Buying or selling a restaurant in New York City is a unique adventure, and not to be taken lightly. The first thing you must consider is whether you are buying/selling the assets of the business, or the company itself. Traditional thought is that if you purchase a company, you inherit all the good and bad, tha comes with that company. On the other-hand, if you purchase only the assets of a company, you inherit nothing. This is true...sort of. New York’s Bulk Sales Law imposes liability on buyers for a seller’s sales tax debt. What this means is that if a buyer does not obtain a release from the New York State Tax Department, they may be liable for the seller's unpaid sales tax debt, up to the amount of the purchase price.
There are several other issues to consider as well, such as:
(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. Be specific
(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) 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.
(i) Most lease agreements require a landlord consent to a proposed sublet or assignment of a tenant’s lease. Make sure that the seller has obtained 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