Should you buy a restaurant?

Why do restaurants sell for a low multiple?

A multiple is what buyers pay for each dollar of profit. In the BizBuySell data, restaurants at 2.15x sit close to hair salons at 2.04x and well below car washes at 4.99x. Buyers pay less because more can go wrong:

• The owner is often part of the labor. SDE includes the owner's pay. If the seller works the line or runs the floor full time, you must replace that work, with your time or a salary.
• The concept can depend on one person. A chef or owner with a following may take customers along when they leave.
• The lease controls the business. Lose the location and you lose most of what you bought.
• Equipment wears out, and kitchen repairs are expensive and urgent.
• Margins are thin. Small changes in food cost, wages or rent move profit a lot.

A low multiple is not automatically a bargain. It is the market's price for those risks. Your job is to find out which of them apply to this restaurant.

What is in the price, and what should you verify?

Ask what the price includes before comparing it to anything:

• Equipment. Get a list and confirm who owns each item. Some kitchen equipment belongs to the landlord or is leased from a vendor.
• Inventory. Food and beverage stock is usually small, but confirm whether it is included or counted at closing.
• The name, recipes and website. Confirm they transfer, especially if the seller keeps another location.
• The liquor license, if any. Transfer rules vary by state and approval can take months.

Then verify the profit. Compare point-of-sale reports, bank deposits and tax returns for at least 24 months. Check food and beverage purchases against sales. If the seller says cash sales were not reported, a lender will not count them, and you should not pay for them. See how to value a business with unreported cash income.

What should the lease say?

For most restaurants, the lease is the most important document in the deal. Before a letter of intent, check:

• Term. The remaining term plus renewal options should cover your 10-year SBA loan. Lenders generally look for this. Confirm with yours.
• Assignment. Whether the landlord must consent, and what it can demand in return, such as higher rent or a new personal guarantee.
• Rent. Base rent, scheduled increases, common-area charges and any percentage rent tied to sales.
• Use clause and exclusives. Whether you can change the menu or concept, and whether the landlord can lease next door to a competitor.
• Personal guarantee. Most landlords will ask for one. Know what it covers and for how long.

Our article on what happens to the lease when you buy a business covers assignment in detail.

Licensing and permits

Health permits are often issued to the operator rather than the business, so you may need a new permit and inspection in your name. Rules vary by state, county and city. Ask the local health department before closing. Check recent inspection reports, fire and occupancy permits, and any open violations.

If the restaurant is a franchise, the franchisor must approve you and usually charges a transfer fee. For an SBA loan, the franchise must be on the current SBA Franchise Directory. See franchise resale or independent business.

Worked example: easy coverage, fragile profit

Illustrative numbers for a restaurant where you will work as the general manager:

1. SDE: $180,000. Price at 2.15x: $387,000.
2. Add $15,000 of working capital and $20,000 of fees and closing costs. Total project cost: $422,000.
3. Minimum equity injection at 10%: $42,200. SBA loan: $379,800.
4. Annual debt service over 10 years at an assumed 10% rate: about $60,200.
5. Subtract a $60,000 salary for you. Cash available for debt service: $120,000.
6. Coverage: $120,000 divided by $60,200 is about 1.99x. That clears the 1.25x test easily.
7. Now assume SDE falls 30% after the seller leaves, to $126,000. Cash available: $66,000. Coverage: about 1.10x. You are paying the loan with almost no cushion.

The low multiple makes the bank's test easy. It does not protect you from the risks that caused the low multiple.

Where these numbers come from: Restaurant, hair salon, car wash and all-sector SDE multiples are BizBuySell data for 2021 to Q1 2026 as summarized by Beancount. The 10% injection, 10-year amortization, 1.25x coverage test and Franchise Directory requirement are SBA rules under SOP 50 10 8.1, summarized by Beancount. The 10% rate is the SBA maximum variable rate for loans over $350,000 with prime at 7% in September 2026, per NerdWallet. Check current prime. SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).

Related questions

Can I own a restaurant without working in it?

Some owners do, but it means paying a general manager out of SDE. Run the coverage test with that salary included. If the deal only works when you work the floor, plan your life around that.

Is a franchise restaurant safer than an independent one?

A franchise brings systems and brand recognition, plus royalties, transfer approval and rules on how you operate. It reduces some risks and adds others. Compare the verified cash flow after royalties.

Should I buy a restaurant to convert to a new concept?

Then you are buying a location and equipment, not a business. Price it as assets plus the lease, not as a multiple of the seller's profit. Confirm the lease's use clause allows the change.

What comes next

The restaurant example shows why the multiple alone does not tell you whether a deal is good. Read how to tell a good deal from a bad deal to apply the full test.

Related articles

• What should you know before buying a liquor store?
• Which "boring" businesses are worth buying?
• What happens to the lease when you buy a business?
• How do you tell a good deal from a bad deal?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.