If you’re considering buying a restaurant, you’re not alone. Over 50 percent of all retail businesses bought and sold in the U.S. are restaurants, bars, taverns and other food service establishments, as reported by BizBuySell. It’s a lucrative industry. In 2014, the restaurant industry reported over $700 billion in sales, and contributed 4% of the U.S. GNP, according to the National Restaurant Association.
Yet, before you rush off and buy your dream restaurant, slow down and proceed with caution. It may not be as great as it appears. Here’s 5 things to watch out for before you buy a restaurant:
1. Existing Liabilities. These may include unpaid overtime, health code or labor violations, undocumented workers, or years later a female server could file a sexual harassment lawsuit because of how she was treated. But a buyer can avoid theses existing liabilities by purchasing only the restaurants assets, such as location, equipment, name and inventory. This may be accomplished by forming a new Limited Liability Company (LLC). The existing employees are terminated and then hired by the new LLC.
2. Existing Leases. When someone buys a business, they are assigned to the existing lease. These commercial leases include a provision requiring the landlord’s approval of an assignment to a new business owner. Before you buy a business, contact the property owner as soon as possible and find out what they require to approve the assignment. If you can prove you have the financial ability to pay the rent, then there’s a good chance of getting approved.
3. Transferring the Liquor License. In California, new restaurant owners must be approved by the California Department of Alcoholic Beverage Control (“ABC”) to transfer the liquor license. Similar rules may apply in other states. The waiting period for a license to transfer is at least 30 days, while the average is about 55-65 days.
4. Nonpayment of Sales Tax. Restaurants have a reputation for not reporting all their income, including severely underreporting cash revenue in order to avoid paying sales tax. This exposes the restaurant to a possible audit somewhere down the line, which in turn may cause the new restaurant owner to pay unpaid taxes. In order to avoid this, hire an experienced accountant to thoroughly review the restaurant’s books.
5. Restaurant Equipment in Poor Condition. The restaurant may contain old worn out equipment that’s near the end of its life cycle, and this may affect the overall value of the business. Restaurant equipment can be extremely expensive to replace. Before you buy a restaurant, inspect all of it’s equipment and make sure it’s in good shape. Also, check that the equipment is actually owned by the restaurant and that no creditors have a lien on leased equipment.
Overall, it’s very important to conduct a very thorough due diligence before you move forward in purchasing a restaurant. Yet, an existing, well-established restaurant in a great location can be a worthwhile investment. You can find many restaurants for sale right now by visiting BizBuySell.
“Ever dream of owning your own restaurant? You’re not alone. Many people do. But before you run out and sign on the dotted line, slow down and take your time to make sure this is the right investment for you. Restaurants are difficult and complicated investments, and they are notorious for having legal problems that …”