Hiring the right restaurant broker can be one of the smartest decisions you make.
An experienced restaurant broker can save you thousands of dollars and ensure you avoid making mistakes that can be fatal to your success.
Restaurant properties are unique.
Even if you are buying an existing restaurant, a good restaurant broker who understands lease agreements and the numerous health department, sanitation, and building department regulations can help you avoid costly upgrades to your restaurant.
A good restaurant broker should provide the following:
1) Access to all properties for sale and for lease.
Most brokers are either business brokers selling existing businesses or commercial brokers leasing property.
Find a restaurant broker that focuses on restaurant properties and has access to both restaurants for sale and commercial properties for lease.
2) Thorough knowledge of Lease Clauses:
You will be living with the terms of your lease for 5-10 years on average.
3) Permitting and Construction Knowledge:
Many first time restaurateurs run into problems because they were not aware of the many permitting requirements to open a restaurant.
Make sure your restaurant broker is knowledgeable about grease interceptors, health department permits, and parking codes.
A knowledgeable restaurant broker knows architects, attorneys, expediters, and contractors who specialize in restaurants.
Getting the Most from Your Restaurant Broker
There are a few key goals you should keep in mind when working with a restaurant broker:
1) You want to see all opportunities that meet your requirement
2) You want the restaurant broker to negotiate in your best interest
3) You want the restaurant broker to feel fairly compensated and motivated
4) You want the ability to cancel the agreement if you’re not satisfied
Should You Work With One Restaurant Broker or Many?
This answer is counter-intuitive. You would think working with many agents would provide access to more properties.
The opposite is actually true.
An experienced restaurant broker won’t spend the time needed to work with you on a non-exclusive basis due to the high risk of not receiving compensation if you purchase a business or lease space through a competing agent.
Would your accountant agree to prepare your tax return if four other accountants were also working on your tax return, but only the first one to finish would get paid?
This method also produces a race to “sell” you a property quickly rather than invest the time to find the right property. (And probably a poorly prepared tax return using the example above)
An experienced and qualified restaurant broker only works on an exclusive basis. An exclusive agreement states the broker will work on your behalf and you agree to only work with the agent for a specific period of time.
You receive the attention needed and the broker has assurance he will be compensated for his time if you complete a transaction.
Problem with Commissions
Since most restaurant brokers work on a contingency basis, they do not receive any compensation if you do not lease a property or purchase an existing restaurant.
They are also compensated based on the total lease amount or sale price.
This can create an issue.
If your requirement is too small you won’t find a qualified person to help.
From the broker’s perspective, it takes the same amount of time to lease a property in Beverly Hills as it does in a low-income area, where rents may be much lower.
If you’re looking for a short-term lease or to purchase a very low priced restaurant the commission may not justify the time involved.
There is a Solution—Minimum Fee
A minimum fee ensures you get the guidance needed and the amount of the sale price or lease amount does not impact your access to available properties.
Let’s say you are prepared to pay $100,000 to purchase an existing restaurant with a monthly rent of $5,000 or build a new restaurant with rent equal to $5,000 per month with a 5-year lease.
The commission to your broker would range between $5,000 and $12,000.
If your broker was able to find you an existing business for sale for $10,000 with a below-market lease of $2,000 per month, you would receive a great deal and save $90,000.
Unfortunately, the broker is actually penalized for finding you a great deal.
The commission for a $10,000 business sale is only $500 for the same amount of work as a sale for $100,000.
You don’t want to risk missing these opportunities (below market rent and attractive sales price).
A minimum fee guarantees the restaurant broker is compensated fairly and you receive the best deal possible.
Assuming the minimum fee was $10,000, in the example above you would be purchasing a below-market lease for $20,000. Far less than the $100,000 you were prepared to pay.
The best solution to ensuring you receive access to all available properties and to ensure your restaurant broker negotiates a lease that’s in your best interest is to agree on a minimum or flat fee.
Typically, the agreement states a minimum fee. If the total commission does not cover the fee, you will pay the difference.
Minimum Fee = $10,000
Commission paid by Landlord= $8,500
Total Fee paid by Client = $1,500
Term of Agreement
If you are unhappy with your broker you should not be locked into a long-term agreement. Make sure you have the right to cancel the agreement.
You will need to agree the broker is entitled to compensation for properties they show you for a certain period of time after canceling the agreement, but you will be free to negotiate or work with anyone else going forward.
This is usually not an issue since you would have already negotiated for the properties shown by the broker if you had been interested in the first place.
If you follow the suggestions above working with a restaurant real estate broker should save you both time and money leasing or buying your next restaurant.
Want to avoid common mistakes and open your restaurant fast at the best price?
Do you have questions about opening a new restaurant? I’m here to help and happy to answer your questions.
Restaurant Real Estate Advisors