When a restaurateur asks me to consider selling their restaurant, one of the first things I do is read their lease. It should not be a surprise that the lease typically favors the landlord. However, the tenant has specific rights as well. Recently I read a lease that said that all the equipment and assets of the restaurant were the property of the landlord. It also stated that any new furnishings, fixtures and equipment (FF&E) that were added by the tenant also became the property of the landlord.
This is an immediate red flag. If the landlord owns everything in the restaurant, then what is there to sell to a new buyer? This was not the first time I have seen this; some of the explanations I have gotten for this type of lease are: “A buyer is buying the rights to operate the restaurant” or “a buyer is buying the lease” or “who cares who owns the equipment as long as the buyer can operate the restaurant.” These are not justifiable reasons for a restaurateur not to own the FF&E.
It is imperative to realize that when purchasing a restaurant a buyer is buying the ownership of all the furnishings, fixtures and equipment. Tenant improvements, like a bar or other built in improvements are owned by the landlord and are not part of FF&E and can only be changed with approval from the landlord.
If the landlord owns all the FF&E, then there is nothing to sell. Some landlords have taken ownership of the FF&E because their previous tenant defaulted on the lease and left the space owing the landlord several months’ rent. When this happens the FF&E becomes the property of the landlord; since the landlord was owed back rent, they are reluctant to give up their ownership. The landlord entices the next restaurateur/tenant by charging little or no key money. If you can save $100,000 to $200,000 or more, why not take the deal? The reason why this is not a good deal is because when it comes time for you to sell the business, you have nothing to sell.
The legal document that is required to complete the transaction, and show that you are purchasing all the FF&E, is an Asset Purchase Agreement (APA). This does not include food and liquor inventory. An APA is an agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company’s assets. Lawyers create this document, which includes a list of all the FF&E. As an experienced restaurant broker, I create this list. It includes silverware, dishes, tables, chairs, artwork (if included in the sale) and kitchen equipment. This is further documented in NY State by filing a Bulk Sales Tax Form. And in CT it is called Successor Liability for Sales and Use Taxes. Obviously each State is interested in collecting taxes on the sale. However the numbers have to make sense. In other words you can’t substitute “goodwill” for assets. The buyer’s attorney and accountant will object to this and the deal will not close.
The important message here is twofold:
- Read the lease(or use a restaurant broker to read it first)
- Realize that when you are buying a restaurant business you are purchasing to own the FF&E.
Buying and selling a restaurant involves numerous and very important details that can cost you money or save you money.
Involving an experienced business broker who specializes in restaurants will benefit you by bringing to your attention any critical issues and ironing them out before you engage an attorney. This will save you time and money, and insure a smooth closing.