Board Topic: Financing the purchase of restaruant
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Financing the purchase of restaruant

Posted by: Gwen Oct 18 2004, 06:08 PM
Hi! I am currently interested in purchasing a resturant/bar, but am unsure of how to go about financing it. It is already an extablished buisness, and the current owner is only selling it because he is ready move south and has no children to take care of it for him. Me and my husband would like to purchase it, but are unsure of how to go about it and what steps are necessary to start the process. The asking price is around $275K, do you know if this would still qualify for a small buisness loan? I appreciate any advice that you may be able to give us.

Posted by: loanuniverse Oct 19 2004, 10:09 AM
The $275K is definitely within the limits of what is considered a small business loan. If I were in your position, I would look at this from the following angles.

1- First, I would like to know if the deal involves any real estate or if it is just for the business. If the deal does involve real estate, then you are probably best served by splitting your requests into two parts {a real estate one, which will be easier to finance due to the tangible collateral}, and {the business acquisition part, which will be very hard to get financing due to the fact that it is a restaurant}.

2- Established business = ”good”. This means that there must be financial information available. You are going to need to get a hold of the last three years because you want to know if the pricing is reasonable, and the lender will want to take a look at it.

3- Be weary of the seller telling you that the tax returns do not really reflect the revenue and profitability of the business. Unfortunately, it is very common on that industry to not report everything and cheat on the taxes. As a lender’s analyst, I have no sympathy for people like that, and base my analysis on the information that was reported, not the one that the borrower says it’s the “true”.

4- Valuation is very important. A business is valuated on cash flow. You might need to get the help of a professional to find out if the price is right.

5- Lenders do not like to lend to restaurants due to its large failure rate. Whether the failure rate is really higher than other industries can be debated, but the fact is that lenders just don’t like to lend to these businesses. Take this into account as I suspect that you will find many doors closed.

6- Knowing that lenders are going to be wary of this loan, it might be a good idea to broach the subject of seller financing. Especially if the portion of the money that you need for the actual business and not the property is small.

7- The value of the property will be the easiest one to determine {again, I am assuming there is a property involved} because there will be an appraisal. Therefore, my negotiation will concentrate on paying the least for the business itself, and getting an understanding that I would pay X for the property unless the appraisal comes in short and then I can use a lower appraised value to renegotiate.

8- If there is a property involved, you will need about 25% equity for that if you go with a mainstream bank lender. The loan for the restaurant will be difficult to get, but you will also need about a 25% equity for that also on a proforma basis {proforma means how the balance sheet will look after financing is done}

Good luck

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