Buying a Restaurant
This is the most comprehensive guide to buying a restaurant online.
In this new guide, you will learn the step-by-step processes I have used hundreds of times to successfully purchase restaurants for my clients.
Let’s dive right in.
Table of contents
- Buying a Restaurant
- Chapter 1: How to Buy a Restaurant
- Let’s get started
- Your Roadmap to Buy a Restaurant is Your Business Plan
- Your Concept and Menu Key to How You Buy a Restaurant
- Know Your Target Customers Before You Buy a Restaurant
- Competitive Analysis is Critical Before You Buy a Restaurant
- Study Competition Before You Buy a Restaurant
- Where should you look to buy a Restaurant?
- What is the Trade Area when searching to buy a Restaurant
- Buying a Restaurant-Determining Your Trade Area
- Site Considerations to Evaluate to Buy a Restaurant
- Property Types for Restaurants You Can Buy
- Types of Restaurant Space to Consider when you Buy a Restaurant
- Financial Projections to Analyze Before You Buy a Restaurant
- Other sources to determine sales for Restaurants for Lease:
- Cost of Rent When Considering a Restaurant to Buy
- Start-Up Costs to consider when you buy a restaurant
- Business Entity Formation
- Corporation, LLC, or Sole Proprietor
- Tax Identification Number
- Bank Accounts
- Personal Financial Statements
- Zoning and Permits for Restaurants
- Is Restaurant Use Allowed?
- How Much Parking is Required for a Restaurant?
- How to Perform Parking Calculations on Restaurants
- Off-site Parking
- Valet Parking
- Health Department
- Chapter 2: How to Find Restaurants to Buy
- Restaurants for Lease Internet Sites
- Commercial Real Estate Brokers
- Real Estate Brokers
- Commercial Real Estate Broker
- Who Does the Commercial Real Estate Broker Represent?
- Beware of Dual Agency
- Who Pays the Commission when you buy a restaurant?
- Buyer Broker
- Should You Use a Real Estate Broker to Buy a Restaurant?
- Getting the Most from Your Restaurant Broker
- Should You Work with One or Many Brokers?
- Exclusive Representation to Buy a Restaurant
- Problem with Commissions
- There is a Solution—Minimum Fee
- Term of Agreement
- Hourly or Flat Fee Consulting
- Viewing Restaurants For Sale
- Buying a Restaurant-Off-Market Deals
- Tracking Restaurant Listings When You Buy a Restaurant
- Analyzing the Deal When You Buy a Restaurant
- What is a Non-Disclosure Agreement?
- Chapter 3: Negotiating the Deal When You Buy a Restaurant
- Chapter 4: Escrow the Final Stage to Buy a Restaurant
- What is Escrow?
- Escrow Fees
- Opening Escrow
- Escrow will require the following information from the Seller and Buyer:
- From BUYER:
- What Happens in Escrow when you buy a restaurant?
- Final Walk-Through
- Bill of Sale.
- Closing Statement.
- Promissory Note.
- Liquor license transfer.
- Congratulations on buying a restaurant!
Chapter 1: How to Buy a Restaurant
Let’s get started
You should complete the following steps before starting your search to buy a restaurant:
- Create a Business Plan
- Form Business Entity
- Prepare Personal Financial Information
Your Roadmap to Buy a Restaurant is Your Business Plan
The main ingredients of your business plan include:
- Target Customers
- Competitive Analysis
- Financial Projections
- Cost of Rent
- Start-Up Costs
Before looking to buy a restaurant you need to have a road map. The following information will be the backbone of your business plan.
Your Concept and Menu Key to How You Buy a Restaurant
You will design your restaurant around your concept and menu.
There are many types of restaurants. A few examples include;
- Fast Food
- Quick Service
- Fast Casual
- Fine Dining
Know Your Target Customers Before You Buy a Restaurant
Determining who your target customer is and knowing where they live, work, and play is critical to your success.
Without getting into a detailed discussion of demographics or psychographics, your customers will share several characteristics such as age or income level.
The quickest way to learn about your customers is to study your competition.
Competitive Analysis is Critical Before You Buy a Restaurant
Let’s say you plan to sell hamburgers priced between $6 to 8 dollars.
We can assume a chain like Smashburger is one of your competitors.
If your competitor is a large chain like Smashburger, it’s pretty easy to learn about their customer profile.
Often you can check under the franchising section of your competitor’s website.
You can also contact their real estate department and ask for their site criteria.
Doing so will provide you with the information they use to analyze sites.
According to information provided from their real estate department, you can determine the criteria they use to find restaurants for lease near their target customers.
Study Competition Before You Buy a Restaurant
Sample Site Criteria
MAJOR METROPOLITAN MARKET PREFERENCES
- Traffic Count: > 50,000 Cars Daily
- Employees (3 Mile Radius): > 75,000
- Population (3 Mile Radius): > 75,000
SECONDARY MARKET PREFERENCES
- Traffic Count: > 30,000 Cars Daily
- Employees (3 Mile Radius): > 40,000
- Population (3 Mile Radius): > 50,000
- Average Household Income (3 Mile Radius): $60,000
- Proximity to QSR Burger, Adult Casual Burger, & Fast Casual Competitors
- Size: Typically 1,600 – 2,200 Square Feet
- Building Type: End Cap / In-Line Location
- Parking: Minimum 16 Spaces, Preferred 20-25
- Seating: 40-70 Interior with Exclusive Patio as Available
- Full Dress Trade Package and Signage
- Electrical: 400 AMPS (120/208 V)
- Gas: 2.5″ Gas Line, Minimum 2 Million BTU
- Water: Per Code, 1.5″ Service Minimum
- Grease Trap: Per Code, Installed
- HVAC: 1 Ton per 150 SF, Approximately 10-12 Tons
As you can see, Smashburger looks for restaurants for lease with more than 75,000 employees within 3 miles, and a total population greater than 75,000 people within 3 miles.
They also look for an average household income of $60,000 per year within a 3-mile radius.
They have also provided valuable information about their business:
SMASHBURGER AT A GLANCE
- Dine-In (70%), Carry Out (30%)
- Lunch (55%), Dinner (45%)
- 10am-10pm Daily
- $8 average check
- Modern Décor
- 1,600-2,200 Square Feet
- Booth & Flexible Seating (40-70 Seats)
- Patio Preferred (20-40 Seats)
- 100% Angus Beef Smashburgers
- Smashfries, Sweet Potato Fries, Classic Fries, Haystack Onions, Veggie Frites, Häagen Dazs Shakes & Floats
- Chicken Sandwiches & Salads
- Beer & Wine
- Counter Ordering, Table Service
- 5-6 Minute Service Times
- 20-25 Minute Table Turns
Using this, you can either look to buy a restaurant near existing Smashburgers or research areas with similar demographics.
Many free and paid services offer demographic information.
Most real estate brokers provide necessary demographic information as part of their marketing information about the property they are marketing for lease or restaurant they are selling.
