If you are thinking to buy a restaurant, here is my first tip: do not do this on your own. Find an accountant or an attorney in your area to give you some assistance in this. You might also want to find a mentor, someone else who owns a restaurant who can give you advice.Why is the restaurant around the corner doing well?

If you want to prequalify the restaurant, ask yourself those questions:

Why is the restaurant you are interested in buying doing badly?
Why do you think that it is a good business opportunity?
What metrics do you have to evaluate profitability?
Do you have the expertise to turn this restaurant around?

If you cannot answer these questions confidently, you should not pursue this investment. I am not trying to discourage you from investing, but the fact that this owner is selling the business raises red flags because it is barely making it; and you don't have any idea on how to evaluate it. It seems that the owner has incurred a tremendous debt and is trying to cash-out.

Find an experienced investor to partner with who has the expertise to evaluate the business to determine if it is a good business opportunity. The restaurant you are buying has no value if it is failing. I have noticed over the years that certain locations will always fail with a restaurant. One after another they come and go and fail. Sometimes the location is just known by the fact that prior restuarants were bad. They have a certain stink factor.

Usually you would value a business at a factor of gross sales, or net profit. But with a failing business I would not pay more than a wholesale/salvage value for the equipment and inventory. Often times the owner of these restaurants are so happy to have the burden lifted, they will take anything to get out. From their books, how much have they been making per day? Multiply that by 30 and less the costs you think you will pay the workers. Multiply that by 12 that will give you per annum income.

Look at the Equipment, how much are they when new and try to cut that by 75%. Roughly this will give you the cost of the assets. You have to add on the cost of land and building, very important. The three added will give you a rough estimate.

And don't forget...

to buy a bad business is bad business.
to buy a good business is good business.
to buy a bad business for next to nothing and turn it into a good business is excellent business.