If you are looking to own a restaurant but don't want to deal with the risk and expense of starting one from scratch, then investing in a “turnaround” restaurant is a great option. A turnaround restaurant is one that is performing poorly, but has profit potential – such as a high-profile location or memorable design.

There are a few reasons why turnaround restaurants can be such great investments. First, they have a low-price tag. Owners of poorly performing restaurants want to cut their losses and are more likely to accept a lower purchase price.

Second, turnaround restaurants have the potential to generate higher profits if they are managed correctly. Oftentimes, there is considerable room for improvement in both operations and marketing.

Finally, turnaround restaurants can be a great way to break into the restaurant industry without the cost and delay of building a new location.

The Focus on Turnaround Restaurants & Asset Sales

Cost-conscious restaurant buyers focus on poor performing turnaround situations, sometimes referred to as asset sales, for a variety of reasons. Here are some of the reasons turnaround restaurant sales are appealing investments:

• Avoid Supply Chain Backups of Materials and Equipment. In addition to sparking higher food costs, supply chain issues can create a backlog for new restaurant buildouts. Long lead times to obtain equipment make turnaround restaurants an attractive proposition. Rather than wait months on deliveries, fully equipped restaurants can be purchased and converted to a new concept. After all, a fryer is a fryer, whether it is heating oil to temperature for fish or french fries.
• Avoid High Construction Costs and Delays for Buildouts. The high costs and long delays in construction also drives greater interest in turnaround restaurants. The construction industry needs to fill 650,000 jobs in 2022 to keep up with current demand. To make matters worse, contractors are moving workers from commercial to residential projects to take advantage of the real estate boom, leaving even fewer workers available for restaurant build outs. Whether it is fast food, fast-casual or full service, most restaurants need the same equipment and have similar layouts depending on the concept. It is easy to change signage, throw on a coat of paint and install new front of house decor to make over a restaurant in a hurry and at minimal cost.
• Easier and Faster Expansion Opportunities. Many franchise brands already leverage poorly performing restaurants to expand their footprint. This is because it’s easier and faster to buy an existing location rather than build a new one from the ground up. Some brands are even known for their ability to turn around under-performing locations quickly.

Why Restaurants Fail, And The Opportunity for Buyers

At least 60% of restaurants shut their doors by the end of their first year in operation and 80% close by their five-year mark. Restaurant profitability can be easily measured by three critical factors: cost of goods or food, labor, and occupancy costs. Combined, these factors represent 65% to 70% of all costs to operate. If each are appropriately managed as a rate to sales, profitability can be attained. If one or all of these are too high, it will place financial stress on the business. Thus, potentially driving the owner to place it on the market.

The number one reason for the failure of restaurants is lack of capital. Many owners open their doors after overspending on the buildout; they open undercapitalized without sufficient marketing budgets. These restaurants, which often have new equipment, do not have enough time to make an impression and build their business. Before long, they are out of cash and are forced to close. This creates a strong opportunity for a turnaround restaurant buyer.

Steps to Investing in a Turnaround Restaurant

By following these steps, you will be able to find turnaround restaurants that have a high potential for success.

1. Research. The first step is to do your research. You should look for restaurants that have the necessary equipment in good working condition and easily convert to any concept. Everything else is cosmetic.
2. Site Visit. Visit the restaurant and assess the condition of the property and the quality of the food. If you are changing the menu, the seller’s recipes will not be important. However, you will need to establish a baseline for food quality. Your costs and quality will be set based on your own concept.
3. Communicate. Speak to the owner and get an understanding of their business model and what they think is necessary to turn the restaurant around. This may be educational. On the other hand, do not expect too much, as the current owner has not taken the steps needed to create the turnaround.

Red Flags to Look for When Buying a Restaurant

Not all turnaround restaurants are a great investment. Pay close attention to these factors to judge whether an eatery is worth the low price:

• Concept. Both the style of food and price point on the menu should be in keeping with competitors and other offerings nearby. A restaurant buyer should focus on what has not worked in the past if they are going to affect a turnaround in the same location. Point of sale (POS) systems capture lots of data and are a great resource. Ask the seller for information on which items were best sellers. Carefully note the price points, day parts, and items that were strong performers.
• Location. You can fix a bad concept, but you can't turnaround a bad location. Location could be a reason for the existing restaurant’s poor performance. For example, there is a "morning side" of the road. This is a real-estate term for where traffic patterns start and end as part of the daily commute. A coffee shop on the wrong side of the highway for morning commuters could simply be the wrong concept in a very good location for a lunch or dinner business.
• Alcohol Service. If the sellers do not have an alcohol license, there may be an opportunity to add this high profit item to the mix. On the other hand, if the current owner has focused on the alcohol service to the detriment of the food menu, this could be a contributing factor in the store's current performance.
• Occupancy Costs. It is critical to understand the rent model of the location. Most landlords will not reduce the cost of rent when they transfer a lease. In most cases, they will ask the buyer to assume and assign the existing lease. If the lease rates are part of the reason the location is struggling, it is important for the restaurant buyer to carefully understand their revenue model, as they could fall into the same issue if their sales are not sufficient to offset the cost of the location.
• Delivery and Take Out. The pandemic forever changed the landscape related to the delivery model, yet some store owners still resist the process and have not embraced customers who are dining out via delivery apps. If an underperforming store has not taken advantage of this trend, it's a sure bet there are sales from this channel that have been missed.

Account for The Time Necessary to Turnaround the Business

One thing a restaurant buyer must plan on when acquiring a poor performing restaurant is allowing for sufficient time to market to the community, raise the profile of the business, and drive sufficient revenue. Unlike the sixty-minute fix you are exposed to on reality TV shows Restaurant Impossible and Bar Rescue, this turnaround will not take place nearly as smoothly or as quickly as these shows portray.

What these shows do accurately portray are problems that are easily identified and dealt with in operations, including slow food service, bad menu planning, failure to understand food costs, an outdated décor, and poor customer service. Just don’t plan on the construction crew making the updates overnight and the reopening resulting in a line around the corner.