Where should you look to buy a Restaurant?
Before starting your search for a restaurant property, you need to determine the “Trade Area” where you wish to open and the type of real estate you want to consider.
What is the Trade Area when searching to buy a Restaurant
A restaurant’s trade area is the geographic area that contains 75 to 90 percent of your customers.
According to Groupon, Customers spend 80 percent of disposable income within 2 miles of a person’s home.
The geographic area can take many shapes and is determined primarily by your customers’ distance or time to access your place of business.
A trade area comprises a combination of employees, commuters, and shoppers.
Quick Service Restaurants (QSRs) and Fast Food restaurants are typically convenience-driven concepts.
Their success depends more on convenience to their customer than a destination business such as a new car dealership where customers usually plan to visit the location for a specific reason.
For this reason, the trade area for quick-service restaurants is usually 1-2 miles or 3-10 minutes in the distance from their primary customer in a central metropolitan area such as Los Angeles.
Many quick-service restaurants rely on residents living within the surrounding neighborhoods for 40%-60% of their business.
Other concepts, such as those located in a Central Business District, may depend almost entirely on employees working within a few blocks and receive limited sales from residential customers.
Ideally, a restaurant’s trade area will provide the right mix of residential, employees, and a robust retail draw to attract shoppers.
The key to determining which trade area is right for your restaurant is the combination of :
- the total number of people who match your customer profile
- the right amount of competition
- position to your competition
- and the perceived convenience of visiting your business in the eyes of your potential customers.
Buying a Restaurant-Determining Your Trade Area
The research about your competition should give you a starting point when you begin your property search.
Each Trade Area is unique, and you will need to determine the boundaries for each.
While many restaurant property brochures will provide demographic reports showing 1, 3, 5-mile radius rings, the actual boundaries are often much different.
Sample Radius Map
A more accurate method to determine your store’s trade area is calculating the drive-time to and from your customers’ home or work to your proposed store.
Let’s use the following example. You have researched a competitor’s site, and you have determined that locating near this store is a good starting point.
Purchase a map or print a map using Google or Yahoo maps. Make sure the map shows all of the streets within 3-4 miles in all directions.
Using a highlighter, mark the major roads leading to residential neighborhoods, business districts, and retail or entertainment areas.
Using a watch or a stopwatch, drive from your proposed store heading north towards your first destination.
Using your timing device, mark your location on the map at various intervals such as 3, 5, and 10 minutes.
Be sure to note any barriers that require you to alter your route or prevent you from reaching your destination.
Using the same process, drive South, East, and West. Your map should now have markings in each direction for 3, 5, and 10 minutes.
The more paths of travel that you compute, the more accurate your trade area boundaries are.
Using dotting lines, connect the dots for each of the periods.
This map should give you a good idea of how easy or difficult it will be for your customers to reach your store.
Use the boundaries developed on your plan to determine the customers’ demographic profile within your limits using various demographic programs.
It’s essential to conduct this study during various times of the day to factor in traffic conditions.
A five-minute drive at 10:00 a.m. on Saturday may take thirty minutes in rush hour traffic.
You will need the help of a commercial real estate broker or demographics service to provide demographics at the level provided below.
Sample Drive-time Map
Site Considerations to Evaluate to Buy a Restaurant
Restaurant Traffic Generators
Most businesses’ primary traffic generators consist of employment centers, residential neighborhoods, shopping, commuter traffic, and entertainment.
Determine where your customers live, work, shop, and entertain themselves within 1 to 3 miles.
Label these locations on a map.
Consider Access When You Buy a Restaurant
Access to your location can significantly impact your sales.
Some restaurants for lease are visible but too difficult to access.
Things to consider:
- How long does it take to get in or out of the property?
- Can you make a left-turn into or out of the property?
- Is there a median that prevents cars from entering from one direction?
The more comfortable and faster it is to enter and exit (ingress & egress), the better
Don’t Overlook Visibility When You Buy a Restaurant
Visibility is vital for most restaurants.
Many sales are impulse sales and not planned. End-caps and pads typically have the best visibility in shopping centers.
If you are locating inside a shopping center, try to find a visible space for cars as they enter the shopping center.
Check regarding any restrictions on the size and type of signage allowed.
Some cities may limit colors and require standardized signage that provides little differentiation between you and the other tenants.
Property Types for Restaurants You Can Buy
Restaurants open in all types of properties.
Although some restaurants have unique locations, most restaurants are in one of the following property types.
Neighborhood centers provide convenience shopping for the immediate neighborhood’s day-to-day needs.
They typically consist of a grocery store, major drug store, or both. The majority of neighborhood centers range from 30,000 to 100,000 square feet.
Strip centers consist of a row of at least three retail stores managed as a single property.
Most strip centers are L-shaped, U-shaped, or a straight line of stores.
Strip centers typically include dry cleaners, fast food, convenience stores.
A community typically offers a broader array of soft goods than a neighborhood center.
Community center tenants sometimes include home improvement, furnishings, and super discount stores.
A power center includes several large anchor tenants, including warehouse stores, and “category killers” such as Best Buy and Target.
A free-standing is building is a stand-alone building. McDonald’s and other fast-food restaurants with a drive-thru often prefer this type of facility.
Mixed-use buildings are typically apartment buildings with retail on the ground level.
Most of the new construction in cities with limited land is mixed-use.
Many office buildings have a few spaces on the ground level to service the tenants of the building.
Restaurants are often tenants in these buildings if the neighborhood is mostly office space.
Types of Restaurant Space to Consider when you Buy a Restaurant
Pad buildings are free-standing buildings and often located at the edge of larger shopping centers.
Restaurants usually prefer these buildings due to being closer to the street and the visibility they provide.
End-caps provide the best visibility in most shopping centers. They often provide additional signage and visibility on two sides of the building.
Inline spaces are located between anchor tenants in larger shopping centers or between end-caps in smaller strip centers.
The elbow is typically the worst space in most shopping centers. The configuration is often not a rectangle, and visibility is often lacking.
Financial Projections to Analyze Before You Buy a Restaurant
Your projected sales will determine your entire business plan.
Again, your competition is the best source to determine your sales potential.
If your competition is a publicly-traded company, you can often determine their average sales per unit. Some companies also provide this information when they advertise their franchise to prospective franchisees.
Some sources for sales information are:
- QSR Magazine
- Nations Restaurant News
- Franchise Disclosure Documents
Here’s an overview of a special report from National Restaurant News.
