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How Much Does It Cost To Buy A Restaurant

How Much Does It Cost To Buy A Restaurant? Guide

Last Updated on May 17, 2024 by Shari Mason

As indicated by Restaurant.Org, the food service sector is projected to generate around 500,000 job opportunities, increasing the total employment in the industry to nearly 15.5 million by 2023.

Following the updated data above, it’s unsurprising that many people want to open their own restaurants. However, not everybody wants to start from scratch, so buying an established restaurant is all they want.

But really, how much does it cost to buy a restaurant? 

Keep reading to have an informed decision about the details and specifics of the restaurant industry before you make any transaction. 

How Much Do You Need To Buy A Restaurant? 

infographics of a two men selling a restaurant

Generally, it would cost you around $500,000 to buy a restaurant. However, this price may vary depending on the restaurant’s location, type, and profit margins.

Furthermore, Investopedia suggests a restaurant’s sale price is about 25% to 40% of its annual operating income. 

For example, a restaurant generating $1,000,000 annually might cost you between $250,000 to $400,000. However, this price still depends on the area where the restaurant is located and its existing market. 

Purchasing an existing restaurant and calculating its seller’s discretionary earnings (SDE) can help determine costs, though additional expenses vary by location.

Alternatively, if you’re someone who wants to test the waters before committing to a substantial investment, renting out a restaurant can serve as a valuable trial run. The cost of renting a restaurant is notably lower in comparison to the considerable costs of acquiring ownership, and this allows you to gain insights into the operational aspects and market dynamics before making a significant investment. Furthermore, you’ll be able to assess the restaurant’s suitability as a potential business opportunity.

“Buying a restaurant is like investing in a relationship – the cost may vary, but the true value lies in the effort and commitment you put into making it thrive.”

– Eat Pallet Restaurant & Food Advice

Factors That Affect The Restaurant’s Cost

infrographics of a Yearly Operating Income of the Restaurant

Location

Location significantly affects the restaurant’s location, depending on its real estate cost, rent, other expenses, and potential profitability.

Typically, restaurants located in affluent neighborhoods or high-traffic areas cost more than those in less traveled places. 

Additionally, restaurants in urban areas may have higher operating costs due to increased competition and higher rent prices. Conversely, restaurants in more rural areas may have lower operating costs and a smaller customer base. 

Yearly Operating Income of the Restaurant

The restaurant’s Yearly Operating Income is essentially the net income or profit that the restaurant makes in a year. 

It’s also important in determining a restaurant’s value when buying it, as it calculates its sale price based on a percentage of its annual operating income.

Restaurant investors and owners usually aim to sell their restaurants for 25% – 40% of their yearly operating income. Typically, restaurants earning at least $1 million are priced at around $250,000-$400,000. 

However, it’s also important to understand that a restaurant with a yearly operating income of $1,000,000 does not necessarily mean it should also be priced with the same amount when sold. 

Seller’s Discretionary Earnings (SDE)

Knowing the restaurant’s SDE is crucial when buying a restaurant so you can accurately get a ballpark estimate of how much you should spend on buying it. 

Seller’s discretionary earnings (SDE) evaluate a business’s earnings based on its cash flow. It includes the business’s profit before taxes and interest while excluding the owner’s benefits, non-cash expenses, exceptional one-time investments, and other expenses unrelated to the business. 

The purpose of using SDE is to provide prospective restaurant buyers with a more accurate assessment of the potential return on their investment. [1]

Restaurant Type

The restaurant’s cost varies depending on its type, such as quick service, full service, and fast casual. However, generally speaking, fine dining restaurants tend to be the most costly type of restaurant to buy.

Fine dining restaurants typically require a higher level of investment in terms of decor, furnishings, tableware, and kitchen equipment. They often require a larger space and a more sophisticated ambiance to create a unique dining experience. 

Additionally, the cost of ingredients and the level of skill required to prepare the dishes in a fine dining restaurant are typically higher, leading to higher labor costs.

As a result, fine dining restaurants often have a higher price point and require a significant initial investment to purchase and operate.

8 Steps To Follow When Buying A Restaurant

1. Decide What Restaurant You Want To Buy

infographics of a Restaurant

The first step you need to follow when buying a restaurant is deciding what type of restaurant you want to buy. You must also consider the restaurant’s target market, location, financial status, competition, and reputation.

We suggest you look for prime locations with high foot traffic and large target markets. You must also check the yearly operating income of the restaurant to ensure profitability and sustainability, along with its good reputation, quality menu, and unique concept.

“Having an identity for your business that’s both unique and easily recognizable is almost more valuable than the actual product you are selling.”

– Louis Mosca, Forbes Contributor

2. Study Your Local Market

When looking for a restaurant to buy, always check its listings for previous sales, square footage, zoning, and building information. 

Studying your local market means assessing the competition, including popular restaurants nearby. Understand the local demographics and the target market, whether it’s a walking or driving neighborhood. 

Determine the restaurant’s role in its part of town to make a well-informed decision. Checking restaurant reviews may also help.

3. Determine The Restaurant’s Value

Buying a restaurant is a hefty investment, so you must ensure that your money is well-spent. Hence, before deciding to buy a restaurant, it’s very crucial to know how much its value is.

We suggest hiring a highly-skilled third-party appraiser involved in the business to look for influential factors such as the restaurant’s historical financial performance, market share, future potential growth, and brand strength.

These factors generally determine the restaurant’s value. If you hastily buy it without consulting an expert, you might buy a restaurant with a higher cost without your knowledge. 

4. Discover Why It’s For Sale

Another essential factor you must consider when considering whether the cost of a restaurant is ideal is discovering the main reason why it’s for sale.

