Don’t Even Think About Buying a Restaurant Without Answering These Four Questions.

menu-restaurant-vintage-tableFor generations, owning and operating a restaurant has been a common dream for would-be entrepreneurs. Unlike many other businesses, most of us think we understand how restaurants operate (we all eat at restaurants, don’t we?), and there is a certain charm and allure to the idea of welcoming our friends and neighbors to a place all our own. Beyond that, while individual failures are plentiful, the restaurant industry as a whole has been remarkably resilient, even in tough economic times.

Still, we all have heard the legendary statistics regarding new restaurants’ failure rates, and wonder if there is a way to mitigate that risk and still pursue the dream of restaurant ownership. For many, the answer is to purchase an existing restaurant, which may have a reliable customer base, an established location, a proven concept, and a well-known name. If you decide to pursue that route, however, we encourage you to ask yourself (or your lawyer) a few questions early on in the process:

1.     What, exactly, am I buying?

Yes, you’re buying a restaurant. We know that. But it’s really not that simple. In most cases, if you are buying a single restaurant, you will do so through what’s called an asset purchase agreement (APA). In such a case, you will buy all the assets of the restaurant business, including both tangible (tables, chairs, kitchen equipment, point-of-sale system, etc.) and intangible (trade name, intellectual property, good will, etc.). When restaurant deals are accomplished this way, the buyer takes over all the operational aspects of the restaurant, but does not (generally speaking) assume the debts and liabilities of the prior owner, as the buyer would if they simply bought the company that owned the restaurant outright. Moreover, regardless of the structure of the deal, all buyers should conduct their due diligence such that they assure themselves they are not “buying” anything they didn’t bargain for, such as long term payment obligations, liabilities to employees or vendors, or pending regulatory violations and associated fines,

2.     Do I need a new lease?

Often, when a buyer purchases a restaurant, they simply take over the existing lease of the prior owner through a process called an assignment. An assignment, however is not always possible or advisable. In most instances, for example, a landlord will have the right to approve any proposed assignment and may not wish to engage with the new owner on the same terms as the prior one. In that case, the landlord may insist on a new lease with more terms more favorable to the landlord than those of the existing lease. Conversely, the buyer may object to certain terms in the existing lease – a demolition clause, or the lack of renewal options, or simply that there is not enough time remaining on it – and request a new lease as a condition of proceeding with the sale. Whatever you case may be, any agreement to purchase a restaurant should include a contingency that the buyer be afforded time to secure either an assignment of the existing lease or a new lease altogether.

3.     Am I able to transfer the liquor license?

For many restaurant sales, the transfer of the existing liquor license is essential, especially in jurisdictions where the issuance of new licenses is limited in some way. In such instances, buyers must take appropriate measures to ensure there is nothing that could prevent the restaurant’s liquor license from being transferred from the seller. Such things could be a poor compliance record that could cause the transfer to be protested, a pending violation that could lead to revocation, or some other factor related to the buyer himself that might cause local authorities to deny the transfer. Investigation into such matters should be part of any buyer’s due diligence, and appropriate contingencies should always be included in any agreement.

4.     Will I have full rights to the restaurant’s trade name?

Here we have the very simple matter of ensuring that, if you are buying “McFinley’s Tap House,” you can still call it “McFinley’s Tap House” after you take over. As stated above, most asset purchase agreements will include the restaurant’s trade name and other intellectual property as being among the intangible assets of the business.   In some cases, however, a third party may have granted the seller the rights to use a restaurant’s name, and may still be entitled to assert some control over who uses that name. Any seller should therefore be required to demonstrate that he has the right to transfer the trade name to you, and that no third party licensor has any ability to prevent you from using it.

Three Common Mistakes to Avoid When Starting your Business

slip-up-danger-careless-slipperyLet’s get one thing out of the way:  when you are starting a business you are going to make mistakes — a million of them.  That’s okay.  It’s how we learn and grow, and it also keeps things interesting.  But what’s not okay is when we make mistakes that are easily avoidable, and which can have serious repercussions for the future of our businesses, whether they succeed, and what happens to us if they don’t.

These are three such mistakes (I hope you’ll avoid them all):

1.    Delay in setting up your LLC or Corporation

No matter what anyone tells you, establishing a corporate entity for your business is not difficult, and should not be expensive. But it is one of the most important things you can do to protect yourself from personal liability for the debts and obligations of the business. If you delay in setting up your LLC or corporation and sign (even a few) contracts in your individual capacity, you can be exposing your personal assets, and those of your family, to risk in the event any of those contracts goes bad. The same would be true if you engage in a business where someone could be hurt while visiting your business or while working for you. If any of those losses occurs before you’ve property established your entity, you are probably going to be on the hook personally. It is therefore imperative that you set up your entity – and know how to use it properly — such that any person harmed (either physically or economically) by your business can only sue the business, not you personally

2.    DIY Your Lease Negotiation

I see this way too often in my practice, especially my restaurant practice: someone signs a lease without having it reviewed by an attorney, trying to avoid another upfront expense. I get it. You’re spending a ton to get your business off the ground and this seems like one you can avoid. After all, the lease is pretty standard, right? Wrong. Most often, the lease was prepared by the landlord’s lawyer and has many clauses in it that skew strongly to the landlord’s benefit. Why wouldn’t it, after all? If you were preparing the lease, wouldn’t you do the same thing? Here’s the thing, though: many of these terms are negotiable, especially for a landlord looking to make a deal. For the worst provisions, I will simply request that they be removed entirely. But if you try to do this yourself, will you know where those bad terms are? Will you know how hard you can push back? Doing it yourself may cost you your best (and last) opportunity to ensure the lease is as fair as possible, and that you have the best chance to succeed in your business.

In many cases, your lease will commit you to pay hundreds of thousands of dollars over the next 5, 10, or 15 years. Your lease has the power to make or break you, especially in the restaurant business, and a bad lease can doom even the best operators. That is why going it alone on your lease is one of the most penny-wise and pound-foolish things you can do. You owe it to yourself to do all you can to ensure you understand what you are signing, and that you have achieved the best terms possible.

3.    Don’t Put Your Operational Agreements in Writing 

            When you start a business with other people, there are only two possibilities: that you see everything exactly the same way as to how to manage the business, or that you don’t. Very often, however, people think they are in the first category, but they are really in the second. The best way to find out is to put everything down in writing. There is really no excuse. And, as I often tell my clients, if you don’t. the worst thing that can happen to you may be that the business is successful. Then there will actually be something to fight about. Don’t put yourself in that situation. Put it all in writing (and make sure you understand it all before you sign).