10 WAYS TO DETECT A RISKY DEAL. PLUS BONUS MATERIAL: ACQUISITION CHECKLIST
LOOKING TO BUY OR SELL A BAR?
The prospect of buying or selling a bar can be a daunting one. Either you are getting out of a business that you spent dedicated time and energy building, or you are walking into a business and are on the verge of dedicating immense time and energy. Whichever side of the deal you are on, it is important to know what your responsibilities are and what your concerns should be during the transaction. This report, What You Should Know About Buying a Bar, is a succinct guide that will walk you through aspects of the transaction that matter most as the buyer.
BAR, WINERY & LIQUOR LAW
At Tracy Jong Law Firm, we help entrepreneurs in the New York hospitality industry (bars, franchises, wineries, bars, nightclubs, bed and breakfasts, country clubs, microbreweries, microdistilleries, liquor stores, catering establishments, and alcohol retail markets). Our clients need an attorney familiar with the regulatory environment and business practices in their industry. We help you review a potential transaction, identify potential pitfalls and mitigate your risks. We help you draft, review and negotiate agreements and obtain permits and licenses necessary to operate your business. We educate you on how to comply with the law and avoid violations, and help you respond if you receive a violation notice. When you are ready to expand or sell, we help you navigate the process to maximize the return on your investment. Our experience in this area is very broad, so we can swiftly address any of our clients’ needs.
Whether you are a start-up establishment, entrepreneur with a dream or a successful business dealing with a business issue or planning for growth, you should consider talking with our experienced legal team. We can help you to keep your business running smoothly, and guide you as you plan for growth.
WE WORK TOGETHER FOR YOUR SUCCESS
Tracy Jong Law Firm has built a solid reputation of competence and integrity in representing entrepreneurs in both start-ups and established small- to mid-sized businesses in realizing their creative potential. In addition to a focus on bar, winery and liquor law, our team has experience in immigration, patent, trademark and copyright protection that have unique applications for these industries. Our attorneys assist clients in expert areas important to New York small business owners. We help clients achieve success throughout the life of their business, from its formation to its operation and even to its eventual sale or dissolution.
Whatever your needs, we work closely with you, focused on your objectives in each situation, keeping you informed of our activities and inviting your participation throughout the process. Our goal is to offer outstanding value through speed and customer service. Our firm turns most projects around in 5 to 10 business days. When expedited processing is necessary, our teams are flexible and can accommodate even same day service in certain cases. While we work quickly to meet your needs, we still take the time to do a thorough and comprehensive job—offering speedy service without compromising quality.
10 WAYS TO DETECT A RISKY DEAL
As buyer, your interests lie in getting the most for as little money as possible. Your primary concern should be ensuring that the business is not a lemon. Before investing your time and money in this new endeavor, your responsibility will be to conduct due diligence investigations into the health and viability of the prospective business. Even if you are only buying the assets, exploring the current busness will help you plan and make projections for a future business at the same location. So, what should you be looking for?
1. Compare claimed sales of sales tax income tax and accounting ledgers.
This is a business investment – resist the urge to get emotionally attached. Study the numbers carefully to detect lurking inconsistencies. The owner has represented a certain income, so compare the numbers on the sales tax and income tax returns. Do they support the revenue claims? Are they internally consistent? Look at a three-year trend. Is the business steadily increasing? Is the business subject to seasonal swings?
2. Compare payroll costs against gross income.
Compare the payroll tax returns to what wages are on the income tax returns. Are they consistent? Look at the disability and worker’s compensation policies. Are all employees on the books? What is the ratio of labor costs to revenues? To determine the percentage of gross revenue to payroll, divide gross annual revenues by total annual payroll and convert to a percentage. For example, if your annual gross revenues are $400,000 and your total payroll for the year is $100,000, your revenue to payroll percentage is $100,000/$400,000 = .25 or 25%. Healthy revenue to payroll percentages vary widely by industry. Bars average about 30-35% labor costs. You can also compare labor costs by department (food, beverage, preparation, etc.) to obtain an even better picture of how labor is affecting the business. You will want to compare figures over several years to get a good idea of the trends for and health of the business overall.
3. Compare food/supply cost against income.
Compare food and supply costs against revenues. Cost of sales ratios determine the percentage of sales needed to purchase the supplies, and average about 25-30% of revenues. These numbers can give you clues about portion sizes, quality of supplies, and amount of waste – all factors that contribute to this ratio. Look at these costs over a 2-3 year period to be certain they are relatively stable over time.
4. Do a FOIL request on all licenses.
The license history of the current owner can affect your ability to obtain a license. You will want to verify public records for important licenses and permits to uncover any issues that may affect your profitability. Especially look at health code violations, building code violations (including zoning and fire code) and state liquor license violations. It is important to also explore whether the premises are a place of police interest. You need to learn about complaining neighbors or a potentially problematic customer base.
