Restaurant for Sale-The Sellers Guide to Making the Sale

Restaurant for Sale-The Sellers Guide to Making the Sale

Before listing your restaurant for sale, you need to have your ducks in a row.

Selling your restaurant is similar to cooking: For the best results, follow a proven recipe.

The French phrase mise en place,  “Putting everything in its place,” is just as relevant when selling your restaurant as it is in your kitchen.

Careful preparation and order are critical to a smooth restaurant sale.

Restaurant for Sale-The Sellers Guide to Making the Sale breaks down the process needed to market your restaurant and close the deal.

Chapter 1: Pre-Sale-Getting prepared to list your Restaurant for Sale

In this first stage of the sales process, you’ll:

• Complete a Seller’s Disclosure Statement
• List the assets of your restaurant for sale
• Review your lease for relevant clauses that could impact your sale
• Gather and prepare all vital documents
• Establish a confidential way for buyers to contact you.

Compiling this information is the most time-intensive part of the sales process, but following these steps now will save you a lot of time later.

By the end of this section, you’ll have your documents prepared, and you’ll be ready to begin marketing your restaurant for sale.

Let’s get started.

Step 1

Seller’s Disclosure Statement for Restaurant for Sale

The purpose of the Sellers Disclosure Statement is to inform prospective buyers about your restaurant for sale.

The Sellers Disclosure Statement will clarify what representations you’ll make regarding the business.

Get your Seller Disclosure Statement Here

Step 2

List of Assets included in Restaurant for Sale

The Asset List itemizes which assets the buyer can expect from your restaurant sale. Providing the asset list upfront prevents tense last-minute renegotiations over assets that the buyer believed were included in the sale.

You don’t need every little detail, but a simple description of each item and its make or model is helpful. This list is also useful if you need to justify the value of the assets — you can quickly contact equipment vendors to price similar new and used equipment.

Get Your Asset and Equipment List Here

Step 3

Lease Abstract for Your Restaurant for Sale

A Lease Abstract is providing a summary of the essential terms of your Lease Agreement. It will be included in your marketing package and is also useful to quickly answer questions about your Lease Agreement.

This step requires special attention, because the lease agreement is one of the most critical items considered by buyers, and one of the biggest reasons restaurant sales fall apart.

Carefully read your Lease Agreement and create a Lease Abstract using the sample below.

Do not skip this step! You need to know in advance if any items in the contract will prevent the sale of your business or impact the price.

There are a few vital lease clauses that can impact your ability to sell your restaurant and the price you receive.

Lease Assignment

Review this clause carefully. Do you have the right to assign the lease? Can the landlord deny your request for any reason? Is there a clear formula describing the landlord’s criteria for approving or disapproving a buyer?

Options to Extend

Many sellers list their restaurant for sale near the end of their lease term and tell potential buyers they have several options to extend their lease.

Your contract might include a clause that states, “Options are Personal to Tenant.”

If your lease includes this clause, the landlord can void the options if you sell your business. It’s critical to know this before marketing your restaurant for sale.

Use Clause

Most leases spell out the permitted uses allowed per your tenancy.

If your use clause is particular and you occupy a space in a shopping center with many other restaurants, this may limit the type of restaurant a potential buyer will be allowed to operate.

You need to know this upfront, so you don’t spend weeks or months negotiating with a prospective buyer to determine later their use is not allowed.

Red Flags

If you run into any of the red flags listed when reviewing your lease, you will need to take action in advance to see if you can resolve the issues.

At this stage, if you are confused about your options, you may want to hire an experienced restaurant real estate advisor or commercial real estate attorney to review the specific clauses and advise you on your options.

You can also approach the landlord, explain that you wish to sell your restaurant, and ask if they will amend the lease and work with you if you secure an acceptable buyer.

WARNING

Many landlords will try to renegotiate other lease terms, such as the rent. You may need to make some concessions to receive their cooperation.

