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IMPORTANT POINTS ABOUT BUYING A RESTAURANT

Mar 17, 2008
Article #4
Author: Mel Jones

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UNDERSTAND THE LEASE: The typical lease requires the lessee to pay all landlord expenses to maintain the property, commonly known as Triple Net (NNN) and/or Common Area Maintenance (CAM).   This is paid in addition to the base rent.  It includes, but is not limited to, property taxes, insurance, and the maintenance or replacement of landscaping, heating and air conditioning, exterior walls, roof, hot water heater, ceilings, plumbing, electrical, and the parking lot.  Furthermore, make sure the building meets all ADA standards.  UNDERSTAND YOUR OBLIGATIONS UNDER THE LEASE BEFORE SIGNING THE LEASE ASSIGNMENT OR SUB-LEASE.

 

 

LIQUOR LICENSE TRANSFER:  If the restaurant has a liquor license, in California it takes 45 days from posting to actually transfer the license and close escrow.  In Arizona and Washington, the liquor license normally aren't personal property so the buyer goes the liquor board at the close of escrow to start the transfer process (Arizona has some liquor licenses that are personal property and can be leaned as well.  Ask you broker for details).  Ask the SellingRestaurants broker about temporary permits used for early possession transactions in California.

 

DUE DILIGENCE: We’re not here to sell a restaurant you don’t want!  Our purchase agreement is designed to give the Buyer plenty of time to perform a thorough due diligence process.  If more time is needed, immediately contact the SellingRestaurants agent. The due diligence process begins once you've made an offer the the seller has accepted the offer. The purchase agreement outlines the contingency that must meet your satisfaction before money is transferred and the deal is close. The most common contingencies are financial review, facility inspection, equipment inspection, furniture, fixtures and equipment inventory, liquor license transfer, and loan approval. The buyer should have ample time to feel that each of these areas meets their expectations. 

 

PREMISES & EQUIPMENT INSPECTION: SellingRestaurants strongly encourages Buyers to have use professional inspectors to inspect the property including the parking lot, roof, HVAC system, hot water system, exterior and interior walls, electrical and plumbing, ADA compliance, and the ceilings.  If defects are found, the Seller is usually responsible for repairs unless the purchase agreement states otherwise. Notify the SellingRestaurants agent in writing of any defects.

 

FINANCIAL DUE DILIGENCE: Make sure to perform a financial due diligence that represents the type of purchase your transaction is.  For example, an income purchase has significant goodwill requiring a more thorough financial due diligence then a facility purchase where the Buyer's primary reason of purchasing the store is to avoid building and equipment costs.  A financial purchase includes reviewing bank statements, point of sales reports, general ledger, payroll, and accounts payable, sales tax returns, and of course, income tax returns.  Seek an accountant's help with the process. Remember, the value of a facility is in the eyes of the Buyer.  Every Buyer has a different value for the same facility depending on the use and cost avoidance estimate, but don't bother doing a financial due diligence because the restaurant is losing money and you're buying the right to open a ne concept for a fraction of the price of building a restaurant from scratch. 

 

 

 

 

CLOSNG ESCROW:  Often a buyer will ask, why do an escrow?  In California, escrow provides sort of an insurnace policy that things will be correctly and you'll be getting a restaurant that's been cleared of liabilities and you're not assuming any liabilities. scrow In California, escrow can close in 30-40 days if there is no liquor license, loan or franchise and if the landlord approves the transfer on a timely basis.  If the landlord delays or the deal has a Liquor License, Loan or Franchise, expect a 75 to 120 days closing process.

 

 

 

 

 

BUYER’S RESPONSIBILITIES: The Buyer is responsible for getting all the permits and licenses to operate the restaurant. SellingRestaurants does not work for the Buyer.  SellingRestaurants provides checklists to help the close the deal and our agents are always available for questions.

 

SELLER WARRANTIES: When purchasing a restaurant the Seller must insure the restaurant complies with all governmental regulations.  Unless negotiated otherwise, the Seller pays the cost to comply with these regulations.  Furthermore, unless negotiated otherwise, the seller must also insure the equipment is in good working condition upon transfer.  This doesn’t mean the equipment is made new.  This being said, there are cases where the equipment could fail a week or month after taking possession. Unless proven by preponderance of evidence that the equipment was faulty prior to taking possession, it would be a better use time and emotions running the restaurant rather than seek damages in a legal battle.

 

SBA LOANS: To obtain an SBA loan a Restaurant must have: (1) 3 years solid tax returns showing consistent owner’s cash flow, (2) the price of the store must be justified by the Income (usually no more than 3 times owner's cash flow) , and (3) the Buyer must have restaurant experience with good credit history.  There are circumstances where the bank is more interested in cash flow than in the Buyer’s Collateral and will lend money even though the collateral is lacking.  Please consult the SellingRestaurants agent for details. It normally takes a couple weeks to complete a loan package and a couple weeks for the bank to approve the loan.  After the approval, it takes 45 to 60 days to close the purchase. 

 

SELLER FINANCING: If a Seller extends credit to a Buyer, expect the Seller to check the Buyer’s credit and financial information. SellingRestaurants does not perform credit checks.   SellingRestaurants will, however, supply the Seller with a “Buyer Profile" containing the Buyer’s work experience, personal financial statement, and a credit authorization approval letter.  Expect the Seller to secure the transaction with either one of these or all of them: (1) a sub-lease, (2) UCC-1 financing statement, (3) a personal guarantee and, (4) the Buyer's real estate.

 

ESCROW FEES: Escrow fee are about $2,000 and usually split equally.  The fee increases with a higher sales price, Seller financing deals, SBA loans, or any other special services requested.  Escrow is sort of like buying an insurance policy for the Buyer.  Escrow transfers the restaurant free and clear of all debts and obligations to the Buyer.  No one can make a legitimate claim against a Buyer from the debts of the Seller.

 

EARLY POSSESSION:  Taking over the restauarant before escrow closes is possible. Talk to the SellingRestaurants agent about this option. Early possession, as It Is known, requires the Buyer to obtain: (1) all licenses and permits, (2) a lease assignment or sub-lease, (3) all insurances, (4) deposit 100% of the funds in escrow, (5) remove all contingencies, and (6) sign the final escrow Instructions.  Of course the Seller must agree to give the Buyer early possession.

MEANING OF “AS IS:  Generally, “as is” is defined as a Buyer accepting the restaurant's defects which are fully disclosed to the Buyer.  SellingRestaurants always recommends using professional inspectors to check the property.

SellingRestaurants AGENCY RELATIONSHIP: SellingRestaurants represents Sellers. Anything the Buyer gives or tells the Agent, assume our Seller receives the same.  Since SellingRestaurants specializes in selling restaurants, bars and clubs, our contracts and processes are designed to sell these restaurants.  By providing the Buyer with access to these contracts and processes, SellingRestaurants is not attempting to create an agency relationship.  Instead, SellingRestaurants is merely facilitating the sale process for our principal, the Seller. SellingRestaurants encourages independent legal and financial counsel for the Buyer.

                                                                                                                                                                                                                                                      

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. 

 

 


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