Why Not To Buy A Business: Lessons from Almost Buying a Restaurant

This might be a personal story, but there’s a reason why I almost made a big mistake by nearly buying a restaurant early in my acquisition journey. While it seemed like a good opportunity, several red flags ultimately convinced me not to go through with the purchase. Here are some reasons why not to buy a business, taken from my own life--especially one outside your area of expertise.

Why Not To Buy A Business: The Initial Appeal

The restaurant was close to my house in Napa, which was a big draw. It had historically decent numbers and survived through COVID, being a breakfast and lunch-only spot in a prime location. Napa is a beautiful town, known for its wine and food, and owning a business there opens up a lot of doors.

The idea of getting into that community was appealed to me.

The Numbers Looked Good

The restaurant was doing a couple hundred thousand dollars net annually, and the price seemed reasonable at first glance. It was a downtown spot, which added to its appeal. On paper, it looked like a profitable venture.

However, numbers can be deceiving and provide an excellent reason not to buy a business sometimes. Make sure you know the difference between good numbers and deceptive ones.

The Red Flags

However, a couple of major issues made me reconsider. Firstly, the restaurant was using patio space that wasn’t legally theirs. During COVID, the landlords allowed this usage, but they made it clear that this arrangement would not continue once the lease was signed.

This outdoor space was crucial for the restaurant's appeal and revenue.

Secondly, the rent situation was problematic. The current owner had a sweetheart deal with the building owner for 20 years, with no rent increases. This meant that the numbers I was looking at were based on an artificially low rent.

Once the lease was renewed, the rent would jump four to five times, obliterating the profit margin.

The Decision to Walk Away

These issues, especially the impending rent hike, made the deal untenable. The SBA requires a ten-year lease, and the restaurant’s viability hinged on staying in its current location. Moving elsewhere in Napa wasn’t an option due to the high costs and the unique appeal of the existing spot.

Womp.

Lessons Learned

• ‍Understand the Lease Terms: Always scrutinize the lease terms and understand how they affect the business’s profitability. Hidden costs can turn a seemingly good deal into a financial disaster.
• ‍Know Your Expertise: Stick to industries you understand. I’m a tradesman, not a restauranteur. My skills and interests lie in mechanics and fixing things, not managing a restaurant.
• ‍Verify Revenue Sources: Ensure that the revenue sources are legitimate and sustainable. The restaurant’s use of unauthorized patio space was a significant red flag.

Conclusion

Reflecting on this experience, I’m happy I didn’t buy the restaurant. It wouldn’t have suited me or my expertise. For those looking to buy a business, remember to thoroughly investigate and ensure it aligns with your skills and long-term goals.

Remember: The reasons why not to buy a business sometimes outweigh the need to buy over build in acquisition land.

For more insights on business acquisitions and growth strategies, visit Owned and Operated. Good luck, and happy hunting!

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