Scrolling through Yelp or Google Maps, readers may notice how often the “permanently closed” status appears across the LA restaurant scene. For anyone with a hospitality background, that phrase can put a knot in your stomach, and it is easy to start wondering: Is the LA restaurant scene really that dire?
In fact, it’s not. According to LAist, LA opened a record 758 restaurants last year, topping the previous high of 729, a trend Commercial Observer also flagged. However, that same period also brought a wave of closures. Record openings and closures are happening simultaneously, and that volatility is affecting deal activity. Buyers, however, have become more selective, with buyers conducting deeper diligence and looking under the ‘hood’ – before committing capital to the opportunities they view as the stronger bets. And as with many other sectors, Private Equity is a significant buyer/investor in the restaurant industry. Capstone Partners’ Restaurant Sector M&A Report notes that private equity now accounts for roughly a third of restaurant transaction volume.
Why Restaurant Deals Carry More Risk for Buyers
Even thorough diligence cannot eliminate every blind spot in an acquisition. If you are considering a restaurant acquisition or starting one from scratch, you need to go in with your eyes open. Too often, the excitement of owning a restaurant or bar does not survive contact with reality. Margins run razor-thin, leaving little to no cushion for a bad or unexpected quarter. Unlike retail or most other industries, inventory has a shelf life: unsold inventory turns directly into losses. Hiring, training, managing, and retaining a workforce is expensive, especially in California’s hospitality market. A lease will legally bind you to a fixed expenditure, regardless of whether your concept succeeds.
Stack those factors together, and small-business surprises can quickly turn into margin-draining disasters. That is one reason why, according to BT CPA’s 2026 restaurant M&A outlook, equity firms are willing to buy distressed or underperforming concepts. They have the capital and the playbook to absorb these risks. Without that same cushion, every one of those risks lands squarely on you.
Hidden Costs that Surface After the Deal Is Done
Several hidden costs tend to surface only after a deal is done. For an aspiring restaurateur, knowing where these costs might lie is essential to building a budget that reflects reality, not just projections.
• Lease terms and occupancy costs: Even a lease that looks straightforward still deserves scrutiny. Percentage-rent clauses tied to gross sales, along with common-area-maintenance charges the seller never fully passed through, can quietly blow a hole in a projected P&L. Personal guarantees can be another trap, one that can leave the departing owner, or worse, the buyer, on the hook for large liabilities.
• Labor and compliance costs: These can just as easily become a liability for the successor. Lingering employee issues and unresolved labor code violations do not disappear at closing; if they are not settled beforehand, they surface afterward. Misclassified managers, unpaid overtime, and meal- or rest-break violations: these are common enough that a buyer should assume they exist until diligence proves otherwise.
Due Diligence Is What Turns Hidden Costs into Negotiated Ones
With all these potential issues, it is fair to wonder why a restaurant deal would be worthwhile. The answer comes down to preparedness. A lease problem identified during diligence becomes a purchase price adjustment. The same problem discovered six months after closing can become a landlord dispute or a lawsuit. Wage-and-hour exposure works the same way: Caught early, it can become an escrow holdback or a seller indemnification. Missed until after closing, it can become a claim the buyer inherits as the new employer of record.
In a market where sponsors are already being more selective, skipping diligence to outpace the next bidder is usually how a buyer ends up overpaying for the deal everyone else correctly passed on.
The EisnerAmper Difference
EisnerAmper’s restaurant and hospitality team, together with our transaction advisory services professionals, helps buyers build an industry-informed financial model through a buy-side Quality of Earnings report. The EisnerAmper financial and tax due diligence teams conduct diligence with the budget clarity so you can move forward with confidence. Are you ready to turn your restaurant vision into a strategic, profitable reality? Contact us today.
By Herb Taylor and Paren Knadjian
