Buying a Restaurant: What is the Confidentiality Agreement?

Posted by Chris & Misti Gordon on Aug 11, 2022 10:22:38 AM

 

Buying a Restaurant can be exciting. Picture yourself scrolling through the local listings, and you have finally found it, the one—the perfect restaurant to fit your cuisine and your budget. It’s the perfect size and in the right city. Or, it's the right concept, but you're not sure if it's in the right location. You want to see the address and understand the state of the business. Before you get all the info, including the name and address, you are stopped by a page asking for you to submit a Confidentiality Agreement. What does this mean?

Why do you have to sign a confidentiality agreement when trying to buy a restaurant?

Why are restaurants sellers so secretive? First and foremost, a confidentiality agreement protects the integrity and the sale of the business and the business itself. It also outlines the professional working relationship of the seller, buyer, and broker as they attempt to come to an agreement. This agreement clarifies the expectations of the buyer as they receive information regarding the business and what will happen to the if they break the agreement. Since the confidentiality agreement is in writing, the confidentiality agreement is something that is easy to refer to by the buyer or the seller.

What am I agreeing to when I sign a confidentiality agreement?

When you sign a confidentiality agreement, you are acknowledging these basic terms:

  • All information on the restaurant is confidential
  • You will not contact the seller, customers, or employees
  • You will not interfere with the business
  • You are not represented by another broker
  • You were not aware that the restaurant was for sale except through We Sell Restaurants
  • You agree to be represented by We Sell Restaurants

What happens after I Acknowledge Confidentiality?

Once you submit your signed confidentiality agreement, you will have access immediately online to view and download the full package of listing information. Here are some reminders about the agreement after you have signed it:

  • It is not a blanket document - you will only be able to view information on that listing. You will need to acknowledge confidentiality on each restaurant for sale that you are interested in.
  • If you bring in another broker to represent you, we may not be able to co-broker with them. Be sure to decide whether you want to be represented by your own broker before signing.

What does the Confidentiality Agreement Cover? 

In the process of Buying a Restaurant, the confidentiality agreement covers these main points: who a potential buyer can speak to about the sale, trade secrets and confidential information, communication, and consequences of breaching confidentiality. The seller has hired a business broker to take on the responsibility of selling the business. Sellers want to focus on running their restaurant, not trying to facilitate selling their restaurant. That’s one reason why all communication from a potential buyer goes through a Broker. 

First, it states that a potential buyer will not speak to the seller, employees, patrons of the business, or the landlord of the business regarding the sale.

If the employees find out a business is for sale, they may feel insecure about the situation and unsure about their job. The uneasiness of not knowing who will buy the business may cause current employees to look elsewhere, leaving the business with labor issues it did not have before, devaluing the business. If patrons find out the business is for sale, rumors can start and the local customer base can decide not to come anymore, which would hurt the business. If landlords find out that a business is for sale before a deal is in place, they will do whatever is in the best interest for them, the landlord. For instance, if the lease is almost up and they know the business is for sale, they may try to rent the location out from under the business owner, which gives the business owner zero dollars for all their good will and business assets.

Additionally, the confidentiality agreement states that all trade secrets and financial information are confidential and that you cannot use the information in any way other than to evaluate the business for purchase. For instance, a competing restaurant cannot request the information to see how the business is run from the insides and to see key metrics such as sales, cost of goods, and net profit. And the confidentiality agreement states that all information of the restaurant must be returned to the broker or destroyed once a deal is no longer going forward. 

Furthermore, the agreement outlines that all communication must go through the broker. Making sure that the broker is aware of everything that is going on in a deal is the best way to make sure that the deal is done in the most proper and expedient way. If the seller and the buyer have communication between themselves with the knowledge of the broker, there may be a side agreement that is not officially captured.

Finally, if a seller breaches confidentiality, potentially bringing harms to the business, the confidentiality agreement outlines the legal ramifications and financial penalties that the potential buyer may owe the seller. By having the legal penalties in place, this help ensures the confidentiality of the business.

What does the Confidentiality Agreement NOT Cover?

It is important to know that the confidentiality agreement does not disclose information such as the commission percentage or what occurs in a co-broker situation. If you have questions about these items, be sure to have a conversation with the broker before signing.

I don't want to sign the Confidentiality Agreement—What can I do instead?

When it comes to Buying a Restaurant and getting information on a restaurant for sale, there are a couple alternatives for the inquiring buyer who is hesitant to sign this legal document.

Option 1 - Hire a Broker to Represent You If you choose to be represented by another party, our team at We Sell Restaurants will be happy to co-broker with them. Have your broker sign our Co-Broker Agreement so that we can provide them information and cooperate with them throughout the deal.

Option 2 - Represent Yourself We list this as an alternative, but we do not recommend except in rare cases. This is a Proceed with Caution scenario. Moreover, we can only entertain this alternative according to what your state laws allow. Representing yourself in the transaction means that We Sell Restaurants brokers can no longer legally provide you counsel or opinions on your restaurant purchase. Rather, you would be your own counsel while you are buying a restaurant. For example, as your own representative, you can no longer ask a questions such as, "Are these restaurants sales good for this restaurant concept?" or, "is this offer reasonable for the restaurant?"

Keep this in mind if you are considering to represent yourself while buying a restaurant instead of signing the Confidentiality Agreement.

When you sign a confidentiality agreement before buying a restaurant, you protect the integrity of the sale, the business that is for purchase, and yourself, the seller, and the broker. This agreement outlines basic rules so that a deal can proceed in good faith and reach a successful close of the deal. 

Ready to buy a restaurant? Browse hundreds of restaurants for sale on our website to start your search for that perfect restaurant to buy!

Download the Free Guide to Buying a Restaurant

Gordons_SlugChris and Misti Gordon, Certified Restaurant Brokers operate in Denver, Colorado. Chris entered the restaurant industry as a dishwasher when he was 15 years old and worked his way up through the ranks to managing a multimillion-dollar restaurant when he was just 19.  He has been a busser, host, expo, cook, server, bar back, bartender, banquet captain, corporate trainer and everything else in between.  He has been a General Manager for multiple operators as well as an Owner himself of a small fleet of food trucks. Misti’s unique background includes over 15 years of project management and technical sales in the Oil & Gas industry, but she found her passion for the restaurant industry as co-owner several food trailers in Denver.

Topics: Buying a Restaurant

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