Property Focus – How to get into the restaurant sector

Stock is up, prices are down and business is booming in the UK's restaurant sector. But branching out on your own is never easy. Elly Earls outlines the essential steps first-time buyers must follow in order to negotiate their way to a successful deal in an industry crying out for enthusiastic entrepreneurs

The UK's restaurant sector is anything but quiet. While the London market is positively booming with properties achieving immense premiums and a steady increase in overseas investment, trade is also up outside the capital - for very different reasons. Not only is stock on the rise thanks to a stream of discreet disposals and corporate failures, landlords are becoming increasingly flexible when it comes to price in an effort to shift their growing portfolios of empty units.

Indeed, according to Richard Negus, head of restaurants at Fleurets, restaurant values are now down 20-25% on where they were at the peak of the market in 2007.

Although properties on the exclusive thoroughfares of Chelsea, Mayfair and trendy city fringe locations such as Shoreditch are near impossible for first-time buyers to secure, there are a growing number of realistic deals to be done if you're willing to venture out of the capital.

"In 2011, we were down 4.1% on the previous year," says Simon Chaplin, head of restaurants at Christie & Co. "Landlords have become more flexible; we've seen a lot of nil premium deals, as well as landlords willing to give contributions and rent reductions."

According to James Shorthouse, head of licensed and leisure at Colliers International, this means there is still a significant appetite for restaurants, driven partly by companies looking to roll out their existing brands, but also by entrepreneurial individuals coming in to the market with innovative ideas. "The trick is to make sure that great ideas are balanced with a good business plan," he emphasises.

This is more important than ever given the reluctance of banks to fund hospitality businesses. Indeed, in addition to a top notch business plan, first-time buyers must have a good track record or other collateral, such as a house or a pension, to put up. "You need to show competence to the banks," Jonathan Moradoff, associate director at Davis Coffer Lyons' agency team, notes. "If it's not you, part of the team you're hiring needs to have the expertise to be able to follow through."

While there are other options for securing financial backing, such as government incentives and white-knight investors, having a strong, realistic business plan in place before you get to this stage is an absolute must. This is particularly key for those looking to invest in corporate restaurants. "They can afford to sell so it's essential to have someone that has a really credible operation and a good business proposal," Negus explains. "If we assign a lease from PizzaExpress to a new company and they go bust in six to 12 months, PizzaExpress has to go back in and deal with the property."

So, where to start? For Shorthouse, it's absolutely essential to understand what your particular skills are and what kind of financial model your business is going to be based on. "The key thing is to understand the market and where your property fits into that market," Negus confirms. "You need to understand where the competition is, where your customers are going to come from and what they're after. What is your USP going to be?"

Next, you need to find the best accommodation to fit your proposal. "Do you need high footfall? How many covers do you actually require?" Negus continues.

For Chaplin, it's advisable to take a leaf out of the big boys' books at this point. "The main players in the industry do their homework, get the best locations and find a site that will suit the model they've got; they won't deviate from that," he says. "So if you've got a particular idea in mind, stick to your plan."

When putting together a business plan for such an important step in one's life, the main thing, for Shorthouse, is to be realistic. "What is the cost of running the business going to be and what are the sensitivities of that business to small increases or decreases in turnover or costs?" he asks.

"Your business plan has got to be based on real scenarios," Chaplin adds. "If you're buying a going concern, look at the trade it's doing now; there's a reason it's on the market and there's a reason the owner is only doing a certain level of trade. You need to create a realistic business plan based on what seems like minutiae - the cost of a cup of coffee and the amount of money you make out of it."

It's also essential to take into account the fact that it's notoriously difficult to make money in the first year of running a restaurant. "Don't be frightened of saying on the business plan that you might only break even in year one, but you've got a contingency plan," Chaplin suggests.

Only once the business plan is honed and the funding is in place is it time to enter the negotiation stage. But how to secure the best possible deal? "If you're buying an existing business from a restaurateur, don't just turn up once and make an offer," Chaplin advises. "Go back two or three times, go back as a customer and find out why they're selling; that way you know what buttons to press."

Having a degree of flexibility on timings is another useful negotiating tool. "The current owner may have a timetable they need to work to," Shorthouse notes. "It may be very quick, in which case having the cash there is going to put you in a good position, or they may need a little more time if it's a way of life business and they're looking to retire."

Above all, make sure you only offer a sum with which you feel comfortable and remain aware of the long-term commitment you're taking on. Although taking the plunge and buying your dream property is by no means going to be easy, for Shorthouse, it's crucial to remain enthusiastic and optimistic. "The restaurant sector really does bring out good ideas and innovations," he concludes. "It's one of the most exciting parts of the hospitality industry."

Five tips for buying a restaurant

1 Assess your requirements and understand exactly what you want to do. If you're buying into a shell unit, you'll have to spend a lot of money, but if you're taking over an existing restaurant, you need to have it clear in your mind how you're going to improve things.

2 Do your research. Look at the surroundings, analyse the competition and be certain of the local demographics. Does the area have the right sort of customer base for what you want to do?

3 Draw up a realistic business plan at the outset. Enthusiasm is great, but always temper this with a realistic assessment of how you're going to control your costs and what the potential sensitivities of your business are.

4 Get some expert advice. A property agent will be able to inform you of all the funding options available and explain what's out there in the market, while an accountant will make sure your business model works. You may also need someone with operational experience who understands how to run a restaurant on a day-to-day basis.

5 If you're hoping to get bank funding, make sure you have other assets against which the borrowing can be secured. You also need to have experience in the restaurant trade, so spend six months working in a restaurant or bar to show the banks you have some knowledgeof how it all works.

Identify a gap in the market

Oni Banurji decided to leave his city banking job four years ago with the aim of creating a chain of high-end Indian restaurants.

"I saw a gap in the market," he says. "Indian food in the UK, particularly in the suburbs, is curry houses, but I'm on a quest to change that."

It took about a year and a half, and a dozen sites, before Banurji found the one he wanted, a Café Rouge in Kingston-upon-Thames, Surrey.

"It's a big challenge - people like me don't get the best sites as the chances of us going bust are pretty high," he says.

Despite his lack of experience in the restaurant industry, Banurji demonstrated his credibility as a businessman to Café Rouge and managed to make a deal. Since then, it's been tough. "We're in our third year and we're only now getting close to breaking even," he admits.

Not one to give up easily, Banurji continues to persevere, having learnt valuable lessons from his first restaurant purchase. "The plan is to continue building the group eventually, when we've made this one work. I expect the same challenges this time, but there's more on the market now than there was four years ago," he says.

"I still believe in what we're doing and why we're doing it; if we can build something that offers the right kind of cuisine at the right price, then it's good for everyone."

People want a good deal

Previously a restaurateur in the USA, Ilias Nathanail decided to open his first UK restaurant, Brooklyn Bite, which specialises in authentic, affordable New York-style pizza, because he felt the market was missing something.

"The UK does high-end pizza extraordinarily well," he explains. "But in these times, people want good honest food, and a good deal."

It's been a long road for Nathanail, who, as a US restaurateur, had been used to a much quicker handover process.

"It takes an amazing amount of time to go through the red tape over here," he remarks. "Since scouting out the location on the King's Road, it's taken us the better part of a year just to get a lease signed. It can be frustrating; you find the perfect location, but it's difficult to maintain that level of energy and excitement when the process takes such a long time."

Finally, though, the entrepreneur is in, and can't wait for what's to come. "We're looking to do an aggressive opening and open multiple locations around London," he says. "But we've got to get the first one right. The most important thing now is to work heavily on creating a brand that is easily recognisable, a place people know they can come for consistently top-tier food."