Buying or selling a restaurant is unique adventure not to be taken lightly. There are several issues to consider many of which are discussed below.
(a) Confidentiality agreements are very important and every seller should ensure that all potential buyers execute such an agreement before discussing proprietary information.
(b) General provisions including all equipment, furniture and supplies of the business are vague and often lead to disputes regarding what was intended to be included in the agreement.
(c) In a sale of stock, the buyer should do more than just review a seller’s book and be certain that the agreement contains a list of the seller’s assets and liabilities.
(d) There are three types of valuations (1) Market Based, (2) Asset Based, and (3) Earnings Based. Market based refers to the sale prices of similar business in your area. Asset based refers to the ‘book’ value of the business or the asset and liquidation value. Earnings based considers a business’s past, present and projected income to debt streams.
(e) Bulk asset purchase agreements are subject to sales tax because the sale involves tangible personal property. Typically, buyers try to purchase restaurant assets in bulk sales to avoid taking on the seller’s liabilities.
(f) Equipment and fixtures can be depreciated over three and ten years while intangible assets have longer tax write-off periods. Good will cannot be amortized so buyers should avoid any allocation to good will unless a minimum amount is required to preserve the seller’s trademark.
(g) Unless there is a price allocation for the good will of the restaurant, a covenant not to compete cannot typically be upheld.]
(h) New York’s Bulk Sales Law imposes liability on buyers for a seller’s debt. Buyers may contract with a seller to recover these amounts from a seller at closing. Furthermore, buyers should always insist that a seller identify all creditors and debts, as well as those debts that will be satisfied prior to sale.
(i) Successor liability refers to the liability imposed on the purchaser of a business. Ensure that your purchase agreement contains a clear and unambiguous defense and indemnification clause.
(j) Many lease agreements do not require a landlord to agree to a sublet or assignment of a tenant’s lease. Be sure that the seller has the authority to transfer the lease agreement to you, and insist on a provision which makes the closing contingent on the landlord’s written approval of the lease transfer.
Please call Attorney James DiPasquale at (646) 343-4607, for a free consultation.
DIPASQUALE LAW GROUP
James D. DiPasquale, Principal |