Buying a restaurant and owning your own business can be an extremely rewarding and lucrative investment. Most Buyers are surprised to know that often, it is really, not that expensive. There are restaurants out there selling for $30,000, $20,000 or even less. Some vacant restaurants are even listed for free!
What the Buyer must understand is that coming up with the money [in most cases for restaurants this inexpensive, it needs to be CASH] is one thing. However, qualifying to sign or assume the lease with the landlord is another thing entirely and something you need to understand very well.
Landlords are a different animal and not your friend. Once you reach an agreement with the Seller for buying a restaurant, you still will have to make a deal with the landlord. They are under no obligation to accept you as a tenant regardless of whether the restaurant’s Seller has accepted your offer.
Any and all offers you make for buying a restaurant should have a ‘’lease contingency’’ meaning if the landlord will not approve you, you can walk away from the deal and get your earnest money quickly returned. You need to be very careful how the language in the offer contract reads in that regard. Consult your Certified Restaurant Broker and an attorney for advice on this language.
In the case of almost any lease, the landlord will require what is called a ‘’Personnel Guarantee’’ That is a critical point that is important for you to understand. What it means is, that if your business fails, you can not get out of the lease by simply bankrupting your Inc. or LLC. You are PERSONALLY on the hook for the remainder of the lease. That mean to landlord can look for your personal savings, home equity, 401K, autos and personal belongings to satisfy the terms of the lease.
Some leases also contain a ‘’acceleration’’ clause. Make sure you understand this. What that means is that if you default on the lease, say, by missing a month or two rent, then you not only owe that back rent, but you may owe the entire value of the lease due and payable immediately! So, say your lease’s rent is $6000 per month and you have four years remaining on it; you could possibly be liable for $288,000 plus late fees, plus attorney costs!
Oh, and by the way, any friends or relatives who have cosigned the lease are in the same unfortunate hook as you are and if they are wealthier expect the landlord to pursue them more vigorously than they do you. It can make family Thanksgiving or other gatherings very uncomfortable.
When buying a restaurant with an accepted offer, you have taken the first step. Landlord approval is the next. Most landlords will seek the following information from someone buying a restaurant.
- A personal financial statement showing the Buyer’s assets, liabilities and net worth.
- 2 years of personal tax returns
- Buyer’s credit score
- A professional resume
You only get one chance to make a first impression with a landlord. If you have any problem with providing the above in a fast, serious, comprehensive detail – DO NOT MAKE AN OFFER ON THE BUSINESS. You are simply not ready for buying a restaurant that has landlord involvement.
If you are ready – get this info together now. Look at it and ask yourself ‘’If I was a landlord would I accept this person as a tenant?’’ Most landlords will require you to have a net worth of, at least, two years the value of the lease [again, if rent is $6000 per month that would mean $144,000 in total net worth.
So, the take-away is, if you are interested in buying a very inexpensive restaurant, it can certainly be done but there are much more considerations than the simple asking price from the Seller. Many of the challenges lie with the landlord. Consult your Certified Restaurant Broker or your attorney for assistance. In the market for buying a restaurant? Visit our restaurant for sale listings online at this link.