How to Analyze a Restaurant for Sale

Restaurant acquisitions are the category where buyers most consistently overpay. The combination of thin margins, high labor requirements, complex operations, and short lease terms creates a due diligence challenge more demanding than most other small business types. Restaurants also attract buyers who are buying a lifestyle or a concept as much as a business — which creates the emotional vulnerability that produces bad deals.

The Restaurant P&L — What to Look For

Food Cost Percentage: Should run 28-35% of food revenue. Below 28% may indicate overpricing relative to the market. Above 35% indicates pricing is too low, waste is uncontrolled, or theft is occurring. A restaurant reporting 22% food cost on $1.2M in revenue warrants detailed investigation.

Labor Cost Percentage: Typically 28-38% of total revenue for full-service restaurants. Above 38% without above-market wages indicates scheduling inefficiency or overstaffing. Owner add-backs deserve particular scrutiny — model the replacement labor cost at actual market rates, not the seller's reported family compensation.

Occupancy Cost: Rent plus CAM plus utilities should ideally run 8-12% of revenue. Occupancy costs above 15% indicate the restaurant is overpaying for its space relative to volume — a structural problem that doesn't improve without a significant revenue increase or lease renegotiation.

Lease Analysis

The restaurant lease is one of the two most important documents in the deal. Restaurants require significant tenant improvement investment — kitchen buildout, HVAC, plumbing, electrical — that is non-portable. Key provisions: remaining term and renewal options, personal guarantee requirements, assignment provisions (can the lease be assigned to a buyer?), and rent escalations over the full term.

Revenue Verification

Request POS system reports for the past 24 months — they show total transactions, average ticket, covers per day, and shift-level revenue patterns. Compare POS data against the reported P&L and tax returns. Significant discrepancies require explanation. Sales tax filings are another verification point.

Chef and Key Staff Dependency

One of the most common post-acquisition failure modes is the departure of the chef or key kitchen staff after the sale. Meet the kitchen staff during due diligence. If the menu depends on recipes that exist only in the chef's head, negotiate a training period and recipe documentation as part of the transaction.

EBITDA Multiples

Red Flags

• Revenue declining in the most recent 12 months
• Food cost below 26% or above 38% without clear explanation
• Owner working 70+ hours per week with below-market compensation
• Lease with fewer than 5 years remaining including renewal options
• Key kitchen staff likely to leave with the owner