How to actually verify the profitability of a restaurant that's for sale

You're looking at a restaurant to buy. The owner shows you their numbers and explains that the business does well. The paperwork looks tidy and the person seems serious.

The problem isn't that they're lying to you. In most cases they aren't. The problem is that they're showing you their best version of reality, which is what anyone would do — including you, if you were on the other side of the table.

Your job isn't to be suspicious. It's to cross-check against sources they don't control.

First: against what they declare to the tax authority

It's the simplest check and the one most people skip because they're embarrassed to ask.

A seller can put together whatever report they like to show you. What they filed for tax has already been submitted, it's dated, and it can't be redone for the occasion. It's an independent source.

Compare it with what they show you. Three scenarios will come up:

• They match reasonably well. Good sign. You can carry on with more confidence.
• What's declared is lower. This is the most common, and it isn't necessarily fraud: there are cash sales, there's an informal economy, there are inherited habits. But here's the hard part: what isn't declared can't be sold at full price. If a buyer can't verify it, they won't pay for it, and they're right not to.
• What's declared is higher. Unusual, and worth understanding why.

If the seller refuses to show filings, that's information too. It doesn't mean something is wrong, but it does mean the verifiable part of the business just got a lot smaller.

Second: against the size of the place

This cross-check is less obvious and surprisingly useful.

A restaurant has a physical capacity: a certain number of tables, a certain number of turns possible in a day, a certain average ticket depending on the kind of food. And it has a payroll: a certain number of people in the kitchen and front of house.

Those two facts put limits on what the place can take. You don't need a sophisticated formula: if someone tells you a twenty-table place, in a mid-ticket area, is taking what a sixty-table place takes, something doesn't add up. Either there's delivery and events they didn't mention, or the number is inflated.

It works the other way too. If the place is large, has a full payroll and takes little, you may be looking at a badly run business. That is sometimes an opportunity, but only if you know exactly what's failing.

Third: strip out what isn't the business's

This is the check that almost always moves the number up rather than down, which is why it's also the one that most benefits the seller.

In the vast majority of owner-operated restaurants there is personal spending running through the business accounts. The family car, the household phone, a salary for a relative who rarely appears, trips that are part personal and part work.

None of that spending will exist once you're the owner. And yet all of it is lowering the profit that shows up on paper.

Stripping it out gives a different and more honest figure: how much this business leaves for whoever runs it. That's the basis the price should be negotiated on, and it's fairly common for it to be higher than the accounting profit.

Two warnings. First: every adjustment has to be documented, or it's just a story. Second: some expenses look personal and aren't. If the owner pays a salary to a relative who genuinely works there, and you'll have to hire someone for that role, that expense stays.

Careful with acronyms

At some point in the conversation an acronym will appear, usually EBITDA, and someone will say the business “does such-and-such in EBITDA”.

Don't take it at face value. The same acronym gets used with different definitions depending on who's saying it, and the gap between two of them can be twenty per cent of the number. Two people can be discussing different things while believing they're discussing the same one.

Ask for it in writing: what's included and what isn't. If there's no written definition behind the number, there is no number, only an impression. In the files we prepare every figure carries its definition beside it, so this conversation never has to happen.

What can't be verified

There's a part of the business no document captures, and it's worth facing directly:

• How much of the business is the owner. If customers come because they get greeted by name, part of what you're buying walks out with them on transfer day.
• Why they're really selling. Retirement, a move, exhaustion, debt, or something they saw coming that you haven't yet. You won't always get the full answer, but the question has to be asked.
• The lease. An excellent business with two months left on the lease and no assignment clause is worth far less than it looks.
• The real state of the permits. Whose name they're in, whether they're current, and whether they transfer with the operation or have to be applied for again.

In short

Cross-check against the tax filings. Cross-check against what the place can physically produce. Strip out what isn't the business's, in both directions. And don't take any acronym on trust without a written definition behind it.

With that, you're no longer buying anyone's word. You're buying a number you can defend — which is exactly what you'll need on the day it's your turn to sell.