What is a Restaurant Purchase Contract?
A restaurant purchase contract is absolutely necessary for the purchase and subsequent operation of a restaurant business.3 min read
A restaurant purchase contract is absolutely necessary for the purchase and subsequent operation of a restaurant business. Restaurants are notoriously difficult businesses to purchase; you must undertake a long and careful review of the market before the investment of any significant amount of money.
Reasons for Purchasing Existing Restaurants
Although the purchase of a restaurant is a difficult and arduous process, starting from scratch (i.e., building a restaurant business from the ground up) is even more difficult, requiring the acquisition of hundreds, if not thousands of tools (such as cooking utensils, tablecloths, napkins, silverware, and many more) needed for the day-to-day operation of a restaurant. For this reason, most individuals would rather purchase an existing restaurant and change the methods of operation.
One important rule of buying a restaurant business is that while you are purchasing it, someone is selling it…for a reason. You as the buyer must understand what that reason is before committing to a purchase, if not you may end up with a liability. Investigating the purchase worthiness of a restaurant is a major part of starting up the business. It should not be rushed no matter the amount of pressure from the seller or how attractive the initial deal looks.
Seek Advice from Professionals
In virtually all markets, a good number of restaurants fail within the first three years. To avoid this, you must carry out a careful and professional review of the modus operandi, financial records, and history of the restaurant before making an offer.
Never rely on the standard business contract drawn up by the broker since in many cases such contracts only protect the interests of the broker rather than the contracting parties. Advice from experienced professionals such as CPAs and attorneys is needed to ensure that your interests are protected in the terms of the contract.
Questions to Ask
The following are facts and questions you should ask the seller before making an offer:
- Who owns the business and what is the ownership structure? - whether partnership, corporate, sole proprietorship, etc.
- Type of insurance policies
- Lease options and arrangements – you must obtain a copy of the lease contract
- Documentation and title to fixtures; warranties
- Use restriction and zoning information
- Vendor information
- Competitors in the area; past and future competitors
- Outstanding litigation
- Key personnel
- Workers compensation – claims and issues
- Changes in customer base such as the opening or closing of malls, factories, business complex, and others
- Contractor information – get details of the working arrangements between the restaurant and the contractor staff
- Employee information
- Issues with the local government
- Opening or closing of branch outlets
- Road changes? Construction issues? Zoning changes?
- Relationship with neighboring business; issues and complaints, if any
- Handling of accounting information – obtain a copy of the financial statements and tax returns for the past three years
- Relationship with the health departments – obtain previous inspection reports
- Information on past owners and employees
- Complaints with agencies such as the EEOC
- Disposal of hazardous waste material? Storage issues? Parking issues?
- Union issues
- Signage costs? Logos? Copyrights? Recipes? Trademarks? Trade names?
- Employees that left and began competing businesses nearby?
- Vandalism and crime in the neighborhood
- Tax audits for the past five years
- Type and frequency of advertisement
- Incentives for purchase of the business
- The status of past offers made to the restaurant owners
- Reason(s) for selling
Other questions you should ask include:
- The validity of the restaurant books; CPA sign off - can they guarantee the same level of business in the near future?
- Expense analysis - gross and net analysis
- Payroll analysis
- Three to five years' tax return
- How tips are handled
- Excise tax and sales tax returns
- Expense and sales trends
- History of payment for vendors – obtain credit reports
- Fringes, both on and off the books
- Value and state of fixtures (fixed or removable) and depreciation schedule
- Availability and cost of training
- Proof of tax payments
- Name of bookkeeper and CPA – payroll service
- Liquor license
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