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
$ 50,000 Cash in bank
300,000 Residence Market Value
50,000 Stocks & Bonds
100,000 Business Value
50,000 Personal Items
570,000 Total Assets
$150,000 Residence Mortgage
10,000 Credit Card Debt
10,000 Auto Loan
10,000 Misc. Other Debt
180,000 Total Liabilities
Net Worth equals Assets less Liabilities
390,000 Net Worth
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.
- 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.