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

For 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 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 your particular 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.