How To Buy A Restaurant, Bar or Nightclub
Coauthored by Steven D. Zimmerman and Jacob Zimmerman

August 2005 (Updated Release From 1996 Article)

Restaurants For Sale Online does not act as an intermediary for the actual transaction. Below are guidelines a business buyer might take during the buying process either with the owner or broker of the sale.

INTERVIEW

Initial Phone Call You make an initial phone call to the owner or broker inquiring about purchasing a restaurant, bar or club of your interest. If you are calling a broker, you may describe your criteria for purchase as they may have multiple leads meeting what you require.

Background Information You will most likely be asked to provide the owner or broker with your personal background information including your financial history. If you are determined to be a qualified buyer, owner or broker will in turn provide you with information on the business of your interest.

SHOWING

Meeting The owner or broker will set up an appointment for you to tour the business. At this time you may ask the owner specific questions about the business. This appointment is generally scheduled during non-business hours so as not to interrupt or alert the employees or customers, especially in the event of a confidential sale.

VALUATION

There are two basic methods for valuing a restaurant, bar or club which are as follows:

1) Assets In Place Method - This method means that only the lease, leasehold improvements and fixtures and equipment are being sold. The name, menu, concept and goodwill are not included as part of the sale. With this method little or no emphasis is put on the financials of the business and the major factors in determining the value are the value of the lease, leasehold improvements and the fixtures and equipment. There is no standard formula in determining value using this method and valuation is somewhat subjective based on the brokers knowledge of the marketplace and comparable sales sold using this method.

2) Going Concern Method - This method means that the lease, leasehold improvements, fixtures and equipment, name, menu, concept and goodwill are all included as part of the sale. The primary valuation method used for a going concern valuation is the yearly adjusted cash flow method. This means that the net profit on the tax return or on the year-to-date income and expense statement is adjusted by adding back the following items to the net income: one working owners salary and payroll taxes, any personal expenses the owner is charging the business (food for consumption at home, life, health and disability insurance premiums, auto expense, entertainment and vacation expense, etc.), depreciation, interest and amortization expense on any loans the buyer will not be assuming, net operating loss carry forward charges and any other expenses which are personal and will not be applicable to the buyer. Once the yearly adjusted cash flow is determined a multiple ranging from 1.5 to 3.5 is used to determine the value of the business. The multiple to be used is determined by several factors which include lease value (whether the lease is at market, below market or above market), the potential upside of the business (i.e. the current operation serves dinner only and has only a beer and wine license and there is potential for a strong lunch business and liquor sales), the quality and quantity of the leasehold improvements and fixtures and equipment, whether the operation is a franchise and whether the operation is a full service or self-service operation. For example, if the yearly adjusted cash flow of the business is $75,000 and the multiple to be used is 2 1/2, the value of the business would be as follows: $75,000 multiplied by 2 1/2 which equals $187,500 sales price.

OFFER

Writing the Offer With assistance of your Broker or Legal Counsel you submit an offer with a deposit to acquire the business. Your offer should be made contingent upon physical inspection of the business, your inspection of the financial records, the assignment of the premises lease or negotiation of a new lease and any other necessary contingencies (i.e. alcohol license transfer or other special licenses, financing, etc).

Presentation You, your broker, or legal counsel will then  present your offer to the seller. It is highly recommended to use an intermediary of some sort for this process. The intermediary will give the seller background information on you, your previous experience, your perspective on how you arrived at your price, terms and conditions, etc. Using an intermediary can help to keep the process smooth and prevent confrontations. If an intermediary is used, they will likely present your financial statement, credit report, resume and business plan to the seller. This may be required even if you do not use such an intermediary.

Response The seller will either accept, reject or counter your offer. The seller or intermediary will notify you of the owners response. At this point you may either accept, reject or counter the seller's response.

Mutual Acceptance When both parties agree to all of the terms and conditions of the sale and sign all amendments and counteroffers, the offer then becomes a purchase agreement signed both ways. At this time there may be contingencies or conditions that still need to be satisfied prior to closing.

Advisors We encourages you to include your CPA and/or your attorney in reviewing the transaction should you feel the need to do so.

ESCROW

Deposit You deposit check (made payable to the escrow company) is deposited and this opens the escrow holding account. An intermediary should provide the escrow officer with copies of all documents relating to the sale.

Inspection You should be given copies of the financial records of the business for your review.

Contingency Removal As your requirements are met existing contingencies in the purchase agreement are removed. Once all contingencies are removed the purchase agreement becomes a binding agreement and the deposit is increased and the escrow is opened.

Closing Date The closing date or the close of escrow is the date when title to the business and normally physical possession of the business is transferred to the buyer. The closing papers are signed in the title company's office or through the mail prior to the closing date.

Inventory Arrangements are made for you and the seller and/or inventory service to take a physical inventory as it applies to the value of the salable items (food, beverages, etc.) and non-salable items (fixtures, equipment, etc.) usually one or two days prior to the close of escrow.

The Closing All parties meet at the escrow office to sign the closing papers or the closing papers are sent to the parties to be executed prior to the close of escrow.

Fees You will generally be responsible for your own accountants and attorney's fees, half of the escrow fees, security deposit for the premises lease and sales tax on the value of the fixtures and equipment that you allocate as part of the purchase price.