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Benefits of working with a Restaurant Broker

A professional restaurant broker should have a vast amount of restaurant, bar, and/or club experience, and understand the operations, marketing, and financial aspects of the business. Additionally, a competent restaurant broker should have successfully completed numerous sales transactions involving restaurants, bars and/or clubs. By having the above experience, a restaurant broker can be helpful to a potential buyer in completing a sales, and can specifically help the buyer with the items mentioned below:

  1. Evaluate the Value of the Business. The broker will help the buyer evaluate the value of the business to help ensure the buyer doesn’t overpay for the business. The two major methods of valuation of a business are the Assets-in-Place Method and the Going-Concern Method, (see Section V).
  2. Evaluate the Location. The broker will help the buyer review the many factors involved in finding the right location. See Section VI for detailed information on finding the right location.
  3. Review the Financial Statements of the Business. If the business being purchased is a Going-Concern Business, the broker should have prepared a Buyer’s Adjusted Cash Flow Statement, which details the cash flow a buyer should realize from the business. Additionally, the broker will help the buyer evaluate several years of past tax returns and profit and loss statements, as well as the current year’s year-to-date profit and loss statement and sales tax returns. See Section V for details.
  4. Review the Fixtures and Equipment List. The seller will have prepared a list of all the fixtures and equipment to be included with the sale. Additionally, a separate list will be provided of any fixtures and equipment not included in the sale, such as personal items to be retained by the seller, and/or items that are rented and/or leased. If certain items are leased, the buyer usually has the option to continue the month-to-month rental agreement of these items, or he can cancel the rental agreement at the time he takes possession of the business. If some of the equipment is leased, it may be a condition of the sale for the buyer to formally assume this lease. See Chapter 43 for sample fixtures and equipment List.
  5. Review Seller’s Disclosure Statement. During the initial stages of the transaction, the buyer will be given a seller’s disclosure statement (completed buy the seller) that discloses all the pertinent information regarding the business—business conditions, regulations and other considerations of the business. See Chapter 43 for a copy of a seller’s disclosure statement.
  6. Review the Physical Assets. Through the due-diligence period, the broker will arrange for the buyer to do a physical inspection of the premises. During the contingency period, the buyer is free to bring in any contractor he would like to inspect the premises; including the plumbing, electrical, refrigeration, heating, air conditioning and ventilating systems, and any other mechanical systems. All the equipment must be in good working condition at the close of escrow. The buyer does another inspection of all the equipment immediately before the close of escrow to assure that it is in good working condition. Any piece of equipment, unless disclosed otherwise, that is not in good working condition must be repaired and/or replaced by the seller, or the buyer will receive a credit in escrow from the seller to have the item(s) repaired, and/or replaced. The exception is if the business is being sold “as is.” When the buyer gets a contract to purchase the business, it is disclosed in writing that certain pieces of equipment are not working and will not be repaired at the close of escrow, and that the buyer has agreed to these conditions. If a business is being sold “as is,” usually the price is adjusted accordingly.
  7. Review Contracts. The broker will provide and review all the various contracts in the transaction with the buyer; including: the purchase contract, premises lease, and if applicable, any equipment leases, equipment rental agreements, franchise agreement, and any other contracts. One of the most important parts of the sale is the premises lease. It is the broker’s responsibility to work closely with the buyer and landlord in negotiating either an assignment of the existing lease, an assignment and modification of the existing lease, or a new lease. For further information about the premises lease see Section VII.
  8. Review Licenses and Permits. The broker will provide and review all the various licenses and permits needed to operate the business with the buyer —the food permit, alcohol license, entertainment license, fictitious business name license, fire department permit, business license, and health department license, etc. In most counties in California, before a buyer can apply for his business license, he must have.
  9. Transfer Various Contracts and Licenses. It is the broker’s responsibility with the buyer to assure that all licenses and contracts are transferred to the buyer before the close of escrow.
  10. The Assignment of the Premises Lease – If the lease is going to be assigned to the buyer, it must be executed by the buyer (also known as the assignee), the seller (also known as the assignor), and the landlord.
    1. Execution of a New Lease – If the buyer is negotiating a new lease, the lease must be signed by the buyer and landlord.
    2. Equipment Lease – If the buyer is assuming the equipment lease, this lease must be executed between buyer, seller, and the equipment lessor.
    3. Franchise Agreement – If the business is a franchise, all the various franchise agreements must be signed by the buyer, seller and franchisor.
    4. Department of Alcoholic Beverage Control License in California (ABC) – If the buyer is having an alcohol license transferred to him from the seller, the ABC license needs to be transferred before the close of escrow.
    5. Entertainment Licenses – If the buyer is taking over an entertainment license, the buyer must get approval from the proper authorities before the close of escrow.
    6. Conditional-Use Permit – The right to use the premises for a certain use not typically allowed for the property, per the zoning laws of the local government. If the buyer is assuming a conditional use permit, he should review the conditional-use agreement, and be aware of the proper procedures for renewing the conditional use permit when it expires.
  11. Other Licenses and Permits – The broker will help direct the buyer to get all the following remaining licenses and permits in place before the close of escrow. This includes the items indicated below:
    1. Business License – required by local government to operate business.
    2. Employment Development Department Permit – required to set up the payroll account.
    3. Franchise Tax Permit – in California you need to set up this permit, which is a registration with the state to pay sales tax and file sales tax returns monthly.
    4. Fictitious Business Name Statement – required in California to legally register a business name so the buyer has exclusive use of the
  12. Saleable Inventory. Saleable inventory are the food products, alcohol products, paper supplies, and cleaning supplies that the buyer will have on hand when the escrow closes. If the buyer is buying a going-concern business, the buyer will most likely want to keep the existing saleable inventory at the close of escrow. There will be a not-to-exceed amount for the saleable inventory agreed to when the purchase contract is executed. Just before the close of escrow, the buyer and seller will take a physical count of the saleable inventory. Then the inventory is computed at the seller’s cost, which is paid for at the close of escrow, in addition to the purchase price. In some cases, the saleable inventory is negotiated at a not-to-exceed amount, and is included in the purchase price. If the business is being sold as an assets-in-place transaction, there is a strong possibility that the buyer will not want the saleable inventory because he is putting a new menu in place, or perhaps he wants to purchase only a portion of the saleable inventory, which will most likely include the alcohol inventory. The broker will oversee this whole process to make sure the buyer and seller are handling the inventory on a reasonable basis.