Estimated Sales Per Unit 2013
McDonald’s $ 2,519,400.00
In-N-Out Burger $ 2,384,600.00
Culver’s $ 1,831,400.00
Steak’n Shake $ 1,697,800.00
Wendy’s $ 1,405,300.00
Jack in the Box $ 1,380,000.00
White Castle $ 1,268,400.00
Carl’s Jr. $ 1,255,400.00
Burger King $ 1,193,400.00
Five Guys Burger and Fries $ 1,070,400.00
Dairy Queen $ 634,600.00
Jason’s Deli $ 2,427,300.00
McAllisters Deli $ 1,358,200.00
Arby’s $ 881,200.00
Jimmy John’s Gourmet Sandwiches $ 874,700.00
firehouse Subs $ 726,600.00
Subway $ 482,300.00
Quiznos Sub $ 291,200.00
Chipotle Mexican Grill $ 2,072,200.00
Taco Bell $ 1,319,800.00
Del Taco $ 1,122,600.00
Moe’s Southwest Grill $ 973,100.00
Qdoba Mexican Grill $ 964,000.00
Krispy Kreme Donuts $ 2,407,400.00
Dunkin Donuts $ 874,900.00
Starbucks Coffee $ 854,700.00
Jamba Juice $ 620,700.00
Baskin Robbins $ 207,100.00
Chick-fil-A $ 2,769,900.00
El Pollo Loco $1,533,600.00
Popeyes Louisiana Kitchen $ 1,168,200.00
KFC $ 957,700.00
Wingstop $ 882,400.00
Church’s Chicken $ 718,600.00
CiCi’s Pizza $ 866,300.00
Little Caesars Pizza $ 813,700.00
Papa John’s Pizza $ 783,100.00
Pizza Hut $ 742,400.00
Domino’s Pizza $ 722,100.00
Sales can vary significantly based on factors such as location and competition in the marketplace.
Using average unit sales is just a starting point.
Once you determine where you plan to open, you will need to dig deeper and possibly modify your numbers.
Also, a large well-known brand like Subway or Chipotle will have higher sales and better margins based on their advertising, brand recognition, and economies of scale.
You should not expect to outperform your competitors.
Other sources to determine sales for Restaurants for Lease:
One of the easiest methods to determine your competitors’ sales is to ask.
Have lunch or dinner at your competitors’ restaurant and ask the manager about their business.
Tell them you are new to the area and thinking about opening a retail store.
Another more time-consuming method is to count customers.
This method can confirm your assumptions once you narrow down a neighborhood where you plan to open.
Determine the average check per person, sit outside, and count the number of customers entering the store during the day’s various times.
In addition to determining sales for your competitor, you will learn the slow and busy times are so you can plan the number of employees needed during different times of the day.
Cost of Rent When Considering a Restaurant to Buy
Rent is the most critical cost to determine. You can adjust other expenses in your business, but not your rent once you sign a lease.
The general rule of thumb is, your total occupancy cost (rent and additional fees for property taxes, insurances, common area expenses, etc.) should not exceed 6-12% of your gross sales.
Your annual sales determine the rent you pay.
Your business plan should provide a realistic expectation of annual gross sales if you were diligent in researching your competition.
You can benchmark your numbers by looking at your competitors’ sales and occupancy costs if they are public companies.
The chart below from Chipotle Mexican Grill’s Form 10 K shows occupancy costs equal to 6.3% of revenue.
Fine-tune after you determine the trade area where you will open.
If your research shows that the occupancy costs for your primary competitors range between 6% and 10% and you’re projecting sales equal to $1,000,000 per year, the annual rent you can afford ranges between:
$1,000,000 @ 10% = $100,000
$1,000,000 @ 6%= $60,000
Assuming you are buying a 2,000 square foot restaurant, you can pay between $5,000 and $8,300 per month, including common area charges, property taxes, and building insurance.
The rent should be a major consideration when determining the value of the restaurant you purchase.
Tip: Buying a below-market lease is a big advantage
Start-Up Costs to consider when you buy a restaurant
Start-up costs will depend on many factors, including but not limited to the size of the store, design, type of equipment required, and existing infrastructure of the property.
If you buy a restaurant you should be able to minimize the time and cost to open your restaurant.
It’s a good idea to know the costs to build from scratch so you can compare your options.
The following Capital Budget sheet includes most of the items you will need to budget.
Leasehold Improvements $50,000-$200,000
First Month’s Rent & Security Deposit $5,000-$10,000
Equipment & Supplies $4,500-$10,000
Outside Signage $2,000-$10,000
Opening Inventory $4,000-$10,000
Opening Advertising $2,500-$5,000
Legal & Advertising $1,000-$10,000
Website Design $2,000-$20,000
Working Capital $10,000-$30,000
Payroll (3 months) $15,000-$50,000
Security System $2,000-$6,000
Exact costs for each item will vary based on where you live, and the vendors you hire.
The following chart shows the average cost to build their restaurants.
|Company||Average SF||Construction Cost||Build PSF|
Using the average cost per square feet, you can get a pretty good idea of the estimated cost to build a new restaurant. 1,200 x $300.00 = $360,000.
When you buy a restaurant you should be able to reduce the cost dramatically compared to the cost of new construction unless you are buying a restaurant based on its existing net income and goodwill.
Business Entity Formation
Before looking to buy a restaurant it’s a good idea to establish your company first.
Many new restaurateurs find a location first. When they do, they have to rush to form a corporation, open a bank account, and obtain the various licenses needed to run a business.
You need the entity before closing escrow.
You will look much more credible to sellers and landlords when you take care of this upfront.
Corporation, LLC, or Sole Proprietor
You will create your business entity based on your personal preference and advice from your attorney and CPA.
It is best to set this up a corporation or LLC early for the reasons listed above.
Suppose you are doing business as a sole proprietor or operating under a different name than the corporation or LLC. In that case, you will need to file a DBA.
You can find information about filing a DBA using the following link:
If you plan to build a large brand or franchise in the future, you may want to determine if your name can be trademarked and confirm that a competitor is not using the name.
Tax Identification Number
If you form a corporation or LLC, you will need to obtain a tax id or EIN.
You will need this before opening a business checking account.
The following link provides a list of licenses based on your zip code and type of business.
License and Permit Information
You will need additional licensing to operate your restaurant. Permitting will be covered in more detail.
Most sellers will request a bank statement providing proof of funds.
Sellers will become suspicious when money that was not there in your bank account will suddenly appear during the prior statement period.
It’s a good idea to open your account before starting your search to buy a restaurant and adding funds to it.
Having a bank account ensures that your accounting for any expenses incurred during your search and before opening the business.
There is a good chance you will need to pay vendors for items such as logo design and concept design before finding a location.
Personal Financial Statements
Balance Sheet and Business Plan
Before submitting any offers to buy a restaurant, it’s essential to be prepared to sell yourself.
Don’t wait until the last minute when you may be competing with other parties. Prepare in advance to provide the following:
- Executive Summary or Business Plan
- Personal Balance sheet listing assets and liabilities
- Credit report
- Bank statements
- (2) Years Personal Tax return
You may not need all of the above. Still, you should be prepared at a minimum to provide a credit application, including a balance sheet and a business plan or executive summary.
Personal Balance Sheet
You will need to provide a personal financial statement to prospective landlords. It’s a smart idea to have a generic balance sheet prepared in advance.
Some landlords will require their form, but it will be much quicker if you have this information readily available.
