Qualifications Needed to Purchase a Restaurant, Bar
and Club
Landlords usually have high standards for accepting
a new perspective tenant for their property due to
the high failure rate for new restaurant, bar and
club businesses. I often tell my clients that the
biggest challenge in putting together the deal is
not getting the seller and buyer to agree on the
price and terms of the transaction but it is getting
the landlord to approve the new tenant. The
qualifications indicated below are not normally
imposed by the seller of the business unless the
seller is entering into a sublease with the buyer
but in most cases are required by the landlord of
the business.
Operational Qualifications
On the Job Experience - A buyer should
have a minimum of three to five years practical
experience as a restaurant, bar or club owner and/or
manager. Ideally, if you are a restaurant, bar or
club buyer, in addition to having management
experience you should have extensive hands on
experience working in the front of the house as a
food server, cashier and host as well as back of the
house experience working as a bus boy, dishwasher,
and cook. By having experience in the various facets
of the operation you have empathy for understanding
the challenges of each job. Also if an employee
should unexpectantly not show up for work you have
the ability to jump in and fill in as necessary.
Although it is great to have a strong educational
background this business is learned largely from on
the job experience. It is hard to learn this
business from a classroom experience although a
solid education in the administrative, financial and
marketing areas is helpful to round out your chances
for success in this business. In some cases, in
larger more ambitious business transactions, the
landlord may insist that the buyer own and operate
an existing restaurant, bar or club whereby the
landlord can go and see and experience the food,
drink and service as a requirement for renting the
premises to the perspective buyer.
Financial Qualifications
Net Worth - The net worth requirement
for each deal varies depending on the size of the
deal. Usually the larger the deal the higher the net
worth requirement. Net worth is defined as a persons
total assets minus liabilities.
For example if a person owns the following assets:
cash deposits in bank $50,000, a home worth
$300,000, a car worth $20,000, stocks and bonds
worth $50,000, an ownership interest in his business
worth $100,000 and personal items including
household items – chinaware, silverware, artwork,
furniture and jewelry, etc. worth $50,000, the
persons total assets are $570,000 ($50,000 –
deposits in bank +$300,000 – home +$20,000- car+
$50,000 – stocks and bonds +$100,000- business
ownership interest + $50,000- personal assets =
$570,000 total assets).
If the person’s liabilities are as follows: mortgage
on home -$150,000, credit card debt- $10,000, auto
loan - $10,000, miscellaneous other debt - $10,000,
the person’s total liabilities are $180,000 (
$150,000 – home mortgage + $10,000- credit card debt
+ $10,000 – auto loan +$10,000 miscellaneous debt =
$180,000 total liabilities). The total liabilities
of $180,000 are subtracted from the total assets of
570,000 and the person’s net worth is $390,000
($570,000 -total assets minus $180,000 total
liabilities = $390,000 net worth).
Example of Above Situation
Assets
Cash in bank
Residence Market Value
Automobile
Stocks & Bonds
Business Value
Personal Items
Total Assets
Liabilities
Residence Mortgage
Credit Card Debt
Auto Loan
Misc. Other Debt
Total Liabilities
Net Worth equals Assets less Liabilities
Assets
Liabilities
Net Worth |
$50,000
300,000
20,000
50,000
100,000
50,000
570000
$150,000
10,000
10,000
10,000
180,000
$570,000
180,000
390,000 |
Cash in Bank. The landlord usually
likes to see at least several months of working
capital in the buyer’s bank accounts above and
beyond the monies he needs to purchase and set up
the restaurant. The thumb rule I have used as a
former restaurant and bar owner and what I hear from
many owners today is that working capital should be
at least six months of projected payroll. So if your
monthly payroll cost is $15,000 you should have
$90,000 ($15,000 monthly payroll x 6 months =
$90,000 working capital) set aside for working
capital.
Good Credit Score. Usually a good
credit score is required to be accepted by a
landlord as a tenant. Most landlords want to see
credit scores of at least 680. If you don’t have a
good credit score the landlord may ask you for one
or more or all of the following requirements: 1)
several times the monthly rent in the form of an
increased security deposit, 2) a security agreement
recorded in favor of the landlord on the fixtures
and equipment of the business and 3) an additional
guarantor with a strong financial statement to
personally guarantee the lease should you not
perform all the terms and conditions of the lease.
Tax Returns. In many cases the
landlord wants to review the perspective tenant’s
last two to three years tax returns, both personal
and corporate if applicable, to examine their income
as well as to review their balance sheet to
determine their financial strength as a tenant. Also
landlords may want to check tax returns to determine
if the proposed tenant is honest in reporting all of
his income as the proposed premises lease may have a
percentage clause in it whereby the tenant is
responsible for a paying a percentage of their sales
in addition to their minimum rent. If a tenant under
reports his income on his tax return there is a good
chance he’ll under report his sales to the landlord
for calculating percentage rent which could
discourage the landlord from renting to the
perspective tenant.
Bank Statements. Frequently the
landlord will want to see the perspective tenant’s
last three to six months bank statements to examine
their inflows and outflows and determine what bank
balances they maintain.
Other Requirements
Business Plan – The Landlord, in most
cases, will want to see the buyer’s business plan
which basically explains the proposed operation in
terms of menu, staffing, physical changes to the
premises and the financial projections of the new
business, etc.
Landlord References. In some cases the
landlord wants to speak to the proposed tenants past
landlords to determine if the tenant paid his rent
on time, and upheld all of the terms and conditions
of his lease.
Nicki Evatz
-
In
Memoriam -
It
has been almost a year since our colleague and
friend Nicki Evatz lost her bout with cancer.
Restaurant Realty pays tribute to an extraordinary
woman who always put her best foot forward at both
work and home. Although Nicki was never a restaurant
owner or operator, during her time at Restaurant
Realty she assisted over 400 restaurateurs realize
their dreams of starting a restaurant. She is an
honorary restaurateur to us and many.
Nicki came to Restaurant Realty in 2003 after
working at various Marin County residential real
estate companies. She was quick to embrace her new
role being involved in a different type of real
estate transaction. She soon was doing escrow
management including tracking the progress of deals,
working with landlords to help negotiate leases,
assisting in the ABC license transfer process, and
making sure all of the i’s were dotted and t’s
crossed in the many documents generated to complete
a restaurant transaction. She screened buyers to
make sure their qualifications fit a particular
project and she oversaw all of the administrative
functions of our office. She was a force to be
reckoned with in only the best way and we sorely
miss her vibrant energy.
Nicki was a proud lifelong resident of Marin County
who descended from her family that settled in
Bolinas in the 1800’s. She grew up in Marin and
initially worked in the horse business and competed
in dressage, jumping and cross country competitions.
She served as president of the Southern Marin
Horseman’s Association in Mill Valley for 2 years.
Besides her work she had a very full life with her
wide circle of family and friends. One of her loves
and great past time was tennis-she was able to
balance work with playing team tennis.
Restaurant Realty's entire team will always have
fond memories of this most wonderful person. She is
sorely missed by so many restaurateurs, friends, and
family.
