What Could Possibly Go Wrong?
You know the restaurant business. That’s why you’ve decided to buy one. As you lean into the all-too-brief due diligence phase of your acquisition, the state of the equipment that’s part of the deal might seem like the least of your worries.
With closing contingent on the equipment and facilities being up to snuff and conveyable to you at the beginning of your term as tenant, if something’s broken, it will get fixed, right?
Maybe. You’re essentially buying a submarine loaded to the limit with literally tons of volatile gas-fueled and high-voltage industrial machinery, pushed to capacity six days a week by an ever-changing string of untrained, undersupervised bodies.
“The hiss and clatter and spray of the dishwasher, the sizzle as a fillet of fish hits a hot pan, the loud, yelping noise–almost a shriek–as a glowing sizzle-platter is dropped into a full pot sink, the pounding of the meat mallet on a côte [de] boeuf, the smack as finished plates hit the ‘window'”–Anthony Bourdain, Kitchen Confidential
The lifespan of most restaurant equipment is about three times that of the average restaurant. It can depreciate faster than a car pulling out of the lot. But many a seller of a failing business may see it as a last chance to get back what they’ve lost over the years.
How much risk are you prepared to manage?
The provenance, specs, and condition of the physical restaurant are significant factors not only in determining the price you’ve agreed on for the business but in its success once you’ve taken over.
Along with the business’s strength of revenue, strength of earnings, lease and location, the details of the equipment, furniture, and facilities you’re buying determine the valuation multiplier applied to the asking price.
According to Mel Jones, president of the national firm Paramount Restaurant Brokers, Inc., this measure is pretty straightforward. “Is the facility in great shape or worn-out? Is the equipment well maintained, or falling apart. If you walk into a restaurant that’s clean, it usually indicates things are taken care of. Score is high if the facility looks great as well as the equipment.”
But think beyond closing for a moment. Whether your intent is to clear the space and fit it out your way or to operate within the existing layout, there is a world of detail to be grasped that is specific to your restaurant’s physical setup. The due diligence period is your opportunity to make sure that what you’ve agreed to buy matches reality–down to the wire.
Who You Gonna Call?
For a first pass, you’ll want to secure the services of a general contractor or building inspector to assess the functionality and longevity of the facility’s main systems: HVAC, electrical, refrigeration, and plumbing. That’s a no-brainer. In many jursidictions, it’s a legal requirement for obtaining a business license, and the downside of skipping this step is clear to most.
Though equally important, equipment inspection is not always seen that way, however. Maybe it’s the sheer profusion of stuff. Besides prep and cooking equipment, there’s everything used for storage, service, cleaning ….
Are you the right person to corroborate all the detail that represents? Probably not. Once the deal is done, do you pick up the tab for broken parts? Employee injuries? Lost business? Indeed you do. So?
Stick with the Pros
Already, a small cloud of appraisers, consultants, and advisors, licensed and un-, has probably formed around your business deal, each offering considered opinion based on considerable experience in real estate, construction, finance, and of course restaurants. Since you are on the hook for this, make sure the professional you hire is the right kind.
Home inspectors charge roughly what equipment inspectors do and may be able to give you certain information about some of your hardware and infrastructure. But can they estimate fire-control system repairs? Source replacement controls for out-of-production icemakers? Spot a weak gasket behind a rangetop? If they can, will they, like a building inspector, issue you a report to that effect, including a cost breakdown of repairs? Bottom line: this is no job for “Joe Inspector.”
Tasks for Inspector Inspector
If you’re using a certified restaurant broker, ask them for at least two referrals. Otherwise, a good place to start is the CFESA (Commercial Food Equipment Service Association). Their technicians are trained in the overall food equipment system, equipment repair procedures and precautions, the national codes that cover gas, electricity, refrigeration, and steam power, plus the regulations of the National Sanitation Foundation and the American Gas Association, to diagnose and repair according to manufacturers’ specs, “trace the effects of a system,” in the CFESA’s language, and communicate with factory engineers to resolve problems.
You might also use an inspector to verify the status of service agreements for the mechanical systems and water lines, sewage lines, and grease traps.
Again in situations where you are using a restaurant broker for your purchase of an operating business, note that you may be bound by a confidentiality agreement to make sure an inspection doesn’t tip off staff to an impending sale. It would be your responsibility to schedule the inspection to take place during off hours by a discreet technician prepared to cover for you, the buyer, with a tactful word if necessary.
Meanwhile, some of the detective work can be undertaken by you.
Tasks for Kato
Back up the paid inspection with your own three-step routine.
Record of Repair
Find out who the owner uses for repairs. Contact them and ask how many times they’ve serviced the account over the past year. Have they recommended fixes that haven’t been done?
Verify with your state that the equipment is owned by the business. If not, is some or all of it leased through a creditor? Month to month or longer term? Is there a lien on it? You will have to secure assignment of all equipment leases–and if that happens, it’s on you to transfer those accounts into your name at close of escrow. Make sure you understand who gets the gear when the lease is up.
Right before the close of escrow, fire up all the equipment to make sure it’s running right. The seller should undertake repairs or issue you an appropriate credit in escrow.
When the Deal Is Done
In their book Appetite for Acquisition, restaurant brokers Robin and Eric Gagnon of WeSellRestaurants shrewdly point out that without existing service contracts on your equipment, calls you place in an emergency may go to the rear of the line, behind the company’s regular customers. They therefore advise nailing down maintenance contracts in the first hundred days of operation with companies that service sprinklers and fire extinguishers; HVAC; fryers and coolers; pest control systems; grease trap cleanout; plumbing; electrical; point-of-sales systems; and anything else that could malfunction.
As you know, if it can, it will, during Sunday brunch on a holiday weekend.