Note: Unless your corporation or LLC has a proven financial history and substantial assets, the Landlord will require a personal balance sheet.
The following is a sample credit application and balance sheet to gather your information.
If you have followed the steps provided above, you should already have
- Defined your concept
- Known your target customer and demographic profile
- Known your competitors’ sales, store size, and occupancy costs
- Have the majority of your business plan complete
- Have your business entity and bank account
- Determined where to open your restaurant
You are now almost ready to start looking to buy a restaurant.
But before you start looking, you need to understand some basics about zoning and permits.
You can’t just open a restaurant anywhere you like.
Zoning and Permits for Restaurants
What is one of the biggest time-wasters made by first-time restaurateurs?
Not understanding the zoning and permitting requirements required to open a restaurant.
Theoretically, the primary purpose of zoning is to segregate incompatible uses. Zoning typically designates an area as residential, commercial, agricultural, and industrial.
Before starting your search, you should research which zoning allows your use. Some uses, such as a bar or nightclub, may have stricter zoning rules.
Also, some individual parcels may have different zoning than the neighboring plots of land.
Before moving too far along in your planning, it’s a good idea to confirm the property that you wish to open your restaurant is zoned correctly.
Warning: Don’t think the restaurant you are buying is zoned or permitted for restaurant use. There are many restaurants for sale that did not receive the proper permits. Always confirm the restaurant you buy has the proper permits.
Where to Find Zoning Information
Most cities have zoning information available online. Typically, you can find zoning information listed under City Planning or Building & Safety.
The following links show zoning information for the City of Los Angeles.
Los Angeles Zoning Information
Los Angeles uses ZIMAS for their zoning information. You can type the address in the ZIMAS database to receive detailed zoning information for every property.
Los Angeles City Planning Department
The American Legal Publishing Corporation provides all of the zoning information for Los Angeles. You can view all the zoning codes at
American Legal Publishing Zoning Information
The quickest method is to call your local planning department and ask a planner to provide you with the necessary information needed.
Ask what zoning your specific use requires. Be sure to ask about parking requirements.
There are different requirements for fast-food and full-service restaurants. Many cities require additional parking when the restaurant exceeds a specific size.
Is Restaurant Use Allowed?
Certain cities limit the total number of food establishments for a given area. For example, Main Street in Santa Monica, California, has limitations on the total number of food establishments.
It’s always a smart idea to discuss your plans with the planning department.
How Much Parking is Required for a Restaurant?
The biggest mistake both restaurateurs and many real estate brokers make is not understanding parking codes related to restaurant use.
Most cities require additional parking for restaurant use.
Parking significantly impacts where you can open for business.
The parking required is based on the square footage and type of use.
You can lose months of time and money when the property does not meet governmental parking codes.
The number of parking spaces required in Los Angeles typically depends on the type of restaurant (take-out, full-service, fast food) and the leased space’s size.
The parking requirements are a ratio.
For example, a 1,000 square-foot full-service restaurant will require ten parking spaces. (10/1,000 parking ratio).
If you are considering a free-standing building, determining the parking required is straight forward.
If the building is 1,000 square feet and you have ten or more parking spaces, you should have the necessary parking per city code for your use.
The calculations get more complicated when you’re dealing with a shopping center with multiple uses.
How to Perform Parking Calculations on Restaurants
Request a rent roll or site plan showing the existing tenants’ names, type of use, and square footage for each Tenant.
Using the city’s parking ratios, determine the required number of spaces for each current use.
For example, a retail store requires one space per 250 square feet.
If space is 1,000 square feet, divide by 250, and you can determine that the store requires four parking spaces.
Add up the total required spaces based on current uses.
Retail Space #1 = 1,000 square feet (parking spaces required 4)
Retail Space #2= 2,000 square feet (parking spaces required 8)
Proposed Restaurant Space #3= 1,100 square feet (parking spaces required 11)
Total parking Required for Shopping Center = 23
Count the total number of parking spaces for the shopping center.
Total number of parking spaces 24
Determine if there is adequate parking based on your required parking and the total number of spaces after subtracting the total parking spaces required based on existing uses.
Parking Spaces Provided = 24
Parking Spaces Required = 23
Excess Spaces= 1
In this situation, the property has adequate parking to meet the required parking.
DO NOT SIGN A LEASE UNTIL YOU DETERMINE THERE IS ADEQUATE PARKING.
Another option is to lease additional parking from a neighbor. Rules vary by city. Some will require a lease with the same term as the lease for your restaurant.
Valet parking may allow you to park additional cars in your existing parking field or off-site.
Parking credits are also available in some neighborhoods.
Tip: Existing restaurants are typically grandfathered and may not be required to meet the current code.
In addition to zoning and building codes, restaurants are also subject to Health Department codes and permits.
The permitting process for the health department varies depending on region and current status of the property.
For example, if you buy a restaurant it will be much faster and will require less paperwork than converting a retail space to restaurant use for the first-time.
In most cases, a restaurant closed for more than 90 days will require much of the same information and take just as long to permit as a conversion from retail to restaurant use.
Many health departments publish their guidelines to open a restaurant on their website.
Let’s move on to Section 2 How to Find Restaurants to Buy.
Chapter 2: How to Find Restaurants to Buy
There are three basic approaches to buying a restaurant.
- Internet Sites
- Commercial Real Estate Brokers and Business Brokers
- Contacting restaurant owners with unsolicited offers to buy their restaurant
Most searches begin on the Internet.
Restaurants for Lease Internet Sites
For a complete list of restaurant listing sites, click here.
Commercial Real Estate Brokers
Suppose you are going to buy a restaurant. In that case, there’s a good chance a commercial real estate agent or broker will represent the seller.
Whether you decide to hire your broker or buy a restaurant on your own, it’s essential to understand the commercial real estate broker’s role and how they get compensated.
Real Estate Brokers
The term “real estate broker” or “agent” is general.
It’s essential to understand the different roles of real estate brokers and how they are involved with commercial real estate aspects.
A broker must meet more stringent educational requirements; an agent works under a Broker’s license.
Commercial Real Estate Broker
Most commercial real estate agents or brokers specialize in a specific type of property or geographical area.
For example, office agents and brokers specialize in office buildings. Retail agents and brokers typically lease or sell retail properties and shopping centers.
WARNING!! It’s not a good idea to work with a broker that sells homes or works on a property type such as office buildings or apartments if you are opening a restaurant.
Who Does the Commercial Real Estate Broker Represent?
Most brokers work for the seller or Landlord. Some brokers called Tenant Representatives or “Tenant Reps” work primarily for tenants or buyers.
Beware of Dual Agency
Dual agency occurs when a single real estate agent represents both the buyer and seller or Landlord and Tenant in a real estate transaction.
A real estate agent can’t represent two opposing parties’ best interests in a negotiation.
Use your agent to protect yourself because the Landlord’s agent cannot represent your best interest.
Who Pays the Commission when you buy a restaurant?
When a seller hires a broker, they agree to pay a commission to the broker. Typically, the commission is a percentage of the sale.
