Things That Can Go Wrong During A Sales Transaction That Sellers Needs to Know: Part 1

There are several reasons why a seller should use a specialized restaurant broker to help sell their restaurant, bar or night club. In addition to getting them the highest price possible in the shortest amount of time on a confidential basis, a good restaurant broker will have the ability to possibly eliminate potential problems during the sales transaction process and get the deal closed.

The possible problems that can occur during the sales transaction are broken down by the major parties involved in the transaction. These include buyer, seller, landlord, broker, governmental agencies, and the escrow/title company. This is a three-part article. This first part will discuss how buyers’ actions can void the deal. The second and third parts (that will appear in the next two issues) will discuss how the seller, landlord, broker, governmental agencies and escrow/title company’s actions can void the deal.

How Buyer’s Actions Can Void the Deal

1) Not being able to raise the money.
One of the roles of a good restaurant broker is to screen prospective buyers to make sure they have the proper amount of money to purchase the business. This is done by examining the buyers’ financial statements including reviewing their sources of cash (for example, current bank statements, securities account statements, and equity in the buyer’s properties). If a buyer plans to get the cash from an equity line on property, the broker looks carefully at the appraised value of the buyer’s property and the respective loan-to-value ratio to make sure the buyer has enough equity to obtain the required loan to obtain the cash for the transaction. If the cash is coming from a third party investor other than the buyer, the broker reviews the same items indicated above from the investor.

2) The buyer gets cold feet.
After the buyer signs the purchase contract and the offer is accepted, the buyer may have second thoughts about moving forward on the transaction. After the buyer completes the due diligence process (which includes reviewing the books and records, completing physical inspections and getting approval from the landlord for an assignment of the existing lease or negotiating a new lease), the buyer may develop reservations about moving forward. If the business is a going concern business and the buyer plans to continue the existing operation, the buyer, after further consideration, may conclude that that he or she is not capable of maintaining the same business activity level as the current owner. If the business is an assets sale and the buyer has to change the menu and concept and complete some remodeling, the buyer may think that the original income and expense projections are not achievable.

3) Family problems.
Restaurant, bar, and night club businesses require long hours. In some cases, family pressures regarding lifestyle priorities may get in the way of the buyer’s ability to close the transaction. Lifestyle priorities is the balance chosen between time spent in the business and time spent with the family, and the family may not be supportive of the time requirement necessary to run the business. Various family problems may develop with the buyer or with family members after the purchase contract is executed. These may include a pending divorce, health problems with the buyer or members of the buyer’s family, or the necessity to relocate due to personal family needs. Although many of these issues can not be anticipated, the broker reviews the buyers background to help get an understanding of their chances for success in the business.

4) Can’t qualify for necessary business licenses.
There are various requirements for obtaining certain licenses such as the ABC license (alcohol license) whereby the applicant can’t have any past felonies or DUIs (driving under the influence citations). Checking these aspects of the buyer’s history is part of our initial screening process.

 

How Seller’s Actions Can Void the Deal:

1) Seller’s Remorse – Seller’s remorse means that the Seller has second thoughts about selling his or her business and may want to back out of the deal for several reasons. These reasons may include the following:

a) The Seller feels that he or she is not getting enough money from the sale.

b) The Seller feels that it is the wrong time to sell the business and that waiting to sell it during better economic times might get a higher selling price.

c) The Seller is concerned that he or she may not know what to do when there is no longer a business to run.

d) The Seller has younger children and starts thinking that maybe one of the children may want to come into the business in the future.

e) The Seller feels that with the new developments going on in the area the business may get significantly stronger and may become substantially more profitable. f) The Seller examines the tax consequences of the proposed transaction and realizes that the after tax proceeds, may not be enough to live on.

 

Restaurant Realty will have extensive conversations with the Seller before the business is listed for sale to determine the reasons the Seller wants to sell and if the Seller is not fully committed to selling the business at this time, Restaurant Realty will advise the Seller to not list the business.
 

2) Seller Goes Bankrupt During the Transaction – There have been some situations where a Seller is forced to file bankruptcy during the transaction which means the business is no longer saleable and physical possession of the premises is taken back by the landlord. Without a premises lease, a business is not saleable.

3) Seller Gets Evicted During the Transaction – There have been several situations where the Seller gets evicted during the transaction for nonpayment of back rent. After the Seller is delinquent for back rent the landlord can file a three-day notice whereby the landlord legally states that if the tenant can’t pay the back rent within three days a legal process will begin whereby the tenant will be legally evicted and removed from the premises and the landlord takes back possession of the premises. Restaurant Realty would examine the financial condition of the business before taking the listing to advise a Seller how to avoid getting evicted and how to avoid bankruptcy.

4) Seller Can’t Support the Financial Statements – There have been situations where certain representations are made by the Seller regarding the financial condition of the business and these representations cannot be supported by the appropriate financial documents whereby the Buyer decides to withdraw from the transaction. Restaurant Realty, when possible, will review the tax returns and profit-and-loss statements for the past three years as well as the year-to-date sales tax returns and year-to-date profit and loss statements for the current year before we take the listing.

5) Premises Deferred Maintenance Is Too Extensive – There have been situations during the Buyer’s due-diligence period relating to the inspection of the physical premises when it was determined that the corrective work was so extensive that the Buyer would walk from the deal. In many cases this can be solved by the Seller giving a credit to the Buyer for completing this corrective work after the close of escrow or the Seller completing the work to the satisfaction of the Buyer before the close of escrow. Restaurant Realty will advise the Seller to make sure everything is in good working order and that the Seller has completed a Change of Ownership Health Department Inspection so the Seller knows exactly what corrective work the Health Department is going to require before putting the business on the market.

6) Lawsuit Occurs During the Transaction – There have been situations where a lawsuit is filed against the Seller during the escrow period which will prohibit the deal from closing until the lawsuit is resolved in most cases. There is not much Restaurant Realty can do in this case other than to advise the parties not to proceed further in the transaction until the lawsuit is resolved.

7) Tax Liens Are So Large That They Wipe Out Seller’s Equity – There have been numerous situations where the Seller has incurred tax liens larger than their equity. This means there is not enough cash available to pay off the Seller’s debts which has resulted in the deal not closing. Restaurant Realty will review the possibility of these items occurring before we list the business for sale.

DISCLAIMER
Jacob Zimmerman and Restaurants For Sale Online assumes no responsibility for decisions made by buyers, sellers or other parties to any transaction. Information has been provided based on experience and research. The results of various articles and studies reflect such information. Restaurants For Sale Online assumes no responsibility for pricing or recommendation of pricing to any of our users. If you are interested in buying a business or piece of real estate, Jacob Zimmerman and Restaurants For Sale Online, LLC recommends you do your own due diligence to verify the source of any information provided to you by a seller and/or intermediary. If you are interested in selling your business, Jacob Zimmerman and Restaurants For Sale Online, LLC recommends you contact an intermediary that specializes in transactions similar to the respective business or real estate.