Buying and Selling Restaurants

Restaurant operators frequently come to me with their original operating agreement asking me to amend it to include one or more new investors that they have brought on-board (i.e. actually obtained money from and promised a membership interest to). I immediately cringe. Bringing in an investor is not always as simple as owners would like to believe. You are offering a security interest in your business which may need to be registered with the Securities and Exchange Commission. Keep in mind that all securities transactions, even your small transaction, are subject to the antifraud provisions of the federal securities laws. In other words both you and your company can be held responsible for any false or misleading statements, whether oral or written. The government enforces federal securities laws through criminal, civil and administrative proceedings and jilted investors can enforce these protections through private lawsuits and obtain a full refund of their investment plus interest.

It amazes me how often clients come into my office having identified a restaurant or bar they want to purchase, but are otherwise unaware of the significant out-of-pocket costs they will incur through the process. If you want to keep costs within reason, consider:

1. If you know you will need and attorney, accountant, broker, consultant, etc., ahead of time, then hire them ahead of time. Often work can be completed more timely and with greater efficiency with advanced planning. Delay and an increase in cost is inevitable whenever you ask your team to drop everything to handle a last minute transaction which requires permits and licenses to be obtained and due diligence to be performed.

Owning your own restaurant can be extremely rewarding if you are able to navigate your way through the labyrinth of industry pitfalls.  If I could offer one piece of advice, it would be to tread carefully.  While the list of considerations, complications and requirements are exhaustive, a few key areas merit discussion. 

1.  Lease Agreement.  When buying a restaurant you will either be assigned the Seller’s lease agreement, or have to execute a new lease with the landlord.  One potential benefit to an assignment might be that the Seller has a long term lease at a favorable monthly rate which you would inherit, whereas a new lease might require a significantly higher monthly rent more in-line with the prevailing market.  Conversely, an assignment rarely permits you to re-negotiate any of the Seller’s lease terms, so careful review of the existing lease is critical.  Often, lease agreements contain hidden charges, obligations and restrictions on alienation that make an otherwise favorable lease, prohibitive.