For example, if the sale price is $500,000 a 10% commission will equal $50,000.00.
In most commercial real estate transactions, the seller’s broker agrees to split the commission with the buyer’s broker.
There are many business brokers that try to avoid splitting the commission so they can make more money. If you find yourself in this position its best to pay your broker hourly to negotiate on your behalf.
Suppose a buyer uses a broker to help them buy a restaurant. In that case, the buyer typically gets the services for free from the buyers’ broker.
Most experienced Buyer Brokers will require a minimum fee if the commission is too small to cover their time.
Should You Use a Real Estate Broker to Buy a Restaurant?
In most cases, using a broker will save you time, provide access to restaurants for sale that are not public knowledge, and help negotiate a better lease than you would on your own.
A few reasons to consider hiring (the right) real estate broker:
- They have access to information that you don’t.
- As a professional, they know more about governmental regulations, rents, and lease agreements
- No cost to you for their service in most cases
- Save time
Hiring the right restaurant broker can be one of the smartest decisions you make. An experienced restaurant broker can save you thousands of dollars and ensure you avoid making mistakes that can be fatal to your success.
Restaurant properties are unique.
A good restaurant broker understands lease agreements, health department, sanitation, and building department regulations can help you avoid costly upgrades to your restaurant.
A knowledgeable restaurant broker knows architects, attorneys, expediters, and contractors who specialize in restaurants.
Getting the Most from Your Restaurant Broker
There are a few key goals you should keep in mind when working with a restaurant broker:
- You want to see all opportunities that meet your requirement.
- You want the restaurant broker to negotiate in your best interest.
- You want the restaurant broker to feel fairly compensated and motivated.
- You want the ability to cancel the agreement if you’re not satisfied.
Should You Work with One or Many Brokers?
This answer is counter-intuitive. You would think working with many agents would provide access to more restaurants for sale.
The opposite is true.
An experienced restaurant broker won’t spend the time needed to work with you on a non-exclusive basis.
There is a high risk of not receiving compensation if you buy a restaurant through a competing agent.
This method also produces a race to “sell” you a property quickly rather than invest the time to find the right property.
Exclusive Representation to Buy a Restaurant
An experienced and qualified restaurant broker only works on an exclusive basis. An exclusive agreement states the broker will work on your behalf, and you will work through the broker.
You receive the attention needed. The broker has assured compensation if you complete a transaction.
Problem with Commissions
Since most restaurant brokers work on a contingency basis, they do not receive any compensation if you do not buy a restaurant.
They are also compensated based on the total sale price.
If your requirement is too small, you won’t find a qualified person to help.
It takes the same amount of time to sell a high priced restaurant as a low priced restaurant.
If you’re looking to buy a restaurant priced under $250,000, the commission may not justify the time involved.
There are solutions if you don’t want a broker or can’t find one.
There is a Solution—Minimum Fee
A minimum fee guarantees the restaurant broker compensation, and you receive the best deal possible.
To ensure you receive all available restaurants for sale and your restaurant broker negotiates in your best interest is to agree on a minimum or flat fee.
Typically, the agreement states a minimum fee. If the total commission does not cover the broker fee, you will pay the difference.
Minimum Fee = $10,000
Commission paid by seller= $8,500
Total Fee paid by Client = $1,500
Term of Agreement
If you are unhappy with your broker, don’t get locked into a long-term agreement.
Make sure you have the right to cancel the deal.
You will need to agree the broker is entitled to compensation for properties they show you for a certain period after canceling the agreement.
Still, you will be free to negotiate or work with anyone else going forward.
If you follow the suggestions above, working with a restaurant real estate broker should save you both time and money buying your next restaurant.
Hourly or Flat Fee Consulting
Suppose you are willing to do the groundwork.
In that case, restaurant real estate advisors will help you negotiate a purchase agreement, protect your interests, and answer your questions for a flat rate or hourly fee.
Viewing Restaurants For Sale
Before scheduling a meeting to see the inside of any restaurants for sale, it’s a good idea to drive by the property and confirm this is a location and neighborhood that meets your general criteria.
If you view a restaurant that is currently open for business, don’t ask any employees or neighbors’ questions about the property.
In most cases, the employees are not aware of it if you would like to see the interior act as a customer and order something to eat or drink.
You will need to schedule a meeting to see the kitchen and areas not visible as a customer.
Often in this situation, the existing Tenant is being forced to leave and may not be very cooperative.
Buying a Restaurant-Off-Market Deals
Suppose you are looking to buy a restaurant in a particular area or type of property.
In that case, there may not be any existing restaurants for lease or sale on the market.
In this situation, you will need to find an “off-market deal.”
You can achieve this by contacting the existing restaurant owner to see if they will consider selling.
You can approach the owner in person or try other means such as a letter or phone call.
If the owner is not interested in selling, leave your contact information and request they contact you in the future if anything changes.
Suppose the owner is not willing to sell. In that case, you can approach the property owner to determine if the lease will be expiring or is currently on a month-to-month lease.
Or, if the Tenant has a poor relationship with the Landlord, has a history of late payments, or the Landlord just wants a new concept for their property.
There are many data sources available to research the contact information for both tenants and landlords.
Tracking Restaurant Listings When You Buy a Restaurant
Create a spreadsheet for listings.
Fill in the address, contact information, and brief description based on your communications.
Analyzing the Deal When You Buy a Restaurant
Before you can receive detailed information about the potential restaurant you want to buy the seller will often require a non-disclosure agreement.
What is a Non-Disclosure Agreement?
A non-disclosure agreement (NDA), also known as a confidentiality agreement (C.A.), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement (S.A.), is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share for specific purposes but wish to restrict access to or by third parties. It is a contract through which the parties agree not to disclose information covered by the agreement.
TIP: To speed up the process, use a service such as DocuSign to accept digital signatures.
Now that you have a list of potential restaurants to buy let’s move onto Chapter 3-Negotiating the Deal When You Buy a Restaurant.
Chapter 3: Negotiating the Deal When You Buy a Restaurant
Preparing the Offer
The purchase process starts when you submit an offer to purchase your restaurant.
There are two types of offers.
Letter of Intent
A Letter of Intent is typically a non-binding agreement used to summarize the basic deal terms incorporated into a Purchase Agreement.
Purchase and Sale Agreement
A Purchase and Sale Agreement is typically a binding document and used as the basis to prepare escrow instructions in states that use Escrow.
Which should you use?
A Letter of Intent is best if you would like to start the process without incurring escrow fees.
The Letter of Intent should require both the Seller and Buyer to complete certain items before entering into a binding agreement or opening escrow.
The Letter of Intent is used to complete investigations before signing a binding contract and incurring expenses.
Get Your Letter of Intent Template Here
Prepare two originals for signature by both Buyer and Seller.
Proof of Funds
Before opening Escrow, the seller will want proof of funds to confirm you can complete the sale and qualify to assume the lease. Provide recent bank statements or bank contact if requested by the seller.
