The somewhat bleak statistics published by accountancy firm Moore Stephens at the end of October indicate that one in five UK restaurants are currently at risk of going under as a result of increasingly difficult market conditions. 13% declared insolvency in the year ending March 2017.
Brexit uncertainty, a weak pound and changes in employment legislation have led to a hike in the cost of food imports (75% of the UK’s food is imported from the EU) coupled with spiralling staff costs. Add to that the fact that real household income has fallen by over 1% and it’s clear to see why some restaurants are struggling. Even big players, such as Jamie’s Italian, have not been immune to the squeeze on costs.
But, as always in business, one person’s misfortune has the potential to be another’s goldmine. If you’re looking to buy a restaurant business, are savvy, have experience of the hospitality sector, access to expert legal guidance from hospitality specialists and, crucially, are prepared to take a calculated risk, buying an insolvent restaurant could prove to be a shrewd investment.
Checklist for buying an insolvent restaurant
There’s typically more time pressure when buying an insolvent business – you’ll have to act quickly. However, the risks are high: it’s important to look before you leap.
The checklist below is by no means exhaustive but covers some of the key considerations before buying a failed restaurant business:
1. Identify the factors which caused the restaurant to fail
It’s not rocket science: to turn around a failing business you’ll need to first have an understanding of the underlying issues that contributed to the cash flow crisis – and calculate whether there are viable commercial solutions.
Focused due diligence is of paramount importance to identify the relevant issues. Quiz the administrator but understand that time will be of the essence: understanding which questions to ask is key.
The reasons for restaurant insolvency are many and varied but broadly fall within two categories: internal issues and external influences:
Most internal issues arise as a result of poor management, a catch-all term for any number of incompetencies including:
- absenteeism (illness or otherwise);
- failure to invest in staff training;
- poor customer service;
- bad planning;
- substandard working conditions;
- failure to thoroughly research the right product for the available market;
- poor communication;
- inadequate marketing;
- inefficient use of technology;
- poor commercial judgement;
- unresolved issues with major contractors;
- poor food/presentation/hygiene;
- unattractive premises
…the list goes on.
The good news for prospective buyers is that management issues can often be addressed and successfully turned around by those with more knowledge and experience – and an injection of cash.
No matter how organised a restaurant manager is, life has a nasty habit of throwing up unwelcome surprises beyond their control, for example:
- increase in local competition;
- local planning developments;
- new consumer trends;
- legislative changes;
- political and economic changes;
- rate and rent increases;
- environmental factors, etc.
Whilst it’s not always possible to anticipate such changes, it is a restaurant owner’s ability to respond and adapt that will dictate whether the business sinks or swims.
Those with creativity and commercial know-how are often able to develop workarounds that can transform a restaurant’s financial position. This might involve anything from a complete change of menu to the introduction of smart technology.
2. Be prepared to move quickly
If an opportunity to buy a failed restaurant comes your way, you’ll need to be extremely focused to make the deal work. The timeframe for completing the deal process will be considerably shorter than that of a normal restaurant sale.
3. Undertake a physical inspection
The information in sales particulars will not be guaranteed, or give a comprehensive picture of the state of the business, so a physical inspection of the property, assets and the quality of the stock is recommended. Check that the administrator has been properly appointed and has the authority to sell the assets.
4. Check for secured loans
Ensure that appropriate releases are obtained from any banks or creditors who have debentures or legal charges over any of the restaurant’s assets.
5. Analyse the workforce
One of the riskiest areas when buying an insolvent restaurant is taking over the workforce. In certain circumstances, the liabilities attaching to employees will be so substantial that they outweigh the commercial advantages of going ahead with the purchase.
The legislation relating to the transfer of employees (‘TUPE’) is complex. Seek legal advice.
6. Be clear about property arrangements
If you want or need to carry on trading in the existing business premises, you must check the property arrangements. It may be necessary to negotiate separately with a third party landlord to ensure continuity.
7. Don’t expect a watertight legal contract
You have to remember that you are buying the business from the administrator, not the previous business owners. The administrator will not be prepared to accept personal liability for anything and will not guarantee legal title to the assets. As a result, you will have to take a commercial view on some parts of the deal.
Taking advice from an experienced business solicitor will help ensure key points are checked and risks highlighted and thoroughly understood. The level of risk you take on should be reflected in the price you offer.
8. Don’t expect to be able to make any claims after the event
In a normal business sale transaction, warranties, indemnities and completion accounts are used effectively to adjust the price if there is a post-completion problem. These provisions will not be available in any insolvent situation. Put simply, the buck stops with you.
Make a free enquiry
The sooner we become involved in the process of helping you to buy an insolvent restaurant business, the better understanding you will have of the associated risk and the more likely it is that your purchase will be successful.
Our full contact details can be found on our Contact Us page.
We look forward to hearing from you.