How to Buy a Restaurant without Documented Earnings

Are you interested in buying a restaurant advertised as “owner takes homes $10,000 a month” only to find the seller doesn’t have any records to prove his statement?  It is still fairly common in the industry to find these kinds of claims for “off the books” earnings without anything to back it up.  At first glance it sounds highly attractive since the seller will often add on high owner financing levels, an easy way to leverage your money.  What could go wrong?  All this money pouring in, a down payment of 50% or so and you’re in business without any effort by those pesky banks that want all kinds of paperwork.  Not so fast.  Here some advice for how to buy a restaurant without documented earnings if you are ready to roll the dice on your future from the restaurant brokers.

First Rule of Thumb – Get whatever you can. 

If you’re trying to buy a restaurant without tax returns, profit and loss statements and detailed understanding of their financial picture, you’ll have to substitute whatever is available.  Here are some things to request.

Work in the business every day for at least 60 days.  This isn’t perfect and is only a snapshot of the business but it’s better than nothing.   Make sure you are at or near the register, not stuck in the back so you can see what’s happening.  Request the “z” tape if they don’t have a POS system and go through it carefully looking at every transaction.  Are there high amounts rung up that look suspicious?  Do a drawer count and make sure the money matches to the totals on the tape.  Check the credit card amounts as well. 

Ask for every invoice for the past six months. You should see that their food cost is out of line with normal averages.  That means they are paying for food they are selling without reporting the income.  If food cost is low, that doesn’t support their story.

Look at their payment types.  Do they have a “cash only” policy or do they accept credit cards?  Sales paid by credit cards can be as high as 80% for upscale restaurants and is generally lower for fast casual and fast food though the number is consistently growing.  Do the math.  If this business accepts credit cards and then tells you that 80% pay them with cash, it doesn’t pass the reasonability test. 

Ask for sales tax filings and employment tax filings.  

Find out how he’s paying his staff.  If the seller runs an all cash business, odds are they are paying their workers in cash and not withholding the appropriate unemployment, 941 and other filings.  You need to understand this to know what your risk will be going forward.  Some states (Georgia included) are now assigning successor liability for unpaid state taxes like unemployment tax and sales tax.  That's the case even if you don’t buy someone’s corporation.  Sit down with your attorney and understand what your risk is so you can adjust the payment or hold back funds appropriately. 

Ask for bank statements to track where the money is going. 

The cash they say they have is going somewhere so ask to see where’s it’s flowing to.  Remember, this is a seller that has lied to the Internal Revenue Service and misrepresented his sales to the Department of Revenue and his franchise.  What makes you believe he’s going to tell you (someone he just met) the absolute truth?

In summary, the best way to buy a restaurant without documented earnings is to have a very high tolerance for risk.  If you’re comfortable with that, then hold your breath,  jump in the deep end and pray you’ll be able to swim.

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