There is a pecking order in the food and entertainment business, a pecking order of honesty and integrity. The most dishonest folks tend to be strip club owners. Every word is a lie. The next are club owners where every other word is a lie. That's all you need to know for this story.
But enough of the definition of honesty and integrity in this business. You get my idea, right!
So I’m doing a club deal. There are 3 seller partners - so imagine the lying here. Two partners are young guys who work the business while the other partner is the grandfather of the club business in this city (not that he's old mind you, just that he's been in the business for years). The grandfather had bought into the partnership with a rather large injection of cash and isn’t involved in operating the business.
They want to sell this prime location club in the heart of a large city's downtown district. We price it at $450,000.
The two young owners however negotiated a bad lease with the landlord whereby the landlord had built a very expensive façade on the outside of the building and charged the $120,000 to the club owners. That became a note that the tenant’s owed the landlord and is due on sale. But the grandfather of clubs had no idea this existed until after he invested. Ooops… So as far as he’s concerned, that’s not his bill and the other two have no choice if they want to have a career in the business, if you understand what I’m saying.
I quickly find a buyer. He’s got money and he wants into the local club industry in a bad way. We enter contract at $400,000 and we start the escrow process.
Now unknown to me, the two young owners are investing heavily in a club in Scottsdale AZ. They badly need cash and lots of it.
They start doing the math on the $400,000 sales price and they’re coming up short due to the $120,000 owed to the landlord.
So I’m on vacation in Hawaii when I get a call from the buyer. He’s demanding a price reduction because of some discrepancy in the numbers. He’s jumping up and down and getting overly excited.
We’ll after that call, I call my buyers – the one’s operating the club, not the grandfather. I tell them the buyer wants to cut the price $100,000. They get upset, and come back to the buyer at $325,000. The buyer agrees. I thought to myself that was too easy.
I redo the contract and everyone signs. I move the process forward. About a month later I get a call from the two young owners telling me to cancel the deal they’re going to keep the club. I say what!
Well, I call up the buyer to tell him the bad news. When he hears the news he proceeds to tell me “Mel, do you remember when we had that price reduction a couple months ago.” I say of course.
He continues, “well, the young owners had reached out to me and told me to scream for a price reduction. But in reality I had cut a deal outside of escrow to pay them directly $75,000.”
I of course was shocked! And asked whether the grandfather of clubs knew about this. He said of course not, they needed to get more money out of the deal because of the club in Scottsdale that had major cost overruns.
I do more research to discover the deal in Scottsdale had fallen apart.
I called the grandfather of clubs to bring him up to date. He knew nothing about cancelling the deal and was expecting a payout. He knew nothing about the backdoor deal either.
Oh, man is all I can think.
Well since I’m his agent, as well as the other two guys, I need to disclose what I know to all of them.
I tell the grandfather of clubs what happened. First there was a nervous laughter quickly followed by a stern WTF do they think they’re doing! They're never going to be in the club business in this town. After an hour discussion with him, he said he would handle it with his partners directly and no need for me to talk to them.
Well, I’m not sure what happened after that other than the deal was canceled. The club concept was changed with the three of them remaining as owners along with an additional owner investor.
On a side note, the Scottsdale deal had blown-up on a all fronts. First the one young owner had sold more than 100% of the stock to investors. A big no-no!
Second, they allowed an investor to be the operator and the investor took over the business and didn’t allow the two young guys into the business. They loss a ton of money on this puppy.
A lawsuit was thrown all over that deal! The young owner in the end was kicked out of the partnership.
The buyer of the club walk away from the deal but later opened up his dream club, which quickly became a nightmare and didn’t last six months. OUCH!
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.