Sample Lease Abstract of Restaurant for Sale

Lease abstract:

Size: 1,840 sf

Patio size: 485 sf

Lease term: 10 years

Lease Commencement Date:

Rent Commencement Date: July 2017

Initial Term:

Lease Year 1: $8,126.67 per month

Lease Year 2: $8,370.47 per month

Lease Year 3: $8,621.58 per month

Lease Year 4: $8,880.23 per month

Lease Year 5: $9,146.64 per month

Lease Year 6: $9,421.04 per month

Lease Year 7: $9,703.67 per month

Lease Year 8: $9,994. 78 per month

Lease Year 9: $10,294.62 per month

Lease Year 10: $10,603.46 per month

Extended Term:

Lease Year 11: the greater of (i) current market rent as determined in accordance with Paragraph 1 to Rider No.1 and (ii) $11,133.63

Lease Year 12: monthly Minimum Rent due and owing in Lease Year 11 increased by three percent (3%)

Lease Year 13: monthly Minimum Rent due and owing in Lease Year 12 increased by three percent (3%)

Lease Year 14: monthly Minimum Rent due and owing in Lease Year 13 increased by three percent (3%)

Lease Year 15: monthly Minimum Rent due and owing in Lease Year 14 increased by three percent (3%)

CAM: $2,459.00

SECURITY DEPOSIT: $9,966.67

PERCENTAGE RENT RATE: five percent (5%)

EXISTING EXCLUSIVES

The following is a summary of the exclusives at the Shopping Center as of the date of the Lease.

Pita Pita. Landlord shall not, during the Term of this Lease, hereafter lease any premises in the Shopping Center for the operation during the Term of this Lease of a restaurant primarily serving Mediterranean-style cuisine (a “Competing Business”). Any such lease entered into by Landlord is herein referred to as a “Competing Lease”. “Primarily serving” means that at least twenty percent (20%) of such restaurant’s sales are derived from items of Mediterranean-style cuisine.

Noodles & Company. During the Term, Landlord shall not lease to a Competing Use (as herein defined) in the Shopping Center As used herein, a “Competing Use” is a restaurant selling noodles and/or pasta or noodle dishes and/or pasta dishes for on or off-premises consumption, provided, however that if the gross sales of noodles, pasta, noodle dishes or pasta dishes by any such restaurant does not exceed, in the aggregate in any single year, twenty percent

(20%) of the annual gross sales of such a restaurant, such a restaurant shall not be deemed a Competing Use.

Step 4

Prepare Documents

Just like the steps above, a little preparation on your part will significantly increase the speed of the transaction. Gather the following documents:

• Lease and any amendments to lease
• Licenses
• Permits
• Architectural plans
• Certificate of occupancy
• Conditional Use Permit

Photocopy or scan any materials that may be requested by a potential buyer or transfer with the restaurant for sale. Scanned documents are preferable.

Nobody wants to search through their garage or old file cabinets for hours when a potential buyer requests a vital document.

Copy all your materials ahead of time so that you can provide them quickly and easily.

Note: Do not provide original architectural plans, licenses, or permits to any prospective buyers. If requested, make copies and keep the originals until the close of Escrow.

Step 5

Contact Information

You need a confidential way to communicate with potential buyers without disclosing the name or location of the business until you give your approval.

Do not use your work email address or phone number.

If you do not have one already, set up a free email account, do not include your business name in your email address. If you plan to include a phone number, use your cell phone.

Summary

Sellers Disclosure Statement

The Sellers Disclosure Statement will clarify what representations you’ll make regarding the restaurant for sale.

List of Assets

The Asset List itemizes which assets included in the restaurant for sale.

Lease Abstract

A Lease Abstract is a summary of the essential terms of your Lease Agreement.

Prepare Documents

Gather all of the following documents and make copies or scan into digital documents:

• Lease and any amendments to lease
• Licenses
• Permits
• Architectural plans
• Certificate of occupancy
• Conditional Use Permit

Contact Information

You need a confidential way to communicate with potential buyers without disclosing the name or location of the business until you give your approval.

If you do not have one already, set up a free email account, do not include your business name in your email address. If you plan to include a phone number, use your cell phone.

Congratulations

If you’ve completed all previous steps, you’ve already finished the most time-intensive part of the sales process.

Let’s move on to Chapter 2: Marketing Your Restaurant for Sale.

Chapter 2: Marketing Your Restaurant for Sale

Now that you’ve gathered and completed vital documents about your business, you’re ready to begin advertising your restaurant for sale to potential buyers.

