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Restaurants: the right time to buy?

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Restaurants: the right time to buy?
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If you’re planning to buy a restaurant, now could be a good time, as property values are 30% lower than they were two years ago. Ben Walker outlines the steps you need to take to secure a successful purchase.

Restaurant property values have fallen by about 30% from their peak in the first quarter of 2008, according to licensed property specialist Christie & Co’s restaurant price index. This would suggest that now is a good time to buy, since vendors’ expectations are more realistic and asking prices are negotiable.

At the corporate end of the market, after a quiet 18 months during which most national operators focused on paying down debt, raising new funds and streamlining their operations, groups such as Gondola, Tragus, Prezzo, Clapham House and Carluccio’s are now back on the acquisition trail and in many cases pushing hard bargains.

“In the current climate, everybody is negotiating harder and many corporate operators are not willing to pay premiums,” explains Carl Steer, associate director at Christie & Co’s Milton Keynes office.

At the same time, the lack of transactional activity has left the door open for fledgling brands, such as Jamie’s Italian, to gain market share.

“Whenever a new brand comes along, it’s fresh in people’s minds. They [Jamie’s Italian] are probably paying a little bit more because they want to get as many sites as they can while the brand is still new. Such companies tend to have a very flat management structure and many landlords will be contacting them directly because they know they’re well-funded and can act quickly,” Steer says.

Nigel Gillingham, partner at property agent Knight Frank, acted for the landlord of the Canary Wharf Jamie’s Italian. He says demand for prime sites in key locations such as London, Manchester and Birmingham remains strong, allowing vendors to command a premium.

Since its first opening in Oxford in June 2008, the Jamie’s Italian chain has continued to expand throughout the recession. New openings this year in Cambridge, Reading, Leeds, Liverpool and London will bring the total to 11 restaurants.

Richard Negus, head of the restaurant division at chartered surveyor Fleurets, agrees that demand for well-located 3,000-3,500sq ft units remains high and premium values have recently been paid, with one unit at the O2 Arena, east London, going for £750,000 and another in Reading’s Oracle shopping centre for £1m.

In the private restaurant market there is always a certain level of churn, but the volume of restaurants for sale has fallen in some parts of the country by as much as 50% compared with 2008. Good-quality businesses, which are not under pressure to sell, are not coming to market. The willingness to pay a premium (which includes goodwill) on a leasehold private restaurant is arguably less compared with the pub or hotel sectors since the vast majority of new restaurateurs want to start afresh and stamp their own identity on the premises.

“Existing staff have to be offered TUPE* by law but when a restaurant changes ownership it’s quite usual for the chef and all the staff to leave,” Steer says.

Some prospective buyers have been looking for a suitable property for up to three years and demand is far outstripping supply in many parts of the country.

“In the private market we’ve had 10 months of solid interest. Enquiries have been consistently up,” Negus adds.

“The problem is that the banks are still not very supportive; they will only lend to people with a good track record, existing businesses and a large deposit or other security.”

There are plenty of fully fitted units available for £200,000 to £300,000, many of which are advertised as leasehold and contents or nil premium, including disposals by Pizza Hut, Pizza Express, Tragus and The Restaurant Group. According to Steer, such units could present opportunities for private owners who are confident of achieving a weekly turnover of £8,000 to £10,000 with their new ventures.


BUSINESS PLAN

The first step to a successful purchase is your business plan. In the current climate, it is more important than ever to avoid replication. You do not want to be just another “me too” restaurant on the high street. In order to gain bank funding you will need to have some very persuasive answers to the following questions:

  • Why do you want to buy a restaurant?
  • What will be your unique selling point?
  • Who will be your target market?
  • How do you expect to achieve your forecast sales?

Once you have established your business model and plan, the next step is assessing your accommodation requirements and accordingly matters such as: number of covers, floor space for kitchen/storage, footfall, parking and cook line, and accommodation will be important.

With leasehold properties, it cannot be assumed that you will be able to alter the premises to suit your purposes, as the landlord’s consent may be required. Similarly, with older listed buildings, planning restrictions may prohibit alterations.


