Buying a restaurant in New York

If you are looking to purchase a restaurant in New York, you have two options: (1) buy the sellers’ ownership shares; or (2) buy the seller’s assets. Like any choice, there are advantages and disadvantages to either option, but generally, an asset purchase is more beneficial to the buyer. It boils down to liability: when you purchase a business’s assets, you assume specific liabilities of the seller, but when you purchase the stock of the business, you risk assuming all liabilities of the company, whether known or unknown.

In either case, a thorough search and due diligence review of the business can mitigate the risk. Guaranties and indemnification provisions can help provide protection. There are circumstances where a stock sale may be advantageous. These include where licenses are owned by a corporation or LLC, such as a liquor license. The process to approve a change in corporate ownership may be faster and less costly than an entire new application. It can also help pre-empt an interruption in operations, keeping the business open and in business during the ownership transition.

You will also want to determine if the seller can assign the lease to you (permission for a lease assignment would be found in one of the clauses in the existing lease agreement). Before you agree to an assignment, make sure that the remaining term on the lease, the rent amount, the security deposit, the personal guaranty, etc. are all acceptable. In the case where the lease cannot be assigned, the landlord will have to agree to terminate the current lease and enter a new lease with you.

The purchase agreement (bulk asset agreement or stock purchase agreement depending on how you are acquiring the business) should contain all the critical information pertaining to the sale. These terms include the purchase price, how much will be held in escrow, a list of the assets being purchased, personal representations and indemnifications, the amount paid at closing, the date of closing, and any contingencies for closing (such as a liquor license or lease assignment approval for the buyer). Along with the purchase agreement, there should also be a Bill of Sale and corporate resolution that authorizes the seller to sell the business.

As the buyer, you are responsible for any NYS sales tax that the seller may owe. You must file a bulk sale notice (at least 10 days before closing) and have the seller personally represent that there are no taxes owed. You should also have the seller personally indemnify the buyer for any unpaid taxes or other liabilities that were incurred before the closing date. The closing date should occur after the buyer receives the tax release letter from the NYS Department of Taxation. This letter states that no taxes are owed. If holding off the closing isn’t an option, a large portion of the purchase price should be held in escrow until you receive the release letter. Failure to follow this procedure makes the buyer responsible for outstanding sales tax and will result in a lien on the assets.

If you need to close in less than ten days, you can use an escrow agreement where the title transfers but funds are held by the attorney until the sales tax issues are confirmed. This is unusual, but your attorney can creatively help you accomplish your business goals and needs with work-around solutions that still protect your interests.