Choosing Between Buying an Existing Restaurant and Starting your own

Advantages and Disadvantages of Independent Ownership and Restaurant Franchising

Posted by Michael Elkins the 16 January 2018

There are big pros and cons to consider when you're trying to decide whether to buy an existing restaurant, contract for a franchise or start your business from scratch. Ideally, most aspiring entrepreneurs want to do their own thing, but there are distinct disadvantages that include attracting a customer base, hiring employees, setting up training systems, generating cash flow and marketing the business.

It’s important to consider your goals, business experience, food knowledge and culinary skills. Franchises often provide training and equipment that make running a business easier, but nothing reduces the amount of work that restaurant ownership requires. According to Webrestraurantstore.com, risk factors vary depending on whether you buy a franchise or become an independent owner. Independent restaurateurs have lots of creative control but high levels of responsibility. Franchise owners need strong financial resources, and they cede control to the franchisor because it has a proven track record.

Buying an Existing Restaurant

Buying an existing restaurant can ensure that you have an established customer base and instant name recognition. However, many existing restaurants don't have great reputation. It might be difficult or impossible to change that perception. Some have resentful employees which may be anxious about the change. The existing opening hours and culinary details might not suit your plans. It's fairly easy to change the hours and the menu but doing so could cost you customers and employees.

Research Your Restaurant Choice Carefully

It's important to consider why a restaurateur is selling the business. There are primarily two reasons: personal and business. Personal reasons include the owner's health, decision to retire or other personal issues such as wanting to work fewer hours with less responsibility. Business reasons include not making enough money, a changing neighborhood demographic that's eroding the customer base and a need for immediate cash.

The last reason can be worrying but not necessarily a deal-breaker. The first two business reasons for selling a restaurant are warning signs. Ask each prospect if you can review the books to determine gross sales, utility averages, payroll and profit. It's important to track whether sales and profits are holding steady, increasing or declining. If the owner refuses to open the books or intimates that the restaurant's actual income is higher than what's on the books, you should not consider buying the operation. Other critical issues to understand include:

  • Location, sales history and potential for growth
  • Detailed analysis of your business plan and financial resources to determine if they will work with projected profits
  • Consideration of whether a mortgage is an additional expense that's not covered in the restaurant's financials
  • Finding out how stable the neighborhood is and whether there are major construction plans
  • Meeting with the building's landlord, if applicable, and finding out whether he or she is amenable to a long-term lease

You're Going to Lose Some Customers and Employees

Even in the best of times, restaurant employees seldom show long-term loyalty, and a change in management always results in some desertions. Some customers have developed personal relationships with the owner and might not choose to continue their patronage unless you can establish a connection. You'll need a marketing and hiring plan to make up for inevitable attrition and for any expansion plan.

You might want to make some important changes - such as creating a new menu and changing prices using menu-engineering techniques - before taking over an existing restaurant operation. In an ideal world, the seller might agree to work with you for a short time to help you get to know the business better and meet the regular customers. However, many sellers prefer to keep the sale confidential as long as possible. You or the owner might not be comfortable working together, so you can't count on any help unless you specify it in the contract.

Choosing a Franchise Operation

Many aspiring restaurateurs are attracted to the idea of owning a successful franchise. Name recognition, dependable food and service, an established supply chain and a structured marketing program ensure that you hit the ground running. If you're successful, it becomes much easier to expand your business. Many franchise owners own more than one franchise. Franchisors now look for wealthy investors who can afford to develop multiple units, and if you're approved to buy a franchise, most franchisors will support your efforts to expand.

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Pros and Cons of Restaurant Franchises

The advantages of choosing a franchise include instant name recognition and proven sales. Traditional lenders look more favorably on franchise financing for the same reasons. You can verify the financials of other nearby franchises, and many of these owners will willingly share information about what to expect.

However, there are no absolute guarantees. Some franchises saturate the market so that you're competing with another franchise operation within just a few blocks in urban areas. Initial investments are often very high because all the equipment is standardized. Most franchisors provide extensive training and support, but these issues could make buying a franchise less attractive:

  • Dealing with local zoning regulations
  • Hiring staff for low-paid jobs typically generates a challenge to keep the restaurant staffed
  • Menus and operations that are competitive with minimal profit margins and dependence on doing a high volume in gross sales
  • Owner/manager work hours that are among the highest in the food industry
  • Lack of independence to choose suppliers and menu items
  • No choice of which POS system to use

You usually have to use a POS system that requires lots of hardware such as terminals, screens and printers. Most franchises offer drive-through-window service, so you'll have to budget for some astronomical equipment costs.

Before buying a franchise, it's important to study the financial, determine your territory and find out about any future plans to add franchises in your area. These operations could cut heavily into your customer base. Typically, franchise agreements will guarantee you an exclusive territory for a certain number of years.

Starting Your Own Restaurant

If you're struggling to finance a restaurant, you might not generate enough cash flow to survive the first few months after opening because you have no established customers. It takes time to build an identity and brand your restaurant with your targeted prospects. It's harder to obtain financing for an unproven concept and an inexperienced management team.

Your best option for starting your own restaurant is to research the location and neighborhood, estimate the costs of designing and equipping your restaurant and develop a solid business plan. In fact, you need a business plan no matter which restaurant option you choose. Fortunately, you can comparison-shop for your own restaurant and choose the most affordable suppliers, contract with local farms for farm-to-table service and choose a POS system that works for your budget and style of restaurant.

Check this blog for other considerations for starting a unique restaurant. These articles could also provide valuable intelligence for running a franchise or taking over an existing restaurant.

Marketing alone won't solve restaurant problems such as a neighborhood that's changing its character or a building site with poor access to your targeted customers. Marketing can generate additional profits, promote new revenue streams and give your fledgling business a jump-start. Fixing up an old place can breathe new life into an area if you can survive the time it takes to get established. There are many things to consider when deciding between a buying a franchise or established restaurant or using your own ideas to establish a unique restaurant.