The Letter of Intent may require you to complete your physical inspections, review the financial condition of the business if applicable, and approve the Lease agreement.
You should conduct a physical inspection of the premises as soon as possible. Issues related to the condition of the Premises or equipment can be a reason to request a price reduction.
The seller can agree to fix any problems, give you a credit for repairs, or hold firm on the sale price.
At this point, either the Buyer or Seller (or both) can decide not to move forward with the sale.
You should request the following from the seller.
- Lease and any amendments to lease
- Architectural plans
- Certificate of occupancy
- Conditional Use Permit
- Financial statements
- Tax returns
Lease Assignment/ New Lease
The sale will require that you either assume the current lease or negotiate a new contract with the landlord.
Notify the landlord and request an assignment of lease (or a new contract if applicable). The lease agreement may require a non-refundable fee paid to the landlord, to consider the assignment. Request that the Seller pays this cost.
You should be prepared to provide a credit application and two or three years of tax returns for the landlord’s review. Check with the landlord to see what information will be required and if you need to use the landlord’s forms or a standard credit application.
If you are requesting a new lease, be very specific in the Letter of Intent or Purchase Agreement that terms of the new lease shall be a contingency.
In most cases, the landlord will not agree to provide you with more attractive terms and accept less rent than currently offered in the lease unless your financial statement is strong or market conditions have worsened.
Landlord approval of an assignment is often the biggest hurdle to buying a restaurant. For many different reasons, the landlord may be slow to respond or maybe less than cooperative.
If you have completed the steps above, you now have an accepted LOI or Purchase and Sale Agreement, have verified the buyer’s funds, and you are ready to open Escrow.
Let’s move on to Chapter 4: Escrow the Final Stage to Buy a Restaurant.
Chapter 4: Escrow the Final Stage to Buy a Restaurant
By this time, you negotiated with the seller and agreed on basic terms and conditions. It’s now time to close in on the final stage of buying a restaurant: Escrow.
Now you will:
Open Escrow to protect yourself during the sale
Comply with Bulk Sale Laws
Schedule a final walk-through, close escrow, and complete your sale
If you’ve conducted the sale’s previous steps carefully, this final stage should be relatively quick and easy. By the end of it, you will have keys to your new restaurant.
Let’s begin with escrow basics.
What is Escrow?
Escrow is a neutral third party used to protect all parties in a transaction. The escrow officer will follow the directions provided in the Purchase and Sale Agreement or Letter of Intent, take care of disbursing funds, ensure that all creditors get paid, and ensure that the buyer receives title free of any liens.
What about states that don’t use Escrow?
Not all states use Escrow. In some states, an attorney, title company, or real estate broker handles all or a portion of the transaction. The website below provides an overview of the procedures used in each state.
Guide to States that use Escrow
Fees and charges for escrow are based on a variety of factors including the sale price, document preparation fees, newspaper publishing fees, and lien searches.
Your escrow company can provide a written estimate of cost and expenses.
Escrow fees and costs are typically split 50%/50% between buyer and seller.
The Buyer or Seller will deliver the Purchase and Sale Agreement to Escrow. The buyer is required to provide a deposit check to Escrow within the number of days specified in the contract.
The escrow officer will create an escrow account and provide an escrow number and supplemental escrow instructions for signature by both Buyer and Seller.
The supplemental escrow instructions incorporate the terms provided in the agreement and provide additional terms and conditions of the escrow.
Sample escrow instruction used to buy a restaurant
SUPPLEMENTAL ESCROW INSTRUCTIONS
The attached ASSET PURCHASE AGREEMENT (hereinafter the “Agreement”), by and the parties mentioned below shall serve as your Escrow Instructions and the Supplemental Escrow Instructions with General Provisions attached to these instructions are by reference hereto incorporated herein and made a part hereof and have been read and are approved by the parties to this escrow and you are authorized to act thereunder insofar as the closing of your escrow is concerned. In the event of a conflict between the Agreement and the Supplemental Escrow Instructions with General Provisions, the Agreement shall prevail.
This instruction is given on December 9, 20XX, by and between the SELLER(S) (hereinafter called Seller) SELLER NAME, LLC, and the BUYER(S) (hereinafter called Buyer) BUYER NAME, Inc.
The subject of this escrow, which Seller owns and agrees to sell and Buyer agrees to purchase from Seller, are all assets of a business known as NAME OF BUSINESS
located at: XXXX MAIN STREET, SANTA MONICA, CA 90405
consisting of (check “X” if applicable) [ X ] furniture, fixtures, and equipment, [ X ] lease, [ X ] leasehold improvements, and items as per the Agreement on the following terms and conditions:
The purchase price of said assets shall be the sum of………………………………… $100,000.00
Payable as follows:
Initial deposit in the amount of………………………………………………………………$10,000.00
Cash through balance, immediately upon the removal of Lease Contingency………….…$90,000.00
This is all Cash-Offer transactions without the loan.
The following is for clarification purpose:
The acceptance Date Is December 8, 20XX.
The escrow Opening Date Is December 9, 20XX.
CLOSING: Escrow shall close upon earliest legal published date, on or before January 15, 20XX, or the date mutually agreed by the parties but no later than 60 days from the Escrow opening date, and Buyer shall deposit in escrow on or before two (2) days prior to the close of escrow by cashier’s check the balance of all monies due to affect the same. The parties agree to do all things necessary to close the escrow on the date set forth or on completion of the conditions so stated herein.
- PRORATIONS: Prorate as of Close of Escrow if agreed: Personal Property taxes for the current fiscal year, ONLY if the tax bill is presented herein prior to the close of escrow.
Charge Buyer and Credit Seller Lease/Security deposits in the amount of (as per Lease, if any).
Current Month’s Rent prorated to date of possession.
COSTS: The Seller and the Buyer shall pay their respective escrow fees, and the cost of this transaction shall be paid 50% by the Buyer and 50% by the Seller.
Seller hereby warrants and guarantees that he has not operated the subject business under a name other than that which is being presented herein. Seller shall deliver to the buyer through escrow a list of all businesses and their addresses which the Seller has owned within the last three years. THIS LIST SHALL BE DELIVERED THROUGH ESCROW PRIOR TO THE PUBLICATION OF THE NOTICE OF BULK SALE.
Seller shall furnish the buyer through escrow not as a condition of this closing but prior to the final disbursement of funds, a tax release from the State Board of Equalization.
Seller shall furnish the buyer through escrow not as a condition of this closing but prior to the final disbursement of funds, a tax release from the Employment Development Department.
Seller shall furnish the buyer through escrow not as a condition of this closing but prior to the final disbursement of funds, a tax release from the County Tax Collector, Business Tax Division.
Buyer hereby agrees and instructs Escrow Holder to withhold the sum of $10,000.00 from Seller’s net proceeds due at closing for State Board release.
