Have you ever thought of owning your own restaurant? Many people, from all walks of life, do but before you rush out and pour your life savings into an eatery, consider the complexity of the investment you are making. A wise buyer conducts a thorough investigation throughout the transaction and especially during the due diligence period.
While growing up, my father owned an Italian restaurant. Working at the restaurant taught me the benefits of hard work and the importance of top notch customer service. I also witnessed the challenges and legal issues that came and went over the course of time my father was a restaurant owner. Now, as an attorney, I spend many hours assisting people, people like my father, in their purchase of their dream restaurant. Often times, the assistance and legal problems I am helping my client solve could have been avoided had they known more about the process and pitfalls of buying a restaurant.
Before you buy your perfect eatery, consider the following closely:
1. EXISTING RESTAURANT LIABILITIES
Restaurants incur liability in countless ways. Employing undocumented workers, health code violations, sexual harassment suits, and overtime pay errors are just a few liabilities a restaurant can incur. Any of these claims can cause serious problems for a new owner. However, existing liabilities can be avoided. The formation of a new entity and asset purchase can significantly limit the liabilities being purchased.
2. EXISTING LEASE REQUIREMENTS
In most situations, purchasing an existing restaurant involves an assignment of the existing lease. Review your commercial lease to see if the landlord’s approval is required for the lease to be transferred. To avoid issues with the existing lease, provide the property owner as much notice as possible of the proposed sale and request the information required to effectuate the sale.
3. LIQUOR LICENSE TRANSFER
Similar to the assignment of a lease, the California Department of Alcoholic Beverage Control (“ABC”) must approve the transfer of a liquor license from the seller to the buyer. A liquor license transfer can be cumbersome and adequate time should be set aside to accomplish the transfer. On average, a transfer is processed in 55-65 days and, in no event, will the transfer occur in less than 30 days. If necessary, a temporary permit can be obtained to allow the buyer to operate the restaurant pending final approval of the liquor license transfer.
4. UNPAID SALES TAX
Restaurants are known for failing to adequately report all income. To avoid sales tax, many restaurants will under report cash sales. As a result, restaurants are audited by the California Board of Equalization to determine the proper amount of sales tax due and owing. If the audit results in a finding of additional taxes due, the California Board of Equalization will order payment due immediately upon notice. To avoid unpaid taxes, hire a competent business accountant to review restaurant books and tax returns.
5. DOUBLE CHECK EQUIPMENT PURCHASED
Closely review all ownership records of equipment to insure the Seller truly has the right and title to the assets sold. Restaurant equipment can be quite costly to replace, equipment near the end of its life cycle should significantly reduce the value of a business. Contact an attorney or the California Secretary of State to determine if a creditor holds a lien against any equipment included as part of the restaurant sale.
Amir H. Afsar, Esq. is an attorney and founder of Afsar Law Group, A.P.C. which represents clients in business, real estate, construction, and estate planning matters throughout the Coachella Valley including Indio, La Quinta, Bermuda Dunes, Indian Wells, Palm Desert, Rancho Mirage, Cathedral City, Palm Springs, Banning, Joshua Tree, and other cities located within Riverside and San Bernardino County. Mr. Afsar can be reached at Afsar Law Group, A.P.C. at 760.345.3110.