THINKING OF GOING INTO THE BAR OR RESTAURANT BUSINESS (OR ANY OTHER BUSINESS)? HERE ARE 7 CONSIDERATIONS BEFORE YOU BUY
So, you are considering purchasing a bar or restaurant? If you have been checking out the classifieds then you probably realize that there are many bars and restaurants listed for sale. That could be good or bad, depending on your outlook. While the failure rate among restaurants may be higher than some other businesses, that may lead to some great deals and opportunities for a buyer.
If you have decided that now is the opportune time for you to buy a bar or restaurant, here are few considerations to take into account. While this article is geared towards purchasing a bar or restaurant, many of the considerations apply to the purchase of any business.
- Buying the Assets v. Buying the Company
There are two ways to buy a bar or restaurant. You can purchase the assets of the business or purchase the ownership interest in the company. Each option has its advantages and disadvantages. With an asset purchase, the buyer is not responsible for the seller’s liabilities unless you specifically agree to assume them. With a purchase of an ownership interest, the buyer will be assuming all of the liabilities of the seller, whether known or unknown. An asset purchase is generally the preferred method for a buyer. However, determining which option is best for your depends on a review of the facts. In either case, you should perform a lien or judgment search on the seller’s business to determine what liens, if any, are filed against the assets of the business.
- The Assets
You want to make sure that you identify each and every asset that you are purchasing. Some assets can be tangible (e.g., refrigerators, soda machines, furnishings) or intangible (e.g., business name, lease). You should determined which assets are owned or leased. You should inspect the tangible assets to make sure that they are in working order. For the assets that you are purchasing, you want to make sure that the seller actually has ownership of them and has the right to transfer them to you. With the leased equipment, you need to decide if you want to (and can) assume the lease and, if so, what are the terms of the lease.
- The Business Valuation
The valuation of the business is always challenging, as bars and restaurants are notorious for having unreported income. Gather as much financial information as possible, including profit and loss statements, tax records, payroll records, supplier invoices, utilities, and meal receipts. Make the seller prove the figures that he claims are the real profits. There are many different formulas for valuing a bar or restaurant. If the business is not profitable or is on the verge of closing, an asset-based method of valuation may be more appropriate because you are simply buying the equipment. If the business is an on-going profitable business, then the value would be based more on cash flow or profits.
- The Lease and Location
Location, location, location! A successful bar or restaurant takes more than just quality food and spirits. The location of the business plays a significant role in its success. You want to observe the traffic flow, proximity to other businesses, and parking. Review the lease for its terms, including the number of years remaining on the current lease, the rent, security deposit, personal guaranty, and the provisions governing assignment. Provided that the seller has the landlord’s consent to assign the lease to you, you want to review the other terms to see if they are acceptable to you. If the landlord is not willing to assign the existing lease to you, you will have to inquire to see if the landlord would be willing to terminate the seller’s existing lease and issue a new lease to you. It is imperative that you address the lease portion of the deal as soon as possible.
- Due Diligence
You want to perform a due diligence review of the business. Check if the business has a good reputation and solid customer base. Identify the customer demographics, and try to gauge overall customer satisfaction. Review the seller’s books and records, inspect the equipment, speak to employees, and make inquiries to the local government agencies to ensure that the business is in compliance with all applicable rules and regulations. Keep an eye on the cash flow, accounts receivables, and company debts. Identify which areas the business is thriving in and which may need improvement.
- Non-Competition Clause
Ask the seller to agree to a non-compete clause in the purchase agreement. This will prevent the seller from opening (or joining) another establishment in the area for a given period of time. A carefully constructed non-compete clause is necessary for its enforcement, especially when there is a unique skill or trade, or when a business is being purchased. A non-compete clause needs to be reasonable in terms of both duration and geographical limitations. While enforcing a non-compete clause may be challenging, the inclusion of the clause may, at the least, act as a deterrence.
- Conditions to Closing
Having conditions to closing affords you the opportunity to cancel the purchase agreement if the stated conditions are not met. For instance, obtaining a liquor license is critical to the purchase. So, you would want your purchase to be conditional on you obtaining the proper liquor license. Obtaining a lease of the premises should also be a condition to purchasing the business, whether it means the landlord agrees to assign you the existing lease or is willing to terminate the seller’s existing lease and issue you a new lease. If you fail to specify the necessary conditions it could open you up to costly litigation.
This article is simply to provide a general overview of some areas of consideration when you have decided to purchase a bar or restaurant (or another business). If you are interested in buying a business, such as a bar or restaurant, we strongly suggest that you contact us as early on in the process as possible (even before you approach the target business) to discuss these, and other, considerations in greater detail.
If you are considering buying a restaurant that is a franchise, read out related post – Looking to buy a franchise? Here’s what you should know and how to get started.
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