Due diligence on a restaurant

Due diligence on a restaurant needs to verify four things beyond the general financial checks used across small business purchases: whether reported earnings match what actually moved through the bank, whether the lease will genuinely survive a change in ownership, whether the liquor and food licensing is current and transferable, and how much of the operation depends on people rather than documented systems. A restaurant that looks strong on a summary financial statement can still fail on any one of these once a buyer looks closely.

Financial due diligence: reconciling what actually reached the bank

Financial due diligence in a restaurant starts from the same seller’s discretionary earnings approach used elsewhere, but restaurants deserve closer scrutiny of the underlying records than many small businesses because of how much revenue moves through cash, tips and card transactions in a single service. A buyer should reconcile point-of-sale reports against bank deposits over a meaningful period, not just accept the tax return, and should ask directly about any gap between the two rather than assume it away. Food and beverage cost as a percentage of sales, and labour cost as a percentage of sales, are also worth comparing against what the seller reports, since a restaurant that looks profitable on paper but is quietly running high costs in one of those categories is carrying a problem the new owner will inherit on day one.

Lease diligence

Lease diligence deserves as much attention as the financials, arguably more, because a restaurant is tied to its physical location in a way many small businesses are not. A buyer’s lawyer should review the remaining term, any renewal options, the rent structure including scheduled increases and common-area or additional rent charges, and exactly what the assignment clause requires from the landlord. An estoppel certificate from the landlord, confirming the lease terms as written and that the seller is not currently in default, protects a buyer from inheriting a dispute or a side agreement they were never told about. Red flags in a restaurant lease — a landlord known to be slow or difficult about consent, an unusually short remaining term, or rent that escalates faster than the business’s likely revenue growth — are worth surfacing early rather than discovering during the final week before closing.

Liquor and food licensing status

Liquor and food licensing status should be confirmed directly with the regulator and the local public health authority, not taken on the seller’s word. A liquor licence generally does not simply follow a change of ownership; in Ontario the AGCO treats it as needing a fresh application or transfer process, and a buyer should understand where that process stands and how long it is expected to take before committing to a closing date. The food premises permit is usually tied to the specific operator, so due diligence should confirm what a new operator needs to do to be authorized to operate, and should review the location’s recent health inspection history for any pattern of repeat violations that would suggest an operational problem rather than a one-off.

Equipment, leasehold improvements and closing-day inventory

Equipment and leasehold improvements need a physical inspection, not just a look at the depreciation schedule. A commercial kitchen’s hood, fire suppression system, walk-in coolers and cooking equipment are expensive and sometimes near the end of their useful life even when they still appear to work, and a buyer who skips this step can face a large unplanned capital outlay within the first year. Inventory at closing — food, beverage and bar stock — is typically counted and valued separately from the purchase price on closing day itself, so due diligence should also confirm how that count will happen and who is doing it.

Staff and operational dependency

Staff and operational dependency round out restaurant due diligence. A buyer should understand whether recipes, prep procedures, supplier relationships and scheduling are documented or exist only in the head of the owner or a key chef, since the latter is a real risk to continuity. Employment matters here too: how staff, including tip handling and any outstanding vacation pay, will be treated through the transition needs review under the applicable provincial employment standards, since the answer affects both cost and risk for the buyer.

Supplier and vendor agreements

Supplier and vendor agreements are worth a specific look too, since restaurants often run on standing arrangements — produce and protein suppliers, a linen service, a POS or online-ordering platform, a delivery-app listing — that were negotiated by the seller personally and are not automatically assignable to a new owner. A buyer should confirm which of these are genuinely under contract, which are informal and could end at any time, and which carry terms, like an equipment lease bundled into a beverage supply agreement, that need to be understood before closing rather than discovered on the first delivery under new ownership.

A restaurant due diligence checklist

A restaurant due diligence checklist reasonably covers:

• Point-of-sale records reconciled against bank deposits over a meaningful period
• Food and labour cost ratios compared against what the seller reports
• Full lease review plus a landlord estoppel certificate
• Confirmed status and timeline for liquor licence and food premises permit transfer
• Physical inspection of kitchen equipment, hood and fire suppression systems
• A closing-day inventory count process agreed in advance
• Review of how staff, tips and employment continuity will be handled