Your restaurant has a unique advantage — at least one — that could make it attractive to prospects. To command the highest possible price for your restaurant, you’ll want to identify its appealing qualities and communicate them to potential buyers.

This chapter will help you:

• Determine your restaurant’s key selling points
• Set your price, and justify that price to buyers
• Write an ad that attracts attention from serious, qualified prospects.
• Make a great first impression with buyers by preparing to show your restaurant for sale.
• Publish your restaurant for sale on popular, high-traffic websites

By the end of this section, you’ll be ready to begin taking calls or emails from prospects interested in your restaurant for sale.

Step 1

Determine Key Selling Points of a Restaurant for Sale

What makes your restaurant unique or special? Why did you pick this location when you first built or purchased your restaurant?

Many factors impact the value and location of a restaurant.

These factors include:

Location.

What is attractive about your site?

Visibility, easy access, parking, signage.

Is the area close to traffic generators such as office buildings, entertainment, and significant retail draws?

Scarcity.

Are there other comparable restaurants available in the area? How difficult would it be to build a new restaurant?

Here are some examples of key selling points.

• The restaurant has grandfathered status and could not be built today for various reasons, such as the building does not meet today’s parking codes and would not be allowed.

• The restaurant has a difficult-to-secure liquor license that offers advantages such as service until 2:00 am or “live entertainment.”

• There are moratoriums on new restaurants or bars in the area. If the City will not allow any new competitors in the area, your restaurant’s value is increased by scarcity. Your restaurant for sale is the only game in town.

Unique Features.

Your restaurant has a view, outside patio, or other features not readily available in the neighborhood.

Below-market lease.

For example, maybe the typical market rents in the area are $5.00 per square foot, but your rental is for ten years at $2.00 per square foot.

List your key selling points.

List every key selling feature you believe adds value to your location.

Step 2

Determine your Price

Similar to the real estate market, there are three ways to value a restaurant for sale:

• Income approach
• Comparable approach
• Cost approach

Restaurant for Sale Valuations

Restaurants for sale are typically purchased for their current cash flow or purchased as an “asset sale”. Use the following methods if:

• You can’t show positive cash flow, or
• You don’t want to disclose financial information, or
• You are selling to a buyer that plans to convert your restaurant to their use.

Pricing Assets of Your Restaurant for Sale

You should be aware of the “New Car Effect.” As soon as you drive a new car off the lot, its value decreases. Unfortunately, the same is true for certain aspects of your restaurant.

Buyers aren’t interested in how much you paid for your equipment or build-out when it was new. Instead, buyers wish to pay according to the current condition of what they’re buying.

Here are a few items you can use to justify the price of your restaurant for sale, assuming the buyer or City requires them:

• Cost to install a hood system
• Cost to install a grease interceptor
• Cost-saving in time for permitting and construction
• Cost of a new liquor license if available
• Time and cost of Conditional Use Permit for Liquor License
• Below market lease. How much rent will buyers save over five years?
• Value-based on a moratorium against more restaurants/bar

Market forces determine the sales price of a restaurant for sale.

If you are selling based on your income, you can value the business based on a multiple of either the adjusted cash flow method or percentage of the gross sales.

For example, if your adjusted cash flow is $50,000 per year and restaurants sell for 2.5 times net cash flow, the value of the restaurant is $125,000.

If you can’t show positive cash flow, but your sales are $500,000 per year, you may price your restaurant at a percentage of the sale.

If similar restaurants sell for 25% of sales, your restaurant would be worth $125,000. ( $500,000 x .25)

Note: If you’re selling a profitable restaurant based on income, you may wish to retain a restaurant broker experienced in selling ongoing businesses or work with your Certified Public Accountant to prepare financial statements and determine the value of the company.

Restaurant for Sale Comparable Sales 

If you are unsure of how to price your restaurant for sale, you can request an opinion of value from a business broker or find information about recent sales on websites such as bizbuysell.com.

Step 3

Get Show Ready

Have you ever shopped for a new home? You have undoubtedly heard the term “curb appeal.”

A properly staged home sells faster and at a higher price than the unkempt, funky smelling house listed down the street.

What is the buyer’s first impression of your restaurant? If the ceiling tiles are stained and the kitchen is not clean, it won’t be a good impression.

