The following list is broken down as follows:
Stage 1 – Items you need to do before you sign a purchase contract;
Stage 2 – Items you need to complete after you sign a purchase contract, and
Stage 3 – Items you need to do in order to close escrow.
Many other items are important, but this is meant to be an outline of the major items that need to be covered.
Stage 1 – Items you need to do before you sign a purchase contract
1. Use a specialized restaurant broker to ensure that you are not overpaying for the business. Follow his expertise to guide you through all the proper steps in the transaction to make sure the transaction gets closed properly without any surprises.
2. In doing your due diligence on the business being purchased, make sure the location and surrounding area is built out, and there is little room for a head-on competitor to come into the immediate area.
3. Make sure to be adequately capitalized to fund not only the purchase of the business, but to have adequate monies for marketing expenses, training costs, remodeling costs, plus reserves set aside for unforeseen circumstances.
4. Do conservative projections of income and expenses for several years in evaluating the potential future of the business.
5. Conduct an extensive review of the competition in the area to assure yourself that your operation will be competitive.
6. Be prepared for the unexpected.
7. Be prepared to be an active, hands-on working owner in the business, unless you are purchasing a large-scale operation and you can afford to hire a high-powered general manager.
8. Complete a comprehensive business plan before you get into the contract.
9. Set up the proper entity, such as corporation or limited liability company, to take title to the business.
Stage 2 – Items you need to complete after you have signed a purchase contract
1. Conduct a detailed review of the physical aspects of the business, including a complete physical inspection of the premises with the appropriate contractors.
2. Thoroughly review the financial records of the business—the books and records, including the tax returns for the past three years, the current year’s sales tax returns, and year-to-date income and expense statement. Have your accountant help you with this process if necessary.
3. Check with all city, state and federal departments as necessary to make sure the physical premise is up to code, including health department, fire department, and the building and planning department’s guidelines, including handicapped requirements. Be sure to get the proper written clearances from these agencies. Also check with the proper authorities to assure yourself that if the laws change, these changes won’t have a negative impact on the operating hours and major operating conditions for your business.
4. Have the premises lease negotiated properly to make sure you have enough time on the lease, with affordable rent increases in the future. Also try to negotiate a first “right of refusal” to purchase the building, and make sure you meet with the landlord before the close of escrow. Get the landlord’s written consent for assignment of the premises lease or for issuance of a new lease. It is best to work closely with your broker in all matters relating to the lease.
5. Have a tight, non-compete agreement with the seller for the appropriate radius from the business being purchased for at least a 5-year period to assure yourself that the seller will not complete against you.
6. Review with the seller the personnel records of all the employees to learn about the employees’ strengths and weaknesses, as well as meet with the employees before the close of escrow to determine which employees you wish to keep.
7. Use an attorney as necessary to review all the legal documents of the transaction, including reviewing the premises lease.
8. Get acquainted before the close of escrow with all of the major tenants in the building you will occupy. These tenants will be potentially exposed to any traffic or noise factors that will be generated from your business, and you need to make sure you’ll be compatible with them.
9. Check the restrictions and conditions for the premises.
10. Complete the allocation of the purchase price, and have the allocation determined so it will be advantageous to you tax wise.
Stage 3 – Items you need to do in order to close escrow
1. Put your remaining money in escrow after the following items have been completed:
a. The lien search has been completed by escrow, and the escrow can pretty much assure you that you will get title free and clear of all liens,
b. All premises lease and other legal documents (equipment leases, franchise agreements, etc.) have been signed by the required parties,
c. All due diligence including physical inspections, review of books and records and other items, have been completed,
d. All alcoholic beverage control forms have been properly processed, and it is eminent that the alcohol license will transfer to you in the near future.
2. Make sure that you receive the proper training from the seller to learn all of the nuances of the business.
3. Confirm that the saleable inventory is counted and properly priced out immediately before the close of escrow. Don’t purchase any excess inventory per the not-to-exceed inventory limits spelled out in the purchase contract.
4. Fire up all the equipment immediately before the close of escrow to make sure it works properly. Any equipment in need of repair is to be repaired by the seller—or you should receive a credit in escrow for the anticipated repair costs.
5. Get the seller’s contact information so he can be reached after the close of escrow.
6. Get the health department, fire department and other clearances necessary from these respective agencies before the close of escrow
7. If there is an equipment lease to assume, validate that it is properly assumed, including having it signed by all the required parties before the close of escrow. Either cancel or properly transfer all rental equipment accounts into your business name at the close of escrow.
8. Have all your insurance policies in place, including liability, workman’s compensation, and any other required insurance, immediately before the close of escrow.
9. Set up all your tax accounts (in California) with the Franchise Tax Board, State Board of Equalization, and Employment Development Department, etc.
10. File a fictitious name statement before close escrow. A fictitious name filing is for registering the use of your business name with the Secretary of State to protect use of your name for your business use.
11. Get a complete set of all transaction documents signed by all parties, including the purchase agreement and addendums, if any, the equipment list, the buyer’s and seller’s disclosure list, premises lease documents, and copies of all the escrow papers for your transaction, including copies of tax clearances.
12. Set up your accounting and bookkeeping systems before the close of escrow.
13. Change over all the utility accounts to your business name at the close of escrow.
14. Change over all merchants’ accounts to your business name at the close of escrow.
15. Transfer to your business name any other special licenses or permits you may need to operate the business, such as an entertainment license or after-hours license, before the close of escrow.
16. Take physical possession of the premises at the close of escrow.
17. Change all of the premise’s locks, and the safe’s combination immediately upon taking possession.
Restaurant Realty Company works closely with its clients in overseeing all of the major items indicated above to assure that the escrow will close smoothly.