You are to notify each respective state agency from which you are to receive either a release or certificate of this transfer and furnish them with any further information which may be required by these agencies. In the event the certificates of releases from the Employment Development Department have not been deposited with Escrow Holder prior to the closing of this escrow, you will receive instructions from the Buyer and Seller to withhold an agreed amount from Seller’s proceeds pending such releases. Seller warrants to Escrow Holder and Buyer that Seller’s outstanding obligations to these agencies will not exceed the number of monies held pursuant to this instruction.
SEARCHES AND PUBLICATION: Escrow Holder is authorized and instructed, at the expense of the parties, to A) Record and publish an appropriate Notice to Creditors of Intended Sale; B) Forthwith obtain from the Secretary of State, Statements of Information on 1) Name of the Seller at any and all addresses; 2) Name of the business at the business address. Said searches to be on the State and County levels. Escrow Holder is authorized and instructed to deduct from proceeds as deposited into escrow, any portion of funds for the payment of reports, and demands, etc. in order to comply with the closing of this escrow, prior to the close of escrow. The parties acknowledge that in the event this escrow is canceled that no portion of the fees/costs paid will be refunded to the parties.
SOLE OWNER: The Seller herein warrants that he is the sole owner of a said business with a full right to sell or dispose of it as he may choose and that no other person or persons whatsoever have any claim, right, title, interest, or lien in, too, or on said business except as stated herein.
LLC DOCUMENTS: Prior to the publication and recording of Notice, there shall be deposited in Escrow by the Seller, a Copy of LLC1, LLC12, and Operating Agreement to clarify the authorized signatory.
CORPORATION RESOLUTION: Prior to the close of escrow, there shall be deposited in Escrow by the Buyer, a copy of the Corporate resolutions authorizing the purchase assets which Escrow is concerned, together with the authority of the undersigned officer to transact the purchase of same and to execute any and all documents in behalf of the corporation to accomplish the sale and transfer of same.
POSSESSION: Possession shall be granted to and taken by Buyer as of the close of escrow.
ALLOCATION OF PURCHASE PRICE: The parties do agree and jointly stipulate that the purchase price consists of the following values paid for the specific assets indicated as follow:
Fixtures, Furniture, and Equipment $10,000.00 Leasehold Improvement $90,000.00
BILL OF SALE-FIXTURE LIST: The parties shall immediately, or in any event, as practical, cause to be deposited in escrow an itemized list of the furniture, fixtures, and equipment being conveyed, approved in writing by both parties. Seller shall deposit herein his good and valid Bill of Sale covering the same, warranting them free of any liens or encumbrances.
SALES TAX – FIXTURES AND EQUIPMENT: Buyer shall reimburse Seller through escrow sales tax on fixtures and equipment based on a valuation to be determined and provided to Escrow Holder prior to the close of escrow.
The undersigned Buyer and Seller acknowledge that they are aware of the governmental regulations which require that all funds deposited into escrow must be collected and available for withdrawal prior to the disbursement of the same from escrow. Pursuant to these requirements, all funds deposited into this escrow shall be in the form of cash, a California Bank’s Cashiers Check or wire transfer, except in the case of initial deposits. In the event of deposit(s) of any other type of funds, the Escrow Holder is authorized and instructed to delay the closing of escrow pending written confirmation of the clearance of all deposits.
The parties agree that for purposes of this escrow, any instructions or amendments executed by the parties and transmitted to Escrow Holder by electronic facsimile shall be valid and enforceable as original signed documents to Escrow Holder.
AMENDMENTS: The parties do agree that in all matters pertaining to this Escrow the signature of any one of the Buyers and any one of the Sellers shall suffice for Escrow amendments.
NO REPRESENTATIONS: The parties hereto agree that no representations have been made by either party other than those specifically set forth in this agreement between the parties, superseding all prior agreements whatsoever. It is further understood and agreed that the Buyer has made his own independent investigation of the subject business, has satisfied himself with his ability to conduct the same, and is now purchasing the said business with the clear and distinct understanding and agreement that all profits are future, to be arrived at from his own resources and labors.
SELLER INDEMNITY: Except as otherwise provided herein, Seller shall indemnify and hold the buyer and the assets of said business, free and harmless from any and all claims, losses, damages, injuries, and liabilities arising from or on account of seller’s operation of said business or seller’s ownership of any assets of the said business that are subject to this escrow or seller’s ownership or occupation of said business. Seller further agrees to indemnify and hold the buyer including said business, and the assets if the said business, free and harmless from any and all lawsuits, actions, causes of actions, or judgments arising from or on account of seller’s operation of said business or seller’s ownership of any assets of the said business that are subject to this escrow or seller’s property.
LEGAL ADVICE: THE BUYER AND SELLER HEREIN ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED TO SEEK THE ADVICE OF LEGAL COUNSEL BEFORE THE EXECUTION OF THESE ESCROW INSTRUCTIONS AND THE DOCUMENTS BEING CREATED HEREIN.
CANCELLATION FEES: In the event, this escrow is delayed for two (2) months from the most recent closing date agreed by the parties or if the escrow is canceled, and if the delay or cancellation is caused by either of the parties to this escrow, the Escrow Co. shall be entitled to receive an escrow administration fee in proportion to the services provided by Escrow Co.
SELLER’S INITIALS: / BUYER’S INITIALS: /
HOLD OPEN FEES: If funds are held by you following the close of escrow, in order to compensate you for the administration and monitoring of this escrow, you are authorized to charge, and deduct from funds on deposit herein, a hold-open fee of $75.00 for each month this escrow has a balance therein following two months after the close of this escrow.
SPECIFIC INSTRUCTIONS: These specific instructions are made of the Buyer’s and Seller’s own free will, under no duress with a full understanding of the consequences, not relying on any information furnished or statements made by the Escrow Holder as to the conditions of the escrow, the title to the property and personal property involved and ultimate outcome of the escrow or otherwise.
HOLD HARMLESS: The Buyer and Seller herein each agree to hold Escrow Co. harmless from any and all liability and/or responsibility that might arise from the Escrow Holder’s compliance with this escrow transaction. Should a lawsuit be filed against Escrow Co. for compliance with these instructions, the parties hereto agree to indemnify and hold Escrow Co. harmless and agree to pay all attorney’s fees incurred by Escrow Holder in defense of action except willful misconduct and/or negligence.
ENTIRE CONTRACT: Time is of the essence. No extension of time for performance of any act or obligation shall be deemed an extension of time for any other act or obligation. All prior agreements between the parties are incorporated in this agreement which constitutes the entire contract. Its terms are intended by the parties as a final expression of their agreement with respect to such terms are included herein and may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. The parties further intend that this agreement constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this agreement.
