CAVEAT EMPTOR...BUYER BEWARE!
All too often I get calls from buyers who don’t understand the dangers of venturing into buying a restaurant business without using a professional restaurant broker. Unfortunately, we’re often, and wrongly, categorized with general real estate agents or even general business brokers. Real estate agents are professionals in selling homes. In fact, I’ve bought and sold more than10 homes in my lifetime and I always used a real estate agent to handle my transactions despite holding a brokers license in three states. I do this because I know that I don’t have the professional experience brokering a home.
At SellingRestaurants we have a motto – we don’t want to sell you something that you don’t want or that you are qualified to operate. We’re in this business for the long run, not for short-term gains. Although our agency is with the seller, we have a duty to treat you fairly and most important, honestly.
That all being said, here are some of risks and dangers you need to know in order to protect yourself:
1. Most states have succession liability laws. Google “succession liability law” and then add your state to the google phrase. Study it.
This means that the liabilities of the business can run with the business. In other words, if you buy a business and the liabilities are not properly cleared through the taxing entities and vendors, you could get a knock on the door by a tax-man for huge amounts of back-taxes the seller failed to pay and either you pay it or lose the business. There are only a few states where bulk sale laws are applicable and in those states whenever an escrow company is used, the escrow company will clear those liabilities for you. But in some states, such as Arizona, the buyer must insist that the Seller provide a tax clearance certificate from the revenue board otherwise you’re on the hook. Here is an article written by an attorney in California and these points are generally true in most states. SUCCESSOR LIABILITY
Under succession liability the buyer could also become responsible for vendor debts as well. In bulk sale states the escrow company takes care of these. But on other states it would be a good idea to get the list of the vendors from the seller, notify them that you’re purchasing the business, get their credit applications and bluntly ask the vendor if the seller is current. To be frank, most vendors will shut the account down if one payment is late, but if that’s a shipment of $5,000 of liquor, that’s something that you need to know about, but then again most liquor vendors get paid cash on the spot.
2. Leases must either be assigned or sub-leased or a new lease obtained before the business is transferred. The transfer must be in writing and must be approved by the landlord. Most reputable escrow companies will require a lease assignment or new lease before closing escrow to protect the buyer. But in Arizona for example, there is no requirement by the escrow company to have a lease completed before closing. Some times brokers will skip this step because the lease assignment process can take months to complete because often the landlords are large corporations who don’t make doing these lease transfers a priority. So here’s what happens if you take possession of a business before the landlord approves: you can lose the business! It is not be likely to happen, but what could happen is the landlord could cancel the lease because the lease allows her to do so and renegotiate a new lease with higher rents.
So don’t put yourself at risk here and make sure you get a lease assignment from the landlord. Sometimes a broker may have a standard lease assignment form and he’ll have you sign it and you’re thinking the landlord prepared it. Don’t be fooled. You should have direct contact with either the property manager or the landlord at some point in the process.
This brings-up another good point. As a broker I try to remove any unknown variables from the deal because it is to the best interest of all parties to get the deal closed efficiently and my agents are trained to do so as well. A deal can go bad very fast if the landlord and you don’t get along or if something is said the wrong way and feelings and egos are hurt. Remember, landlords are usually cold-hearted people. They’ve grown to be that way due to all the stuff they’ve been through with tenants and banks. So I try to keep the buyer away from the landlord to avoid personality issues or misunderstandings arising that kill a deal. Remember, you will rarely see the landlord once this deal is done. You’ll be working with the property manager most often. That being said, I’m happy to introduce a buyer to the landlord once the documents are completed.
3. Is the facility ADA compliant? It is always a good idea to make sure the business’ rest rooms, dinging area and entrance comply with the Americans with Disabilities Act laws because if they don’t you could get sued and be required to make the improvements on your dime. So get a professional to take a look at the entrance, the dining area and the restroom for ADA compliance.
About 8 years ago I sold a restaurant where the landlord had recently completed the ADA improvements to the exterior of the property. A few months after the tenant took over she received a $5,000 bill from the landlord for those improvements. Even though I had the landlord sign a statement that there were no outstanding liabilities running with the lease, he basically said pay it or else. She paid it. She wasn’t happy of course.
These tend to be the largest liability exposure one has when buying a business. A good restaurant broker will guide you through these issues to make sure you get the business free and clear of such risks. Don’t allow yourself to be trapped in these situations. Give me a call any time.
Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry. Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer. Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world. There he participated in more than $11.5 billion of merger and acquisition transactions. Give Mel a call at 480.274.7000 if you have any questions.