If a restaurant’s reason for selling is due to low income or profit, of course, it shouldn’t cost much. As mentioned above, the restaurant’s cost is determined by its SDE, so if it is established with a strong identity and branding, expect to pay a higher cost.

Knowing why a restaurant is for sale means you have the edge to negotiate better. Hence, it’s always best to come prepared. Study the business’ history, current status, and reputation to prepare better questions while negotiating.

5. Secure Financing & Funding

Infographics on Securing Finance & Funding on a restaurant

If you have finished all the preliminary steps in buying a restaurant and are sure to buy it, securing financing and funding should be your next step.

You can secure financing to buy a restaurant by securing investors, applying for a loan, or using your savings if you have secured some.

Tapping into a capital pool of other investors through a partnership or LLC is a great way to finance buying a restaurant. However, you must be mindful of the investment pool size and each investor’s contribution, usually 50% of their ownership share. 

You can also find a lender that understands the restaurant industry if you cannot secure a loan in the bank. However, it would be best to prepare a solid business plan and present financial statements to potential investors. 

Lastly,  if you choose to rely on your savings, ensure to have at least $50,000. You’ll have to calculate monthly expenses and consider tax deductions when planning finances. 

Expert Tip: Ensure that payments are made on time according to the contract with lenders or investors.

6. Negotiate

Don’t be too excited to dive in and sign a contract without negotiating. Whether you have already decided to buy a restaurant because you feel like it’s the perfect business venture for you or you have already secured your finances, you still have to negotiate.

To get the upper hand in the negotiation, you must establish an asking price, which often starts the negotiations. This will help things move along smoothly. 

You also need to understand the negotiating terms. In most cases, these terms vary depending on the restaurant type you wish to purchase, such as a newly built restaurant that hasn’t opened or a restaurant with already established branding.

Additionally, never forget to ask for the seller’s guarantee as your security net against future liabilities incurred after you purchase their businesses. 

7. Draft A Contract & Close The Deal

The next step would be drafting a contract and finally closing the deal. A contract must outline the key terms and conditions of your purchase, ensuring that the buyer and the seller agree on all the terms stipulated in the contract.

The contract must also state vital information such as the final purchasing price, timeline for the transaction, and other important matters identifying who is responsible for what costs and other contingencies.

If you aren’t confident enough to draft or understand a contract’s legal terms, we suggest you seek legal advice from experienced restaurant attorneys to guide you through the legal process. 

Once you’ve drafted the contract and both you and the seller are amenable to all the terms stipulated in the contract, you can close the deal by signing the contract. 

8. Create A Reopening Plan & Open Your Restaurant

Infographics of Reopening Plan & Opening a Restaurant

The last step of the process of buying a restaurant is creating a reopening plan. As the new owner, you must develop a transition plan for the previous restaurant owner to ensure the restaurant business runs smoothly upon opening.

Establish good communication with the previous owners and keep them updated on the relevant information and any progress made on outstanding issues identified during the sale of the restaurant.

You must also consider important things before finally opening the restaurant, such as:

  • Creating a new name and concept for the restaurant,
  • Retaining or changing the previous staff of the restaurant,
  • Reinventing the menu,
  • Updating the signages, logos, and branding,
  • Renovating the place,
  • Reevaluating the costs of its operating expenses

If you have established the reopening and transition plans, then you are ready to open your new restaurant.

FAQs

u003cstrongu003eHow much should a restaurant be sold for?u003c/strongu003e

Restaurant investors and owners usually aim to sell their restaurants for 25-40% of their yearly operating income. [u003ca href=u0022https://www.investopedia.com/articles/investing/040715/how-much-would-buying-local-restaurant-cost.aspu0022 target=u0022_blanku0022 rel=u0022noreferrer noopeneru0022u003e2u003c/au003e] 

u003cstrongu003eHow much do I need to invest in a restaurant?u003c/strongu003e

FreshBooks.com reports that the cost to open a restaurant, factoring in all expenses, ranges from $100 to $800 per square foot on average. The amount varies depending on location, concept, size, materials, new or existing location, and equipment. [u003ca href=u0022https://www.lightspeedhq.com/blog/restaurant-startup-costs/u0022 target=u0022_blanku0022 rel=u0022noreferrer noopeneru0022u003e3u003c/au003e] 

u003cstrongu003eIs $10,000 enough to open a restaurant?u003c/strongu003e

It would be challenging to open a restaurant with $10,000 due to high expenses like rent, equipment, inventory, marketing, licenses, and staffing. Rent in prime locations can cost thousands per month, and equipment can be tens of thousands. 

u003cstrongu003eHow profitable is owning a restaurant?u003c/strongu003e

The restaurant business is known for its tight profit margins, with the average profit margin for a restaurant business being between 2% to 6%. [u003ca href=u0022https://smallbiztrends.com/2023/04/most-profitable-types-of-restaurants.html#:~:text=Restaurants%20can%20be%20profitable%2C%20but,between%202%25%20to%206%25u0022 target=u0022_blanku0022 rel=u0022noreferrer noopeneru0022u003e4u003c/au003e]

Wrapping Up 

In conclusion, the cost of buying a restaurant is around $500,000, but it can vary widely depending on several factors, such as yearly operating income, reputation, location, concept, size, and profitability. 

It’s essential to do thorough research, seek guidance from a financial advisor and a restaurant consultant, and develop a solid business plan to assess the potential costs and returns and make an informed decision when buying a restaurant.

References:

  1. https://corporatefinanceinstitute.com/resources/accounting/sellers-discretionary-earnings/ 
  2. https://www.investopedia.com/articles/investing/040715/how-much-would-buying-local-restaurant-cost.asp 
  3. https://www.lightspeedhq.com/blog/restaurant-startup-costs/ 
  4. https://smallbiztrends.com/2023/04/most-profitable-types-of-restaurants.html# 
Shari Mason

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