Before marketing your restaurant, fix any broken items, and thoroughly clean the entire restaurant front top to bottom.

Photos/Video

A picture is worth 1,000 words.

Quality photographs will significantly increase the number of prospects requesting additional information about your restaurant for sale as well as answer questions about the kitchen.

TIP!

Google “Lighting Tips for Real Estate” or “Lighting Tips for Restaurants”

Include photos of the kitchen and individual images of equipment and storage areas. Be sure to CLEAN the kitchen and restaurant before shooting pictures. If needed, hire a professional photographer to photograph.

Warning: be sure to remove any items that would disclose your location, such as the name of the restaurant or other things that identify the restaurant.

There are many free photo editing programs available.

Step 4

Sales Copy to Advertise Your Restaurant for Sale

Effective copywriting paints a picture of the benefits the buyer will receive. Use the critical selling points above to describe the benefits of purchase to your buyer.

• Rare opportunity to purchase a restaurant in this high demand neighborhood
• Below the market, The lease rate provides a competitive advantage.
• Turn-key restaurant for less than 10% of the cost to build new

You want to give enough information to generate interest from the right buyers. If you can do so without divulging your actual location, list the City or neighborhood.

Marketing Brochure/Executive Summary

Create a flyer or executive summary highlighting the main selling points such as the lease terms, size of the restaurant, and asking price.

You can create a flyer for free using https://www.canva.com

You also create a Business Summary the provides all the details in an easy-to-read format.

Get Your Business Summary Template Here

Step 5

Where to Advertise Your Restaurant for Sale

There are numerous sites to advertise your restaurant for sale.

Here is a list of both general business for sale websites and restaurant-focused sites.

Their average monthly traffic varies, so check their monthly number of visitors compared with the cost per month to advertise. Most of these sites cover a broad range of businesses, so the amount of traffic for restaurants in your area may be substantially less.

Should you cooperate with Brokers if You List Your Restaurant for Sale by Owner?

Brokers can be a good source of buyers.

This decision comes down to how much money you need to achieve from the sale. Commissions are negotiable by law, but you can expect to pay 5% of the sales price to a real estate or business broker if they procure a buyer.

You should sign a single party commission agreement with the broker, which limits the payment of a commission to a specific registered buyer.

Hiring a Restaurant Broker to Market Your Restaurant for Sale

If you would like professional help marketing your restaurant for sale and handling the entire process you have a few choices. Learn more about working with real estate brokers.

Summary

Determine Key Selling Points to Advertise Your Restaurant for Sale

What makes your restaurant unique or special? Why did you pick this location when you first built or purchased the restaurant?

Determine your asking price

Here are a few items you can use to justify your price, assuming the buyer or City requires them:

• Cost to install a hood system
• Cost to install a grease interceptor
• Cost-saving in time for permitting and construction
• Cost of a new liquor license if available
• Time and cost of Conditional Use Permit for Liquor License
• Below market lease. How much rent will buyers save over five years?
• Value-based on a moratorium against more restaurants/bar

Get show ready

Before marketing your restaurant for sale, fix any broken items, and thoroughly clean the entire restaurant front top to bottom.

Photos/Video

A picture is worth 1,000 words.

Quality photographs will significantly increase the number of prospects requesting additional information.

Sales Copy to Advertise Your Restaurant for Sale

Effective copywriting paints a picture of the benefits the buyer will receive. Use the critical selling points above to describe the benefits of purchase to your buyer.

Marketing Brochure/Executive Summary

Create a flyer or executive summary highlighting the main selling points such as the lease terms, size of the restaurant, and asking price.

Where to Advertise Your Restaurant for Sale

Pick one or two high traffic websites and list your restaurant.

Brokers

If you decide to work with Brokers, sign a single party commission agreement with each broker, which limits the payment of a commission to a specific registered buyer.

If you’ve completed all the previous steps, you’ve:

• Identified your key selling points
• Your restaurant for sale is in show-ready condition.
• You have attractive photographs or video ready.
• Crafted an eye-catching ad
• Listed your restaurant for sale on one or more high traffic sites

Congratulations!

