HOW CALIFORNIA CAN STREAMLINE BUYING RESTAURANTS
Before the economy took a dive, closing restaurant and bar deals in California would typically take 60 to 120 days. If it was a simple deal, perhaps 40 days. If it was a complex deal that included an SBA Loan and/or a franchise, perhaps it was 4 to 6 months. In Arizona and in most states it takes weeks to close deals.
Today, due to unknown reasons, in California it now takes no less than three months to close simple deals and often four months+.
THE PROBLEM
Why so long one might ask? How is it that a state that needs more revenues (aka taxes) can be so business broker unfriendly? Why is it that a state that has every thing to gain from streamlining a process and every thing to lose from bogging it down has created such a mess of a process? There is an axiom in this business, and all businesses for that fact, "time kills deals." When a deal fails, the state loses revenues. The escrow company doesn't make money. The broker doesn't make money. The seller doesn't pay taxes to the BOE, Franchise Tax Board, the IRS, county, etc. The buyer doesn't get his business. Every one loses when deals are cancelled due to delays created by the state.
In the first quarter of 2008, SellingRestaurants put 65 deals into contract in California for a market value of $10 million. Due to delays in closing deals within a reasonable timeframe, we lost 35 of those deals. That's a lot of tax revenues!
California State is controlled by unions. Nothing new, everyone knows it. How is it that the liquor license board is taking weeks just to get an appointment and than another 30-60 more days to transfer liquor licenses than it did a few short years ago? They haven't laid people off. They are processing far few transfers than they did only three short years ago. How can this be? Who the hell is in charge over there?
How is it that the Board of Equalization has become anti-business and have shut restaurants down left and right while taking an extraordinary amount of time clearing the business so the seller of the business can get paid? People are losing their jobs as a result of these shut-downs!
The answer is simple. The state has taken a business unfriendly stance and I think in part it is due to the mentality of employing as many people as possible instead of the mentality of the tax payer is a customer, not the enemy. The notion that a business fucntions only because the state allows it to function is a loser position for a state to take. The Liquor Board has shifted resources to license enforcement from license transfers in an effort to levy fines on business owners to collect more "revenue," a new word replaced by politicians who are afraid to tell you they're raising taxes. The Board of Equalization is shifting resources to send out bull dogs to collect taxes and if they don't collect what they beleive is owed - key word "what they think" is owed - then the business is shuttered.
A couple years ago I personally experienced the state's ridiculous position. I had a deal in escrow for $150,000. The seller failed to file tax returns for four years. Yes, stupid seller. Nevertheless, the state had an opportunity to hold the sales price in escrow until the seller filed the returns. Logical right! Wrong! They didn't care. They wouldn't allow the deal to close. The buyer walked. The seller walked. No one made money. The state lost a tax opportunity. Everyone lost!
This is not a sustainable position for the state of Calfiornia.
SOLUTION
There are two points in the closing process that delays escrows, Bulk Sale Laws and Liquor License Transfer regulations.
BULK SALE LAWS
Bulk sale laws require escrow to published in local newspaper the sale of the business for a twelve business day period. In reality, this process could take 30 days in total. Since it costs about $500 to run a bulk sale, broker who know what they're doing won't start this process until it is certain the deal will close.
What is a bulk sale law? Bulk sales laws were instituted nearly 100 years ago to help manufacturers collect on money business owners owed. What was happening back in the turn of the century was criminal, no doubt. People would travel from town to town, ordering goods from manufacturers. These people would sell the businesses and skip town, never to be heard from again. The manufacturer would lose. So under the UCC laws, the states adopted the Bulk sales laws whereby the business would have to notify all vendors of the sale otherwise the buyer assumed the risk to the vendors.
Well, today only 5 or so state still has such laws. Why have so many abandoned the law? Because with today's credit system, there is absolutely no need for a Bulk Sale Process. If people want to apply for credit with a vendor, they must have good credit. If one were to jump from city to city doing what they did 100 years ago, they would be reported to the credit agencies and that would be that.
But I believe California keeps this law because it employs and pays unions. It pays the newsprint companies for printing the notices. That cost $500! Look in your local business journal. Each ad is $500 bucks!
California needs to rescind this law immediately and adopt the laws that nearly all states in the union have adopted. That will cut 30 days off escrows and save the consumers $500 in closing a deal.
LIQUOR LICENSE REGULATIONS
The transfer of a liquor license is a paper intensive process requiring about 10 separate documents to be completed - and God forbid if you forget a "." somewhwere! First, the broker must wait for the deal to be firm before starting this process. Firm means that the landlord has approved the buyer and/or the franchisor has approved the deal as well. Getting these approvals alone could be more than 30 days into the deal and often 45 days.
The buyer must first make an appointment with the liquor board. This could take weeks to get an appointment and God forbid if it is around the time the board is issuing new licenses. Than it cold take 45 days to get an appointment.
Once an appointment is received, then we wait for the appointment day...and we wait...and wait. Once we have the appointment, then the 30 days waiting clock starts - known as the posting period. Then we wait and we wait...and wait. Then when the 30 days is up, escrow informs the liquor board that escrow is ready to close. Then we wait...and we wait again. Perhaps in two weeks the liquor board transfer the license. But most of the time it is much long. In the meantime, we wait and we wait. Only when the liquor board transfers the license can the escrow close and money change hands.
This liquor license transfer process is a waiting game. But if the state would adopt what other states do, which is to place the burden on the buyer instead of the seller - California forces the seller to wait to get his money in the event the liquor license doesn't transfer tothe buyer. Why? Transfers are rarely held-up. And why should the seller bare the burden of the risk of the liquor license? A liquor license won't transfer to a new buyer for a very small list of reasons. The buyer should be given this list and told if you have any of these defects in your background, then you won't get the liquor license.
Other states place this burden on the buyer, where it belongs. They allow the escrows to close; the buyer to go to the liquor board and gets a temporary operating license while the license transfers. This reduces the closing process to ZERO time for the liquor license. ZERO folks from 100+ days today.
CONCLUSION
These simple two steps would make the state millions of dollars in taxes and reduce the closing time from months to weeks. There are more than 15,000 business transfer a year in California. How many deal didn't close de to delays? How much tax could be collected if these deals closed?
Streamline the process and put the burden of proof where it belongs Calfiornia and everyone wins!. Unfortunately, the unions and the publishing unions won't allow this to happen. Only pressure from the public to the legislators can make this happen.
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. He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions.