Key Money Deals: Buying and Selling Restaurants

Buying or selling a restaurant or bar 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, that come with that company.  On the other-hand, if you purchase only the assets of a company, you inherit nothing.  This is not entirely correct.  The 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 Department of Taxation and Finance, 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:

(a) Confidentiality agreements are very important and sellers should consider having buyers execute such an agreement before disclosing proprietary information.

(b) Contract provisions which too broadly describe all equipment, furniture and supplies included in the sale are vague and often lead to disputes regarding what was intended to transferred. 

(c) In a sale of stock, the buyer should do more than just review a seller’s financial records for profits and loss, they should ensure that every asset, liability, contract, vendor, debtor and lawsuit of the seller's be disclosed.   

(d) There are three types of valuations which determine the key money purchase price of a restaurant: (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.  The same way that a consumer would be required to pay sales tax on a television he/she purchased, the buyer in an asset sale is required to pay sales tax on the assets acquired.

(f) Equipment and fixtures can be depreciated over three or ten years while intangible assets have longer tax write-off periods.  Goodwill cannot be amortized so buyers may want to avoid any allocation towards goodwill unless a minimum amount is required to preserve the seller’s trademark.

(g) Unless there is a price allocation for the goodwill of the restaurant, a covenant not to compete cannot typically be enforced.

(h) Successor liability refers to the liability imposed on the buyer of a business.  Ensure that your purchase agreement contains a clear and unambiguous defense and indemnification clause.

(i) Most lease agreements require landlord consent to a lease assignment.  Make sure that the seller has obtained authority to transfer their lease agreement to you, and insist on a provision which makes the closing contingent on the landlord’s written approval of the lease transfer.

Individuals seeking legal advisement in the buying or selling of a bar or restaurant, call DiPasquale & Summers for a free consultation.

Red Flags When Purchasing a Restaurant
The Law Blog of DiPasquale & Summers

Checklist For New Restaurant Formation
The Law Blog of DiPasquale & Summers

© 2024 DiPasquale & Summers | Attorney Advertisement
555 5th Avenue, 14th Floor, New York, NY 10017
| Phone: 646-383-4607

Legal Services