What To Do When Buying A Restaurant

Check before buying into a restaurant.

Check before buying into a restaurant.

When thinking about or researching to buy a restaurant, it is often thought of as a less risky option than starting your own restaurant business from the ground up. However, without proper financial research, due diligence, and consideration for the essential legal steps and potential liabilities involved, it can be even more risky than starting your own restaurant.

A short list to consider is whether there are existing liabilities such as unpaid overtime, pending lawsuits, or healthcode violations.  You should inquire if the previous owner has been in compliance with all tax laws and employment laws.  Ask about the terms of the commercial lease (if any) and what terms are proposed for the purchase.

These are just a few of the many questions and issues you need to ask as you approach the process of purchasing a restaurant. The below comprises a brief list of the issues and subjects to consider when purchasing any business, especially a restaurant:

  • Always use a licensed business attorney to help you pursue the forming of a new restaurant or to purchase of a restaurant. There is always a reason why a restaurant owner chooses to market his or her restaurant for sale.  Only an attorney who focuses their practice in business, as opposed to a Jack-of-all-trades, will have the necessary skill set and experience to properly advise you as to your liabilities upon purchase and help you structure the purchase agreement for the acquisition.

  • Negotiate a non-compete and non-disclosure clause if a) you intend to purchase the business (not just the assets); b) the seller is an LLC or corporation; and c) you intend to purchase substantially all of the seller's shares or interests. Otherwise, the non-compete clause will likely be unenforceable under State law. This can be a major issue for new business owners. If the seller has the legal right to open a competing restaurant next-door, this is something that you should be aware of before you purchase.

  • Perform your due diligence. Have your attorney help you ascertain whether there are any outstanding or existing liabilities relating to the business, such as unpaid overtime for staff or health code violations. Are workers fully documented? Have detailed employee files been created? Are any employees being misclassified as independent contractors? Have sales taxes been paid? These are all questions you must ask yourself (and your attorney). If there are existing liabilities, one solution may be to purchase only the assets of the restaurant and not the liabilities. In other words, don't buy the business, just buy the assets. For example, using an asset purchase agreement, acquire the location, equipment, name, inventory, and goodwill. Form a business structure, commonly an LLC, to purchase these assets. Employees, in most cases, are terminated at the end of their last day under old ownership and hired by the new LLC the next day. However, if taking this approach, be conscious of non-compete laws in the State of Texas (discussed below).

  • Obtain approval from the Texas Alcoholic Beverage Control (TABC). You cannot simply purchase a liquor license. You must first obtain TABC approval for transfer of the license. This is a time-consuming and somewhat complex process. Transfers are closely scrutinized by the TABC and there is often a waiting period. Transfers cannot occur immediately. It is, however, possible to receive a temporary permit pending final approval of the transfer. TABC approval may be used as a condition in the asset purchase agreement allowing you to "back out" of the deal if approval cannot be obtained.

  • Use a letter of intent or memorandum to outline the terms of the transaction. If appropriate or desired, ensure with your attorney that the document is binding pending execution of a complete asset purchase agreement. This will, in effect, preserve your right to purchase the restaurant, even if another buyer makes an offer.

So in conclusion, there are several key legal issues to consider before you purchase a restaurant. Always seek the advice of qualified tax and legal professional before acquiring any restaurant or other business.