This is the second installment in our series on buying a restaurant, where we share information about each step of the restaurant buying process. Read our first article to learn how to find a restaurant to buy.
Some people are on the hunt for property to start a new restaurant, and others would rather buy a restaurant business instead of starting their own. If you’ve found the restaurant or property you’d like to purchase, it’s time to roll up your sleeves, make an offer and start the negotiation process.
Let’s dive into the steps you need to take to buy a restaurant.
Understand What You’re Buying
As the buyer, you must understand what’s included with the purchase. Knowing how to negotiate when buying a restaurant starts with knowing what you get with the seller’s original offer. For example, just because there are commercial ovens on the property doesn’t mean they come with the sale. The seller may have plans to sell the equipment separately or move it to another business.
Never assume everything inside the building or every asset of the business comes with the purchase. A commercial real estate broker will help you determine what’s included in the property sale and remain in contact with the seller if you’d like to negotiate terms. In addition to equipment, there are many things you should consider before signing a letter of intent to purchase.
As a first step, buyers should take inventory of what they need and determine if those things are included in the sale. If they aren’t included, the buyer may be able to negotiate with the seller and have terms added to the sale of the property.
What factors should you consider before sending a letter of intent? What questions should you ask before buying a restaurant?
- Equipment. Is there kitchen equipment on the premises? If so, do you get to keep it once ownership changes? New equipment is expensive. If the current equipment is in good shape, the buyer may want to negotiate for it. The same goes for technology like a point of sales system. If the tech is already in place, there’s no harm in asking if it’s included in the sale.
- Leases. If you’re purchasing a restaurant business, you’ll have to assume the current lease or negotiate a new lease with the landlord. Even if you reach an agreement with the seller, you will still have to be approved by the landlord. When you make an offer, be sure to include a lease contingency clause so you can walk away from the sale if the landlord doesn’t approve you. There may be equipment that is leased, too, such as a dishwasher. Make sure you know and have copies of the equipment leases.
- Inventory and menu. Does the restaurant’s current inventory come with the sale? Will you obtain the ingredients left behind if you purchase the business? These are questions you should ask the seller. Buying a restaurant business doesn’t guarantee you can keep the menu, either, so you’ll need to check to see if recipes are included.
- Liquor license. The current restaurant may have a liquor license, but it probably won’t come with the property. Often, the state or municipality will have requirements for the new owner to obtain the liquor license.
Making an Offer They Can’t Refuse
You did your research. You toured the space. You talked with the current owner. Are you ready to put an offer out there?
When you want to make an offer, the first thing you need to do is draft a letter of intent. Depending on the sale, you will prepare a letter of intent to purchase the restaurant business itself, the property, or both.
A letter of intent (LOI) is not legally binding. It starts the negotiation by summarizing the buyer’s intentions and terms. Though it’s not a formal offer, a letter of intent alerts the business or property owner that you are serious about making a purchase. Once the LOI is prepared and agreed to, a review period will begin.
If you aren’t ready to start negotiations and make a purchase, you should not send a letter of intent.
What’s Included in a Letter of Intent?
The LOI is typically drafted by the buyer’s commercial real estate broker, and it includes the:
- Purpose of the letter
- Names of each party
- Address of the property
- Description of the property
- Purchase price
- Escrow information (if applicable)
- Due diligence items and timeline
- Signage costs (if applicable)
- Closing date
- Explanation that the letter is not binding
- Expiration date (letters of intent often expire in 5-10 business days)
The seller will ask the buyer for proof of funds before moving forward. You can provide the seller with your recent bank statements or a contact at your bank. This lets the seller know whether or not you can complete the sale.
Do Your Due Diligence
If the seller agrees to your letter of intent, you move onto the next phase of the process: due diligence. As the buyer, you have a set period of time to prepare before opening escrow and closing on the purchase agreement. An LOI will always include a due diligence period.
During this time, you will follow the terms and conditions laid out in the LOI. Those terms allow the buyer to perform a physical inspection, acquire items from the seller and manage any leases. Depending on what you find, you can choose to walk away or complete the sale after due diligence.
Physical property inspections allow the buyer to call out problems with the property and make sure it meets regulation. Having the property inspected could reveal issues with the building’s structure, foundation, roof, plumbing, electrical systems and more.