5. Talk to neighboring businesses.
One of your best resources is the neighboring businesses. Ask them about business, foot traffic and the neighborhood. Ask other tenants of the same landlord how the landlord is about maintaining the property and responding to tenant complaints. Inquire about support from local business associations or the municipality. The time you take here can be important to your success.
6. Observe the business for a few days.
You should observe the business for a few days to see if the reported revenues seem realistic. Understand the trends – is it steady, or are there big busy-not-busy extremes over the course of the day/week? Answers to questions like this may uncover some “overestimated” projections or business claims. This will also be important information for your personnel planning and food ordering patters, as well as other general management and planning issues and tasks.
7. Ask your accountant how to allocate the purchase price to reduce taxes.
Creative ways to “sweeten the deal” without increasing tax liability include post-closing consulting contracts for the owner, higher than market interest rates on seller-financing, or agreeing to pay all or a portion of real estate broker commissions or closing costs. Allocating more of the purchase price to equipment will cause a sales tax liability, but it is often less than the real estate tax liability. Allocating more to good will and less to equipment cost may reduce your insurance values for the equipment. There are many factors to weigh in allocating costs, but your accountant can help you make these important decisions.
As the buyer, you are responsible for any NYS sales tax that the seller may owe at the time of closing. Unpaid sales tax is a lien on the business assets. 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 or gives an amount that must be escrowed and paid prior to releasing the proceeds to the seller. 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 or may result in a lien on the assets.
If you need to close in less than ten days, you can use an escrow agreement where possession or the title transfers but funds are held by the attorney until the sales tax issues are confirmed. This is unusual and has certain risks under sales tax law, but your attorney can creatively help you accomplish your business goals and needs with work-around solutions that still protect your interests.
8. Caveat emptor – verify everything yourself.
Don’t rely on statements by the sellers or brokers. If there are things that are important to your decision-making process, you will want to verify these representations before closing. Representations and warranties are your “Plan B.” Post-closing litigation is expensive and uncertain. The contracts and agreements will almost certainly provide that you had a chance to verify any facts and take the risk on anything that happens after closing.
9. Look into whether there are plans for the area that would lower traffic or property/business value in the neighborhood.
Many cities may have long-term plans for neighborhood revitalization or highway upgrades. These projects may increase the long-term value of the property but extended construction can lower foot traffic and severely impact revenues. Imagine the road where your bar sits being closed for an entire summer and the impact that would have on revenue.
10. Have the seller terminate employees and you re-hire any you want to keep so he pays all accrued vacation/sick time or unemployment.
The seller has been the employer
for a while. First, you may or may not want to hire the same employees.
Secondly, the employees have accrued vacation, pension, and sick pay. The
seller should terminate the employees, or you should negotiate a credit against
the purchase price for these assumed liabilities. Most importantly, you don’t
want to take on the unemployment liabilities for being the terminating employer
if it is a bulk asset sale rather than a stock transfer.
ACQUSITION CHECKLIST: DON’T FORGET THE DETAILS
Leases, Contracts, and/or Vendor Agreements
- Do the leases/contracts/vendor agreements need permission to be transferred?
- Is there a cost to terminate them?
- How will any security deposits be handled? (Transferred, closed, or paid for?)
- When does the property lease expire?
- Is permission needed to transfer the lease?
- How do you transfer your vendor systems? (Point-of-sale cash register system, credit card sale system, office practice management software, etc.)
- Can government permits & licenses be transferred?
- Are there any supplier accounts to transfer? Insurance accounts?
- What regulatory permits and licenses are there for the business?
- What contracts/leases/agreements do you have for advertising? (Internet/websites, telephone book, etc.)
- What utilities will need to be changed over? (Gas & electric, telephone, water, sewer, trash, etc.)
- Is there infrastructure to consider? (Security system, HVAC, carpets/mats, website domain names & social media)
Inventory & Products For Sale
- Create a complete inventory
- Determine if there will be an actual or an agreed-upon value (if actual, determine the wholesale and retail value of the stock)
- Collect receipts for all stock in house
- Identify and non-usable stock and determine how to handle it
Equipment (Built-in & Portable)
- Air conditioning
- Cash register
- Security system/cameras
- Computer hardware and software
- Fixtures, counters, shelves, and racks
- Appliances (refrigerators, freezers, stoves, etc.)
- Music systems
- Books and records, corporate books, taxes, payroll, insurances
- Office furniture & supplies
- Warranties & manuals, maintenance or service contracts
- Maintenance equipment & parts
- Gaming machines
- Computers & peripherals
Determine Required Condition of Facility At Time of Turnover
- Who is responsible to clean up debris?
- Who is responsible to dispose of unwanted inventory?
- How will final inspection & inventory be handled?
- NYS Bulk Sales Tax Unit
- State Liquor Authority
- Secured creditors
If you are looking for representation in the sale or purchase of a business, please contact our office today! Email us at bb[email protected] or call the office at (585) 247-9170.