's your first, or the newest addition to your growing empire -you may be wondering - should I buy or should I build? Each option has pluses and minuses - so how do you know which way to go?

Read on...

Buying an existing restaurant

One of the major reasons restaurateurs choose to buy an existing restaurant over building their own is time. It takes many months to construct a new restaurant in a vacant space. It also takes time to obtain a liquor license, pass required inspections and install equipment. If your goal is to open your new location within a certain time frame, it may be easier to purchase an existing restaurant and renovate.

But before you do so, you need to understand exactly what it is you are buying. Are you buying the existing business including the copyrighted name, logo, web site, concept, menu, recipes and equipment? Or do you want to introduce your own concept and simply want the location fpr its remaining lease, active liquor license and permits such as those for sidewalk or rooftop use?

If you are thinking of buying an existing restaurant, among the first questions you want to ask is why the space is for sale. There are many reasons an owner may want to sell a restaurant and in all of my years of restaurant brokering, I don't think I've heard the same one twice. Some are personal such as poor health, retirement or a divorce, others may be business-related, such as the breakup of a partnership, departure of the chef or poor reputation.

If you plan to purchase the existing business with the idea of turning it around and continuing to operate under its current name, then sales figures are important. Ask to see the restaurant's bank statements or tax returns to determine how the business is currently performing. These numbers help you determine where improvements can be made and forecast how those improvements will effect future sales.

However, if your main reason for wanting to purchase this particular restaurant is to obtain the lease, and not the business, then you need not be so concerned about current sales figures. Perhaps you like the location, size and can use the current build out with just minor renovations. Or, maybe it has an active liquor license which will save you money and enable you to open for business sooner.

In either case, you should know what you are getting into and make sure it's what you really want. Your other option is to find a vacant, or soon to become vacant, location, get a new lease and build your own restaurant from scratch.

Leasing a vacant space

In this case, as with buying, you need to know what you are getting. Building a restaurant from scratch can be extremely costly and, as mentioned, very time-consuming. Working with an experienced broker with extensive knowledge of the restaurant business can save you considerable time and money. Don't be shy about asking lots of questions. There is a lot to know.

If you are considering leasing a retail space, it's a good idea to bring an architect or construction manager in to preview the site and inspect it for overall condition and soundness. Is it already vented for cooking or will you need to install a vent, hood and fire suppression system? If you need to install your own cooking vent, just how easy or complex that is will determine the cost and time frame. Is there a kitchen set up or will you need to build a kitchen. Are the plumbing, electric and gas lines already installed? Will the floor accommodate drains and grease traps? Are the ceiling heights adequate for use in the basement? Can you legally have people working in the basement? Where will deliveries be made? Garbage picked up? Is there room for storage?

Make sure you can you get a liquor license, sidewalk, patio or other permits if you need them. Is the storefront suitable for your use or does it need to be rebuilt? And most importantly, what accommodations in the form of TI (money for tenant improvements) and free rent is the landlord willing to offer to assist you in completing the build out and opening for business?

Building a restaurant from scratch, especially if there wasn't one there before, can be a formidable and expensive undertaking, so if you do choose to lease, rather than buy, make sure you have the prerequisite nerves and budget in advance.

After shopping around and weighing all these factors, think about your own priorities to determine which option makes most dollars and sense.

* Marjorie Borell is a consultant with Manhattan Restaurant Brokers and founder of www.restaurantspaceny.com. She can be reached at (646) 307-6405 or mb@nycrs.com.

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User Comments – Give us your opinion!
  • Lee Shadle
    105265378
    This article is the reason that so many new restaurants and restaurateurs fail. There is so much more that goes into deciding whether to buy or build a restaurant than time. Time should be one of the least important factors when deciding to build or buy a restaurant and regardless of whether you want to use the existing restaurant brand or develop or franchise another brand in the space the sales figures are valuable information. The only restaurateur that says "you need not be concerned about the sales figures," is the one that is going out of business in the near future.

    There are pros and cons to both strategies. Here are some valuable tips when deciding to buy or build.

    Buying an existing restaurant:
    -Usually you can purchase an existing restaurant for less than the cost of building a new restaurant
    -You get years of sales history and you get a good idea of projected sales for your business
    -It's much easier to get financing for an existing restaurant with cash flows already coming in, why? because it's less risky and the outcome of building a new restaurant is unknown
    -The brand of the restaurant is already in consumers minds. Especially if you are buying an existing franchise people know the brand and if it's well executed they like the brand and think of it first when deciding where to eat. Even if the brand is not a franchise it has a built in customer base that doesn't come with a new restaurant.
    -The bottom line of buying an existing restaurant is information. An existing restaurant doesn't come with the unknowns that a new build does. Even if you are building a new franchise location, your odds of success may be better because of the built in brand equity, but you still don't know what kind of sales your location will do.

    Building a restaurant:
    -Usually more expensive and as soon as that restaurant equipment leaves the lot, it's worth at least 50 cents on the dollar.
    -If you are building your own restaurant brand you have complete control over branding, location, design, operations, menu, etc. If you are building a new franchise location you have very little control over anything other than running the restaurant per your operations manual.
    -If you are building a restaurant you will want to know what the sales of businesses around your location are doing, regardless of whether you are looking to gut an existing restaurant space or build from the ground up.
    -The bottom line, regardless of whether your building your own restaurant brand or a new franchise location, there are many unknowns. You aren't working from any historical sales numbers other than the previous tenants if your lucky to get that information or surrounding businesses. If your builiding a new brand you have to not only design, build and run the restaurant but you also have to market the restaurant and build a good reputation for your brand. I have people ask me all the time whether they should buy or build and I always tell them to go purchase one existing franchise with a good reputation with good sales in a good location that they believe in. If it works buy more units of that brand. If that works buy more units. If those work then look into diversifying with other existing brand with good reputations in good locations. Once you accomplish that you should have enough cash flow to start developing your own restaurant concept.
  • Matt Vetter
    102601555
    While leasing a vacant space to build-out your concept can be more expensive, there are plenty of ways to reduce and/or limit such costs. Developing a strong and coherent project team is key - you simply must have people in place that are experts in new store development. You wouldn't ask a lumberjack to remove a dental cavity; as such the average restaurant owner (or owner-to-be) shouldn't expect to effectively run a construction project. Professional advice and guidance can save you sup rising amounts of money, time, and headache during a new restaurant project.
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