Buying an Existing Restaurant: How to Finance the Acquisition

Buying an existing restaurant offers advantages over starting from scratch: proven concept, established customers, trained staff, working equipment. But financing an acquisition is different from financing a new venture. Lenders evaluate both you and the business you are buying.

This guide covers how to structure and finance a restaurant acquisition successfully.

How Restaurant Acquisitions Are Valued

Restaurant valuations typically use these methods:

• Multiple of earnings — Most common. Restaurant value = annual adjusted net income (seller discretionary earnings) × multiple. Multiples typically range 1.5x to 3x for independent restaurants.
• Asset-based — Value of equipment, inventory, leasehold improvements minus liabilities. Floor value for struggling restaurants.
• Revenue multiple — Less common. Value as percentage of annual sales (typically 30-50% for restaurants).

Example: A restaurant generating $180,000 in seller discretionary earnings might sell for $360,000-$540,000 (2x-3x multiple) depending on lease terms, location, concept strength, and market conditions.

Best Financing Options for Restaurant Purchases

Ranked by cost and terms:

• SBA 7(a) loan — Best option for most acquisitions. Up to $5M, 10-year terms, typically 10-20% down payment required. Rates: Prime + 2.25-2.75%. The SBA specifically supports business acquisitions.
• Seller financing — Seller carries a note for part of the purchase price. Often combined with bank/SBA financing. Terms negotiable.
• Conventional bank loan — Available for strong buyers with banking relationships. Often requires more down payment than SBA.
• ROBS (401k rollover) — Use retirement funds as equity. Complex but allows using your own capital without early withdrawal penalties.

Typical Deal Structure

Most restaurant acquisitions combine funding sources:

• Buyer equity — 10-20% of purchase price in cash.
• SBA or bank loan — 60-80% of purchase price.
• Seller note — 10-20% of purchase price, subordinate to bank debt.

Example: $400,000 restaurant purchase

• Buyer down payment: $60,000 (15%)
• SBA 7(a) loan: $280,000 (70%)
• Seller note: $60,000 (15%), 5-year term, 6% interest
• Monthly debt service: approximately $4,200 (SBA + seller note)

What Lenders Evaluate

For acquisition financing, lenders assess:

• The business: Cash flow, trends, lease terms, equipment condition, customer base.
• The buyer: Industry experience, management capability, credit history, equity contribution.
• The deal: Purchase price reasonableness, transition plan, working capital adequacy.
• The lease: Term remaining, transfer provisions, rent-to-revenue ratio.

Due Diligence Checklist

Before committing, verify:

• Financial verification — Tax returns match claimed revenue. Review bank statements.
• Lease review — Assignability, term remaining, rent increases, landlord approval process.
• Equipment assessment — Age, condition, remaining useful life of major items.
• Health inspection history — Recent scores and any violations.
• Employee situation — Who stays? What are their wages and tenure?
• Licenses and permits — Transferability of liquor license, health permits, etc.
• Liabilities — Pending lawsuits, tax issues, outstanding debts.
• Vendor relationships — Payment history, existing contracts, any disputes.

Example Deal: Profitable Neighborhood Restaurant

The opportunity: An Italian restaurant in a suburban strip center. Owner retiring after 12 years. Annual revenue $950,000, SDE $175,000. Asking price: $425,000.

The buyer: Assistant manager at an upscale restaurant for 5 years, previously line cook. Good credit (705), $80,000 available for down payment.

Financing structure:

• Purchase price: $400,000 (negotiated down)
• Buyer equity: $60,000
• SBA 7(a) loan: $290,000 at Prime + 2.5% for 10 years
• Seller financing: $50,000 at 6% for 5 years, deferred 6 months
• Monthly payment: $3,850 (SBA) + $970 (seller note after deferral) = $4,820

Why it worked: Strong cash flow coverage (SDE covered debt service 3x), buyer had relevant experience, seller agreed to 60-day transition support, favorable lease with 7 years remaining.

Mistakes to Avoid

Common acquisition financing errors:

• Overpaying based on potential — Value the business as-is, not what you think you can make it.
• Underestimating working capital — You need cash for operations beyond the purchase price.
• Ignoring the lease — A bad lease can doom even a good restaurant.
• Skipping due diligence — Every problem you find after closing is your problem.
• No transition plan — How do customers, staff, and suppliers learn about the change?

Buying an existing restaurant can be an excellent path to ownership with lower risk than starting new. The key is proper valuation, thorough due diligence, and financing that leaves adequate working capital.

Liminal can help you compare acquisition financing options from SBA and conventional lenders. Our marketplace is free, takes about 2 minutes, and shows you offers without impacting your credit score.