Thinking about buying an existing restaurant for sale but aren't sure about how to get funding? Then you've come to the right place. In this article I will go over which funding options are available to you and what the lending institutions look for when qualifying both you and the restaurant. I'll also touch on a couple of alternative financing options that can help you bridge any funding gaps you may have.
I'd like to start by saying that getting pre-qualified by a specialist for restaurant purchase financing before you even start looking at establishments for sale is extremely important. Over the years I've had many client's come to me only after they tried to get financing from a bank or lending institution first and found that the process took too long and as a result they ended up missing out on a restaurant they really wanted to buy.
Not only that, but they also were out all the fees associated with vetting a business for sale: some buyers up to almost $8,000 in expenses for due diligence & investigative consulting, business and real estate appraisal fees, attorney fees and more! In my opinion, getting pre-qualified by a restaurant financing specialist is a must and it will save a lot of time and money (and possible lost deals in the process).
Sources of financing for restaurant purchases:
Many banks and financial institutions can be wary about funding any small business purchase. Restaurants are particularly risky and not all banks or financial institutions offer loans for such purchases. Because of this, I've found over the years that you are better off approaching a smaller, local or regional bank or financial institution that is familiar with you as they are more likely to offer financing for local restaurant purchases and at better rates than the bigger national banks. I've also found that bigger banks tend to take a longer to approve financing than some of their smaller counterparts. They key here is to go to "the right person" at "the right financial institution"!
However, I personally have been able to secure financing for restaurant purchases for my clients from both large and small lending institutions from all over the country. So, even though trends say a smaller, local institution is a better bet, in reality geography and size doesn't necessarily matter in all cases. For example I might get the perfect restaurant financing for a restaurant buyer in Texas from a regional lender in California (who has an appetite - no pun intended - for such deals).
The first loan option I would like to discuss is SBA loan financing. This type of loan is great for both the buyer and the lender because the government guarantees a percentage of the loan. They also come with longer repayment terms than a conventional bank loan as well as favorable rates and lower down payments. Banks love these types of loans because they know they are not on the hook for the entire loan amount and buyers love them because of the favorable terms, rates, (and speed if you go to the right person at the right financial institution).
A couple more things on SBA loans that you should be aware of:
Many SBA lenders require restaurant experience to qualify for financing to buy a restaurant.
There are lower and upper limits on SBA loans. Most banks have a lower limit of $150,000 while the upper limit varies, but is usually between $4 million and $5 million depending if your are purchasing real estate along with the restaurant.
The next type of loan I'd like to discuss is conventional loans. These types of loans are perfect for people who have great credit (over 700 credit score), 30% or more to put down, enough collateral to cover pretty much the entire loan and plenty of work related restaurant experience. The downside to these types of loans is that they are extremely difficult to get even with great credit, they usually come with higher interest rates and less favorable repayment terms than an SBA loan as well. Also, in most cases you will have to put up your home or other properties or assets as collateral on the loan. The business itself also has to be extremely, financially healthy in order to pass the banks requirements in most cases (the cash flow from the financials/tax returns of the restaurant will have to demonstrate that there will be funds to pay the debt service of the loan).
Qualifying for restaurant loan/financing:
There are two elements to qualifying for a business purchase financing loan (1) qualifying the buyer and (2) qualifying the restaurant. Each process is different and so are each lending institution's standards.
When the lending institution qualifies the buyer they are looking for:
- Business experience (Resume covering work history for last 5 to 10 years - depending on the lender requirements)
- Cash for the down payment (Personal bank statements will need to be provided)
- Collateral to cover the loan(a Personal Financial Statement detailing personal income, assets, liabilities.)
- Good Credit (Any bankruptcies, personal or business, require detailed explanations.)
When the lending institution qualifies the restaurant they are looking for good financial health. To determine this they will want to look at the following:
- Complete business/restaurant tax returns from last 2 to 3 years.
- Profit and loss (P&L) statements for the last 2 to 3 years.
- Interim financials for the current year up to within a couple months from the closing date.
- Current balance sheet
- List of assets and liabilities
These items mentioned here are not a complete list of everything you will need to present to the lending institution in order to complete the application process. They are however what they bank will want to see in order to determine the financial health of both you and the restaurant you are looking to purchase.
Here are some alternative forms of financing. While these options won't, in most cases, allow you to fund the entire purchase of a restaurant, they will be able to help you cover the down payment or close any funding gaps that may remain after you are approved for one of the loans mentioned above.
Many of my clients utilize this strategy for their down payment or cash injection into a deal. How this option works is simple. The law allows you to roll over a portion of your retirement funds from your 401K, or personal IRA, into a company you've created specifically for buying your restaurant. You will incur no early withdrawal penalties when using your retirement funds for this purpose if you utilize the right vendor for this option.
In today's lending environment you rarely see a restaurant / business for sale transaction that doesn't include some amount of seller financing. Seller financing is usually used to bridge the gap with traditional SBA and conventional loans. These loans work as follows: A seller will provide a loan to the buyer (usually between 20% and 50% of the total purchase price) at an agreed upon interest rate. The buyer will make a down payment usually between (15% and 25%) and then make monthly payments over a specified period of time agreed to by both parties.
Purchasing an existing restaurant for sale can be a good investment. Annual sales in the restaurant industry were $783 billion last year. In 2016 the restaurant industry comprised 47% of the family food dollar. It was only 30% just a few decades ago. The national average for projected restaurant sales growth this year is 5%. One of the states with the highest actual restaurant sales growth in 2016 was California with $79 billion. According to a recent survey 90% of Americans enjoy going to restaurants, compared to 66% who enjoy going to grocery stores, and 56% of adults say they would rather spend money on an experience, such as a restaurant, compared to purchasing an item from a store.
The food and beverage industry is literally one of the oldest in the world and will be around as long as people have to eat and don't feel like, or have the time to cook for themselves. If you have what it takes to run one successfully you can make a good living, create a legacy for yourself and leave something of value to your children and grandchildren.
If you're interested in purchasing a restaurant I highly suggest you get "Professionally Pre-Qualified" for restaurant purchase financing before you start your search to buy a restaurant or agree to a business purchase agreement contract.
About The Author: For over 25 years Peter Siegel, MBA has provided niche business purchase financial advisory and loan broker services with SBA Loans, Non-SBA Loans, Retirement Plan Conversions, Hard Money, Gap/Bridge Financing, Note Restructures, etc. He assists with financing for: Business Purchases, Business With Real Estate Purchases, Franchise Resale Purchases, New Franchise Purchases, Pay Off Existing Seller Notes, Partner Buyouts, Employee Buyouts. Peter Siegel can be reached direct toll free at 888-983-1632 regarding getting professionally pre-qualified, and receiving advisory & loan placement services.