Let’s move on to Chapter 3:Working with Buyers after Listing Your Restaurant for Sale

Chapter 3: Working with Buyers after Listing Your Restaurant for Sale

In Chapter One, you prepared all the documents you needed to begin offering your restaurant for sale.

In Chapter Two, you wrote an informative ad and began marketing your restaurant for sale.

At this point in the sales process, you should soon begin to receive emails or phone calls from prospective buyers.

In this chapter, you will:

• Safeguard your time and energy by screening potential buyers
• Invite qualified, serious buyers to view your restaurant at its best
• Schedule walk-throughs that inspire competition between bidders
• Prepare and rehearse your answer for the most robust question buyers will ask.

Once you’ve moved through the steps outlined in this section with a serious prospect, you’ll be ready to begin the actual sales negotiations.

Let’s begin.

Screening prospective restaurant buyers

The purpose of your first contact with potential buyers is to judge whether they’re qualified. Don’t waste your time with tire-kickers and unqualified buyers.

At this stage, prospective buyers won’t hand over a financial statement. However, you can still determine if they’re qualified by asking questions and requiring them to sign a non-disclosure agreement.

The best approach is to tell them that the landlord needs to approve the buyer wand before spending too much time. You want to make sure they meet the minimum requirements of the landlord.

If you’re selling for all cash, you want to determine if they have the funds to buy your restaurant. You can phrase it this way: “The landlord has minimum cash in the bank requirement. How much cash can you show in your bank accounts?”

Ask them about their concept and experience in the restaurant business or general business experience. Again, you can explain the landlord has ‘specific requirements and that you don’t want to waste either party’s time.

If they provide satisfactory answers, ask them to sign a non-disclosure agreement. This added hurdle may frustrate the buyer, but the majority of sellers and business brokers require them. If they are serious, they should be willing to sign the non-disclosure.

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.

Get Your NDA Template Here

Keep Track of Prospects Selling a Restaurant

It’s easy to lose track of prospective buyers during the marketing process. A prospect that does not seem like a good fit today may be a real buyer next month. Keep track of everyone that inquires about your restaurant for sale.

Use the following spreadsheet. Fill-in their name, contact information, and brief description about them based on your communications. If circumstances change, such as a price reduction, go through the list and contact each prospect again to see if they may reconsider your restaurant.

Get Your Buyer Template Here

Pre-Meeting

Once you receive the potential buyer’s signed non-disclosure agreement, you can provide the restaurant’s address to your prospect.

Before signing the non-disclosure, the buyer knows very little about your location.

It’s a good idea to have the prospect drive to the site and take a look as a customer. If they like the place, you can schedule a meeting to show them the entire space, including the kitchen.

If you are busy at certain times of the day, suggest they stop by at those times so they can get a feel for the traffic.

Nothing sells a restaurant more than foot traffic and customers.

Remind the prospects not to ask any questions or discuss the sale with your employees.

You will recognize potential buyers as they stand outside looking at your restaurant or how they look around as they order a meal or drink.

Meeting with Prospects

After the initial drive-by, most prospects will need to see the space in more detail before making an offer.

It’s best to schedule a walk-through when you are slow and will not be distracted with running your business.

If you are very sensitive about your employees learning the restaurant is for sale, you can limit showings to early morning or after closing.

If you have multiple prospects interested, it’s a good idea to schedule a showing with more than one candidate to create a sense of demand and competition.

Showing Your Restaurant for Sale

Be prepared to answer questions and try to understand the prospective buyer’s perspective. “If your restaurant is such a great place,” they may ask, “Why are you selling?”

Practice your response to this question and have an answer prepared.

“Retirement” and “I’m moving out of the state” are better answers than “I want to focus on my other more profitable restaurants.”

Be as open as possible, but avoid getting into too much detail about financial operations if you are selling the restaurant for its assets. You should answer questions truthfully and don’t make any misrepresentations.

Let the buyers know that upon acceptance of an offer, they will have time to inspect the premises and review the lease agreement and any other information you have available.

Highlight the key selling features that you’ve identified, such as: “I have been told it’s almost impossible to get this type of liquor license in this neighborhood” or “The vacancy rate in this area is almost zero. It’s very hard to find a place to rent, and I have a below-market lease.”

Don’t oversell, and let the prospect do most of the talking if possible. Let the buyer know you are happy to answer any questions they may have.