It is hereby agreed and acknowledged by the parties that the buyer is responsible for taking necessary steps and procedures OUTSIDE OF ESCROW, in order to change ownership of the business on any/all governmental license and/or permits, obtain a business license and/or business tax registration certificate from City clerk office, health license permit, seller’s permit from State Board of Equalization, check all applicable department in the City and obtain a necessary permit(s) including Conditional use Permit, open an account to Employment Development Department, obtain an education for food stamp program, and/or change ownership for utilities such as telephone, gas company, Department of Water and Power, and electricity. Further, the seller agrees to take necessary steps OUTSIDE OF ESCROW, in order to terminate, withdraw, or close his account or permit(s). The parties hereby hold the escrow holder harmless and relieve of any liability and/or responsibility for the foregoing.
IT IS ACKNOWLEDGED BY BUYER AND SELLER THAT IN THE EVENT OF CANCELLATION, THE FUNDS DEPOSITED IN TRUST ACCOUNT OR IN ESCROW ARE NOT RELEASED AUTOMATICALLY OR PER REQUEST BY SELLER OR BUYER ONLY. RELEASE OF FUNDS IN ESCROW REQUIRES WRITTEN CANCELLATION/AGREEMENT EXECUTED BY BOTH PARTIES, JUDICIAL DECISION OR ARBITRATION.
BUYER, Inc., a California Corporation
John Buyer, Authorized Signatory
SELLER, LLC, a California limited liability company
Escrow will require the following information from the Seller and Buyer:
From SELLER (Current Owner):
- Business Name & Address (Exact entity name or individual name)
- Doing Business As (DBA)
- All other business names and addresses used in the last three years
- Home/Forwarding Address, other than business address (EDD requirement for post-closing items)
- Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)
- Employment Development Department Account Number (If you have employees, Escrow will need the EDD # to order the necessary release from the Employment Development Department)
- Sales Tax Permit Number (In connection with the State Board of Equalization)
- Copy of your Sellers Permit
- Allocation (Breakdown) of the Purchase Price
- Liquor License Number (If the transaction involves liquor license transfer)
- Contact Information (Phone number and email address)
- Deposit to open Escrow, as agreed upon, made payable to Escrow Company
- Buyer’s Name & Address (This must be exact – If the buyer is forming an entity, Escrow will need a copy of the Articles of Incorporation)
- Forwarding Address, for post-closing items (If different from above)
- Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)
- Employment Development Department Account Number (If you have employees, Escrow will need the EDD # to order the necessary release from the Employment Development Department)
- Contact Information (Phone number and email address)
What Happens in Escrow when you buy a restaurant?
The following is a summary of the escrow process and does not attempt to explain every step of the transaction.
Bulk Sale Notice Requirements
The Bulk Sales Act is part of the Uniform Commercial Code. Most states adopt a version of the Uniform Commercial Code, and accordingly, the Bulk Sales Act.
The Bulk Sales Act, as adopted in California, provides that where a debtor proposes to sell more than half of its inventory and equipment, not in the ordinary course of business, the buyer must give notice.
Notice is in two forms:
Record notice of sale at the county recorder’s office where the assets are
Publish notice of sale once in a newspaper (in general circulation) where the assets are located. The debtor does not have to mail notice to its creditors before the bulk sale. Recordation and publication must happen at least twelve (12) days before the sale.
Failure to comply with the Bulk Sale Act may cause the buyer to be liable to creditors not paid in full.
The primary purpose of the Bulk Sale Act is to provide a debtor’s creditors with notice so as to have their claims paid (or take protective action) before the debtor transfers assets and makes off with the sale proceeds and to insulate the buyer from the debt of the seller.
Tax and Lien clearances
The escrow officer will obtain clearance certificates from taxing authorities such as the Employment Development Department, Franchise Tax Board, and State Board of Equalization on behalf of the buyer to ensure no successor liability to any taxing agencies. Any liens recorded need to be paid before the close of Escrow.
State Board of Equalization
In most escrows, unless the business closed and the State Board of Equalization has final tax returns, Escrow will be required to hold back a portion of the sales proceeds to pay any taxes that may be due.
To determine tax proceeds required at closing, Escrow will often review the last two quarterly tax returns.
State Board of Equalization is often the cause of delays to close Escrow. If the business will close, file your returns as soon as possible. If the seller is delinquent on taxes, notify Escrow as quickly as possible to determine a course of action to avoid additional delays.
Escrow submits a request for a release from the State Board of Equalization (“BOE”) at the close of Escrow because the Seller will need to file his final return and pay sales tax on the fixtures and equipment. The BOE has 60 days to reply to the request with either a release or demand with any amounts owed.
If you have any concerns about the seller’s history of payment negotiate to hold back as much of the purchase price as possible until escrow receives a release.
UCC Search & Tax Lien Search
A UCC-1 financing statement (an abbreviation for Uniform Commercial Code-1) is a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor.
Escrow will order a UCC search, and tax lien search to determine if there are any creditors or tax agencies that currently have claims on any assets.
A final walk-through should be scheduled a few days before the close of Escrow. You will confirm the fixtures and equipment are all present and in good working condition.
If the inventory is part of the sale, a value is assigned.
Buyer and Seller will notify Escrow in writing that they are ready to close Escrow. The escrow officer will prepare the closing papers, which include the following:
Bill of Sale.
For the equipment and fixtures.
The closing statement provides both Buyer and Seller a breakdown of the accounting showing the total credits and debits paid by each party. If applicable, certain expenses such as rent or prepaid expenses get prorated.
If the seller is providing a loan for part of the purchase price, a promissory note is prepared by Escrow and secured by a UCC1 security agreement.
If the stock is part of the sale ( food, beverages, paper, and supplies), you will pay for these items.
Liquor license transfer.
If a liquor license is part of the sale, Escrow will complete the processing of the liquor license.
Once all of the above is complete, Escrow will disburse funds, and you will receive the keys.
Congratulations on buying a restaurant!
If you followed all of the steps provided, you should have experienced a smooth transaction.
Do you have any questions? Contact me.
Time needed: 90 days.
How to Buy a Restaurant
- Create a Business Plan
Create a Business Plan including the financial information you need to buy a restaurant.
- Research Your Competition
Research your competition and gather their sales information
- Determine How Much Rent You Can Pay
Calculate how much rent you can pay as a percentage of projected sales.
- Search Restaurants for Sale
You can hire a restaurant broker or search restaurants for sale online.
- Analyze the Deal
Use your research to determine the value of the restaurant.
- Negotiate the Deal
You or your broker will submit a Letter of Intent ( LOI) or offer to purchase.
- Due Diligence
You will have a period of time to inspect the financial records, lease agreement and condition of the restaurant.
- Open Escrow
Open escrow to protect yourself during the sale process. Escrow will notify all creditors of the sale, provide a lien search, and handle the transfer of assets.
- Close Escrow.
You will do a final inspection and notify escrow you are ready to close. Escrow will send closing documents to you and the seller for signature.
- Pick-up the Keys
Congratulations! You are now the new owner of a restaurant.
Alice Carroll says
You made a good point that competitive analysis is crucial when planning to buy a restaurant. After years of perfecting some recipes, I think it’s about time for me to open my own restaurant. Hopefully, it would be easy enough to learn how to properly negotiate with a restaurant broker.