Know the Score When Buying an Existing Restaurant

Many restaurateurs get into the business by starting brand-new operations from the ground up or becoming franchisees. There are, however, those who either get their start or increase their holdings by purchasing existing shops. These can be win-win deals for all involved.

The sellers are typically owners looking to retire and/or cash out on a successful concept, and are in the position to realize value created through hard work, creativity, and skilled management. The buyers have an opportunity to take over a successful operation with a known revenue stream, an established reputation, and a base of customers. The customers continue to enjoy a favorite eatery that changes hands seamlessly.

But between making an initial offer to purchase and being handed the key to the front door, the buyer has a lot to consider. These transactions can be complex from a legal and tax perspective for all parties; however, typically it is the buyer who is the most vulnerable. The seller often controls the transaction. His attorney typically draws up the first draft of agreements, including the purchase contract, which contains warranties, representations, and indemnification language. To the unarmed buyer they might look reasonable at first blush. In fact, often there are liability and tax issues that the buyer might overlook, unless he involves a competent transactional attorney and tax consultant in the negotiation and drafting process to protect his interests.

If you are contemplating the purchase of an existing restaurant, we hope that this article provides an awareness of some of the issues that face a buyer of a business, and helps you have more productive conversations with your lawyer and tax adviser. In particular, the potential tax ramifications of these transactions can be mind-numbing, unless you have a particular interest in tax and transactional law. However, we also believe that the more you understand about your transactions, the more confident you will be in the process. We've tried to simplify some of the key issues as much as possible.