Summary

Screening Potential Buyer

The purpose of your first contact with potential buyers is to judge whether they’re qualified. If they are qualified, send a Non-Disclosure Agreement.

Non-Disclosure Agreement

By signing a non-disclosure agreement, a Buyer agrees not to disclose any confidential information about the business or sale.

Keep Track of Prospects

Keep track of everyone that inquire’s about your restaurant using the prospect tracking sheet.

Pre-Meeting

Once you receive the potential buyer’s signature on a non-disclosure agreement, you can provide the restaurant’s address to your prospect.

Have the prospect drive to the site and take a look like a customer. If they like the location, you can schedule a meeting to show them the entire space, including the kitchen.

Meeting with Prospects

Most prospects will need to see the space in more detail before making an offer. It’s best to schedule a walk-through when you are slow and will not be distracted with running your business.

Showing Your Restaurant for Sale

Be prepared to answer questions and try to understand the prospective buyer’s perspective.

Answer questions truthfully and don’t make any misrepresentations.

If you have completed the steps above, you are now closer to receiving an offer to purchase or have learned what issues may be preventing buyers from taking the next level. Some problems you may be able to address may include the perceived value compared with your asking price.

Congratulations!

Let’s move on to Chapter 4: Negotiating the Deal for Your Restaurant for Sale

Chapter 4: Negotiating the Deal for Your Restaurant for Sale

In the previous section, you screened potential buyers, invited qualified buyers to visit your restaurant, and walked them through the property.

This next section guides you through the process of preparing to sell your restaurant to a seriously interested buyer. In this section, you will:

• Prepare for a common negotiation tactic that buyers use
• Learn a valuable tactic for achieving your desired price
• Acquire all necessary documents that begin formalizing your sale
• Open Escrow

How to Handle Lowball Offers and Criticism when Marketing Your Restaurant for Sale

Rule #1: Don’t take negotiations personally. There is a good chance you will receive some lowball offers and possibly some negative remarks about your restaurant to justify the buyer’s low offer.

Deal Terms

Price is only one of the deal terms you will need to agree on with the buyer. Depending on your situation, a short escrow and being released from your lease obligation may be more important than price.

If you are having trouble achieving your price, you may consider providing financing for part of the sale to meet a higher sale price.

For example, if you want $125,000 and the buyer only has $100,000 available, you can offer to provide a loan of $25,000.00 to be paid over 12 or 24 months.

In this situation, you will want a lien on the equipment, and there is still a risk that the buyer could default before you get paid in full.

But if you collect payments for 12 months, you will make more money than accepting the buyer’s current offer of $100,000.00. Also, you will have a lien on the assets.

Preparing the Offer

The purchase process starts when you receive 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.

If you are working directly with a buyer, there is a good chance they will not have experience writing a Letter of Intent.

You can request that the buyer send an overview of terms, price, length of Escrow, and any other conditions required. Once you receive the terms, you can complete a Letter of Intent (LOI) or a formal Purchase and Sale Agreement.

See the sample Letter of Intent below.

Get Your LOI Template Here

Prepare two originals for signature by both Buyer and Seller.

Proof of Funds

Before opening Escrow, verify that the buyer has enough funds available to complete the sale. Ask for a recent bank statement or contact at their bank.

Pre-Escrow Period

The Letter of Intent should require the buyer to complete their physical inspections, review of the financial condition of the business if applicable, and approve the Lease agreement.

Physical Inspection

The buyer 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 buyer should provide written approval of the condition of premises and equipment. You can agree to fix any problems, give credit to the buyer 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.

Also, it’s a good idea to require the buyer to submit all the information needed for the landlord to approve a Lease assignment or new lease.

Lease Assignment/ New Lease

The sale will require that you either assign your current lease to the buyer or that the landlord and buyer negotiate a new contract. The landlord will need to approve the buyer.

Notify the landlord and request an assignment of lease (or a new contract if applicable). Your lease agreement may provide require a non-refundable fee paid to the landlord, to consider the assignment. If you reviewed your lease to prepare a Lease Abstract, you should be aware of such costs.

The buyer 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 the buyer needs to use the landlord’s forms or a standard credit application.