FUNDING

“If you can’t afford it, you’re not going to get anywhere in the current market,” Steer says.

Funding will be essential to any purchase as well as getting your business started. Go to your bank or lender and explain your business plan. A letter from your lender providing an in-principle proof of funding will demonstrate your seriousness.

Steer advises using an experienced specialist licensed broker, such as Christie Finance, who will be able to adjust your business plan to make the bank see you in the best possible light. A broker may also be able to source three or four in-principle funding decisions and then pick the best one for your needs.

With your business plan and in-principle proof of funding you will make a favourable impression on agents who will be more likely to tell you about any off-market opportunities, giving you an advantage over other prospective buyers.


LOCATION

Finding the right site is the next step and is probably the most important part in the process. As with all property, “location, location, location” will be the dominant factor affecting your decision.

Once you have found your site, do your homework. Understand and visit the existing and future competition. Check if there are any new applications submitted to the local authority for new restaurants. Understand how the traffic (car and pedestrian) flow works and if alterations are proposed. Investigate future developments regarding roads, pedestrianisation, and car parking, which may alter the attractiveness of the location to your customers.


EXPERT ADVICE

Once you have done your homework, you will need to understand what you are buying.

“Find a specialist licensed property solicitor and travel to find one if you have to,” advises Steer.

“They will explain the details of the lease in plain English and protect you from the pitfalls of buying the wrong lease.”

Next it’s time to negotiate the price with the vendor. At this point you may seek valuation advice.

“Your lender will require a valuation by an independent firm of chartered surveyors, but ultimately the value of the lease and contents, will be the true worth to you as the restaurateur,” says Negus.

The guide price quoted by the selling agent is exactly what it says: a guide. Whether the restaurant’s value exceeds or falls short of the guide, will depend on timing, interest from other parties and whether the agent has marketed the property to prospective purchasers. This is where your negotiating skills come into play and it could be worth you utilising the services of the surveyor to help negotiate.

The “best price” is not always the highest value, but factors such as ability to proceed quickly, proof of funding, a valid business plan, and the ability to fund up to a six months rent deposit, will all add weight to your bid.

* The Transfer of Undertakings (Protection of Employment) Regulations, which protect employees if the business in which they are employed changes hands.


CASE STUDY: PARADOR RESTAURANT, REIGATE, SURREY

Acting on behalf of private clients, Christie & Co has sold the leasehold interest of the Parador restaurant in Reigate, Surrey, to experienced local operator Nazma Groves, for an undisclosed sum, off an asking price of £265,000.

Located in a prominent position in the town’s High Street, the 125-cover restaurant and bar specialises in authentic Spanish dishes and has built up a strong local trade.

Groves also owns Le Gourmet tapas restaurant and bar in nearby Horley. She plans to improve both the menu and service of the Parador, and create a new website where people can view the restaurant, look at some of the dishes on offer and make bookings online.

Kevin Chapman from Christie & Co’s Maidstone Office said: “The current economic climate has meant that many deals across all sectors are taking longer to complete than normal, as was the case with this popular restaurant.

“However, we are delighted that we were eventually able to find an established local operator for this well-located, quality business.”


TIPS ON BUYING A RESTAURANT

Know your point of difference
Have a clear understanding as to your restaurant’s offer and what will make it different to the local competition – ie, better service, better ambience, coldest Indian beer in town, cheapest meal, best quality, etc.

Know your market
Make sure your offer supports the local demographics. Understand local spending habits, traffic movement and competition, etc.

Get financial support
Have your business plan prepared and fine tuned. Discuss it with your bank and with other restaurateurs, and have a contingency plan in case things don’t work out.

Staffing is key
Selecting the right back-of-house and front-of-house teams will ensure the delivery of your “offer” and is therefore essential. Have in mind the key members of your team long before you contemplate opening your restaurant.

Get professional help
With so many other considerations, employing a valuer, solicitor and surveyor experienced in restaurant properties/transactions will enable you to concentrate on the business.

Source: Fleurets

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