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

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.

Restaurant Realty Company, having completed over 500 transactions, has experienced most of the situations above which has given us the ability, in many cases, to eliminate or minimize these problems and get the deals closed.