The one critical thing every buyer must how about how to buy a bar.

Posted by Robin Gagnon on Jul 25, 2010 1:25:00 PM

If it’s not on the books, don’t pay for it.  Here’s how to find the best bars for sale and confirm the earnings.

Determining how much a pub, bar or club is worth is the key issue in buying a bar.  Simple enough under the income valuation method, it’s another story when the bar has “stated” or “off the book” income.  In the income valuation method add backs are used to get bottom line owner benefit or seller’s discretionary earnings (SDE).  That’s why an expert restaurant broker has no problem validating sales and earnings on bars for sale.

Quite frequently however, buyers encounter bars for sale advertised by broker with “off the book” income.   These are cash earnings or money an owner tells you he takes from the business without reporting it.  This is entirely different from reasonable and customary “add backs” which can be verified through due diligence and makes the bar or pub for sale almost impossible to value or sell at the asking price.  Here’s why.   

First, the seller wants more for their bar for sale than can be justified.  Value can’t be established using standard income valuation since both sales and earnings are incorrect on the P&L.  Secondly, by including this income the seller is providing a flawed picture to the would-be bar buyer unless they are willing to operate under the same model. Lastly, the owner of the bar for sale has already received multiple benefits from these “tax free” earnings because of their under reporting.  They have not paid sales tax, state or federal income tax.  They haven’t paid withholding on employees if they paid employees in cash.  This can amount to easily 25% to 35% on their earnings.  By pricing their business with these earnings tabulated but without the tax implications, they are trying to get the benefit coming and going.  They didn’t pay taxes on the front end and they are asking the buyer to pay for it on the back end where it can’t be verified.   

Converting  “off the books” income for a bar for sale to one that operates within the law requires that the entire P&L be re-cast to account for the layers of taxes into the expense categories.  On some small margin businesses, the impact of the tax structure may wipe our any potential earnings.

That’s not the biggest issue however.  Consider that by telling you a large percentage of his income is “off the books” the seller is telling you he has lied to the Internal Revenue Service, the state sales tax authority, the franchise, and his accountant.  Despite all that, you’re expected to believe that he’s telling you, a complete stranger who wants to buy a bar, the absolute truth.  Outside of working in the bar or restaurant for sale for three to four months, there’s no way to validate the sales and earnings being put forward.  Also, while a buyer should not technically encounter any liability for another’s issues, buying and continuing the process places you in the same scenario of illegal operation in order to meet the same stated earnings.

Buyers for pubs, clubs or bars should enter negotiations on bars for sale with  “off the books” income with a caveat emptor or “buyer beware” mentality.  Better yet, focus on bars and clubs for sale with good books and records that substantiate earnings.   An expert restaurant broker can detail everything that falls into the “add back” category which should be verifiable.   Then it’s a simple matter of due diligence to verify add backs to be certain you’re getting a true picture of the earnings.

Topics: Buying a Restaurant

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