When we carry out restaurant due diligence for an acquisition or an investment, we look at how the business really works: the site, the front-of-house and kitchen operation, the cost structure, the team and the brand’s ability to replicate itself. The accounts tell you what has happened. The operation explains why it happened, and whether it can keep happening under a new owner.
Why operational due diligence starts in the dining room
Financial due diligence reviews the accounting information, the contracts and the tax and employment risks. It is essential, and specialists carry it out. Operational due diligence complements it: it checks that the numbers on the balance sheet have a sustainable business behind them.
At Link Capital we do this with the operational backing of Linkers, and that changes the way we look. Anyone who has run businesses in the sector knows that a healthy EBITDA can rest on an owner who is at the pass every day, on an old lease that is about to expire or on a chef with no intention of staying. None of that shows up in a profit and loss account.
That is why it pays to start before opening the data room: get to know the place as a customer, at different times of the week, and watch the service with the attention of someone who has stood on the other side of the bar.
The site: the asset you cannot move
Site quality is one of the five factors we use to value a hospitality asset, alongside brand strength, cost structure, management team and the ability to replicate the model. In a restaurant, the premises shape almost everything else.
We look at the street and its footfall at different times of day, the visibility of the frontage and the competition around it. We read the lease carefully: term, rent reviews, assignment clauses in the event of a change of ownership. A transaction can get complicated if the landlord has a say in the sale and nobody has checked in time.
We also review licences, outdoor seating and the technical condition of the premises. A limited kitchen extraction system or a terrace on a precarious permit affects the capacity to generate revenue, and that is worth knowing before a price is set.
The kitchen and the cost structure
A restaurant’s cost structure is easier to understand in the kitchen than in a spreadsheet. We study the menu and its engineering: how many items there are, which ones sell, what margin each dish leaves and how much preparation it demands. A long menu usually hides waste and an excessive dependence on skilled staff.
We review purchasing and suppliers, recipe costings where they exist, and how stock is controlled. We test raw-material and staff costs against the average spend per head and the real occupancy by service period. We look at the condition of the equipment and at the maintenance investment that has been put off, because it ends up surfacing in the new owner’s first year.
The aim is to tell structural costs from circumstantial ones. A low margin caused by poor supplier negotiation can be fixed. One that stems from a concept that allows no other way of working is much harder to correct.
The team and what depends on the owner
In many restaurant groups the founder is at once general manager, buyer, head of front of house and public relations. It is one of the issues that weighs most heavily on the valuation, because it determines how much of the business is actually transferred with the sale.
We talk to the management team and to the managers of each site. We want to know who takes the day-to-day decisions, which processes are written down and which live only in one person’s head. We review staff turnover, how new hires are trained and the stability of the key positions in the kitchen and front of house.
A team that works without the owner present is an asset. When that is not the case, we flag it and propose how to organise the transition so that the transaction takes it into account.
The brand and the ability to replicate the model
For an investor who is thinking about growth, the central question is whether what works in one site will work in the next. We analyse brand strength: what the customer remembers, how the brand performs on social media and review platforms, whether it generates repeat visits and whether it holds a clear position against its competitors.
Then we look at replicability. A concept with an operations manual, a stable menu, centralised suppliers and a defined standard site can be expanded. One that relies on a chef’s charisma or a one-of-a-kind location can be bought, but it calls for a different plan. This reading also feeds the post-investment phase: the expansion plan and the opening of new units start from what we have seen here.
Checklist before a restaurant due diligence
If you are preparing the sale of your business, or are about to invest in one, these are the points we review and that are worth having to hand:
- Accounts for the last few financial years, with revenue broken down by site and, where possible, by service period.
- Complete leases, with schedules and assignment or change-of-control clauses.
- Trading, outdoor seating and kitchen extraction licences, and their administrative status.
- Recipe costings, the current menu and sales data by product.
- Contracts with main suppliers and purchasing terms.
- Organisation chart, contracts for key positions and staff turnover data.
- Equipment inventory and a log of recent maintenance and investment.
- Operations manuals, standardised recipes and opening and closing procedures, where they exist.
- Trademark and domain registrations in the company’s name.
The most common mistakes we come across are simple to avoid: trademarks registered in the founder’s personal name, leases nobody has read since they were signed, and sales figures that do not reconcile between the till system and the accounts. Resolving them before opening a process avoids delays and price adjustments in the negotiation.
An operator’s eye in the service of the transaction
Operational due diligence sits alongside financial and legal due diligence. It provides a reading of how the business works every day and of the risk involved in keeping it that way. For the buyer, it is the basis for a reasonable price and a post-closing plan. For the seller, it is the best way to arrive at the negotiation prepared.
If you would like to know how we approach this work, see our operational and financial due diligence in hospitality service. And if you have a transaction under consideration, a Link Capital partner will review your case in complete confidence and reply within two working days.