Get Your Request for Assignment Template Here

Note: If the Buyer is requesting a new lease, be very specific in the Letter of Intent or Purchase Agreement that terms of the financial terms of the new lease shall be similar to the existing contract.

In most cases, the landlord will not agree to provide the buyer with more attractive terms and accept less rent than currently offered in the lease.

Landlord approval of an assignment is often the biggest hurdle to selling a restaurant. For many different reasons, the landlord may be slow to respond or maybe less than cooperative.

If you provide the landlord with a financially stable and experienced buyer and run into a roadblock, seek the advice of an attorney specializing in commercial lease transactions.

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.

Congratulations!

Let’s move on to Chapter 5: Escrow the Final Stage to Close Your Restaurant for Sale.

Chapter 5: Escrow the Final Stage to Close Your Restaurant for Sale

By this time, you negotiated with your buyer and agreed on basic terms and conditions. It’s now time to close in on the final stage of your sale: Escrow.

In Chapter 5, you will:

• Open Escrow to protect you and your buyer 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, your restaurant will have a new owner, and you’ll have your proceeds.

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

Escrow Fees to Close a Restaurant for Sale

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.

Opening Escrow

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 SUPPLEMENTAL ESCROW INSTRUCTIONS

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

1. This is all Cash-Offer transactions without a loan.
2. The following is for clarification purpose:

The acceptance Date Is December 8, 20XX.

The escrow Opening Date Is December 9, 20XX.

3. 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.
4. 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.

6. 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.

7. 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.

8. RELEASES:
   1. 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.
   2. 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.
   3. 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.

9. 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.

10. 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.

11. 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.

12. SOLE OWNER: The Seller herein warrants that he is the sole owner of the 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.

13. 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.

14. 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.

15. POSSESSION: Possession shall be granted to and taken by Buyer as of the close of escrow.

16. 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

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. 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: /

26. 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.

27. 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.

28. 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.

29. 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.

30. 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 the 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.

31. 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.

BUYERS:

BUYER, Inc., a California Corporation

By:
John Buyer, Authorized Signatory

SELLERS:

SELLER, LLC, a California limited liability company

By:
Suzy Seller/Manager

Escrow will require the following information from the Seller and Buyer:

From SELLER (Current Owner):

1. Business Name & Address (Exact entity name or individual name)

2. Doing Business As (DBA)

3. All other business names and addresses used in the last three years

4. Home/Forwarding Address, other than business address (EDD requirement for post-closing items)

5. Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)

6. Employment Development Department Account Number (If you have employees, Escrow will need the EDD # to order the necessary release from the Employment Development Department)

7. Sales Tax Permit Number (In connection with the State Board of Equalization)

8. Copy of your Sellers Permit

9. Allocation (Breakdown) of the Purchase Price

10. Liquor License Number (If the transaction involves liquor license transfer)

11. Contact Information (Phone number and email address)

From BUYER:

1. Deposit to open Escrow, as agreed upon, made payable to Escrow Company

2. 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)

3. Forwarding Address, for post-closing items (If different from above)

4. Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)

5. Employment Development Department Account Number (If you have employees, Escrow will need the EDD # to order the necessary release from the Employment Development Department)

6. Contact Information (Phone number and email address)

Get Your Asset Allocation Form Here

What Happens in Escrow?

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:

1. Record notice of sale at the county recorder’s office where the assets are

located; and

1. 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.

WARNING:

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 you are 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.

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.

Liquor license Transfers

Licensing laws vary in different areas of the country. The chart below outlines the process involved to transfer a liquor or beer and wine license.

Final Walk-through

A final walk-through should be scheduled a few days before the close of Escrow. The buyer will confirm the fixtures and equipment are all present and in good working condition.

If the inventory is part of the sale, a value will 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.

Closing Statement.

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.

 Promissory Note.

If you are providing a loan for part of the purchase price, a promissory note is prepared by Escrow and secured by a UCC1 security agreement.

Inventory.

If the stock is part of the sale ( food, beverages, paper, and supplies), the buyer 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 provide the keys to the buyer.

Congratulations on the successful sale of your restaurant!

If you followed all of the steps provided, you should have experienced a smooth transaction.

Do you have any questions? Contact me.

Cheers!

Mark