Inspections ensure you are well aware of the building’s condition before you invest. Often, finding a qualified inspector is an issue. You may need to hire a roofer, HVAC contractor, electrician or a structural engineer to perform the inspections for you.
If problems are identified, the seller may offer to fix them or reduce the sale price. However, sellers aren’t required to do either of those things. Some sellers may hold firm to their original sale price regardless of the condition of the premises.
Due Diligence Checklist
Just as the seller can request your bank statements and information, you can request documents and permits from the seller. That way, you can make an informed decision about purchasing the restaurant.
Due diligence saves buyers from making poor investments since you’ll gain access to the financial and legal information you need before buying.
What should you request? Cross these documents off your list:
- Licenses: All restaurants have a business license and food service license. Some may also have a liquor license for serving alcohol or music licenses. In certain areas, you even need a license for a pool table if you plan to have one of the premises.
- Permits: Businesses have resale and seller’s permits, both of which deal with sales tax. There are also local permits for signs, dumpster placement, employee health and building health.
- Architectural plans: You can request the building’s original plans or drawings, as well as plans for renovations or add-ons. If the owner doesn’t have the plans, often the city inspection department may have them on file.
- Certificate of occupancy: This document states that the property meets local building codes and can be occupied.
- Conditional use permit: Granted by the local governing agency, this permit refers to zoning exceptions. It allows the property to be used for purposes other than what the area is zoned for.
- Title insurance policy: Buyers are usually responsible for purchasing the title insurance from the seller. Title insurance protects the owner of the property from specific claims like unrecorded liens or encroachment problems.
- Service contracts: If the seller has service contracts, you can ask for them to divulge those as well. You’ll need to know if those contracts continue after you take ownership.
- Lease: Any information about current leases is vital information to have! You may be assuming the current lease and need to know what those terms are. If you’re purchasing a larger property with other tenants, you need to know what their leases entail.
- Financial statements: Balance sheets and other financial documents reveal how well the restaurant has been doing at that location. You should request statements from the last five years to get a full picture of the restaurant’s cash flow and profits.
- Tax returns: You want to be sure no liens or judgments have been made against the property. The seller should show potential buyers recent tax returns or their Schedule Cs.
Landlord Approval: Restaurant Lease Agreements
You have to get landlord approval if you buy a restaurant business and plan to lease the space it currently occupies. Before the sale is made, you must notify the landlord and discuss the restaurant lease agreement. As a soon-to-be tenant, you can either assume the current lease or negotiate for new terms.
If a new lease is a dealbreaker for you, include that information in your letter of intent as a contingency. You’ll want to get started on this step as soon as possible, so the landlord has plenty of time to review your request.
To earn landlord approval and thus the lease assignment, you need to provide the landlord with a few documents and possibly a reassignment fee.
- Credit application
- 2-3 years of tax returns
- Reassignment fee or security deposit
Purchase and Sale Agreement: Make It Official!
Once the due diligence period is complete, you can move forward with the official closing and the release of all contingencies. If the review was satisfactory, the contract proceeds to closing.
After you both sign the release of contingencies, the sale is ready to close. The purchase agreement will direct either the title company’s closing agent or your attorney as to what comes next, including a date and time.
Get Ready to Close the Deal
Before you close the sale, you need to open escrow. You may work with an attorney or title company if your state doesn’t require escrow officers to direct real estate transactions. Escrow protects the buyer during a sale and ensures funds are distributed appropriately.
The buyer will share bank statements or their bank’s contact information to prove they have the capital to purchase the property or business. After the buyer deposits to escrow, the escrow officer will obtain clearances and ensure the sale is good to go on behalf of the buyer.
In our next article, we’ll dive into opening escrow and closing the sale on a restaurant.
Haven’t found your restaurant yet? If you need information on finding a restaurant to purchase, read the first article in this series—How to Buy a Restaurant: Finding Real Estate to Purchase.
Restaurants for Sale in Branson, MO
Are you ready to buy a restaurant? Can’t find the right property? Open your restaurant in Branson, MO, where more than 9 million people visit annually and eat out twice a day on average.
Contact Rich Crowell at Commercial One Brokers for more information. Restaurant properties, sales and leasing are his expertise. He will help you identify available restaurant properties in Branson, MO, and prepare to make a purchase.
Learn more about the available property for purchase and lease in the Branson, MO area by reaching out today!