Choosing the wrong lender can be a costly mistake for restaurant buyers and sellers, leading to significant delays in closing a deal and sometimes derailing the purchase altogether. This article shares the pitfalls of selecting an inexperienced lender that does not knowledge of the restaurant industry and how this choice can disrupt your plan for buying or selling a restaurant. We will include real life examples that feature the financial impacts of delays, the strain on buyer-seller relationships, the legal implications of delays, and common mistakes to avoid when choosing a lender for buying a restaurant.

Why do Lenders Delay Deals? 

Let’s start with the basics. Why are deals for buying a restaurant delayed at all? After all, the parties are subject to the terms of a contract that lays out the closing date, the loan approval date, and expected lending terms. Despite all this, deals are frequently delayed. The reasons range from lenders that are overwhelmed with too many transactions, inadequate staffing or insufficient experience in the industry to manage the tasks required for closing.

Every deal should include a lending checklist, but one size does not fit all. Sellers will always need to provide the latest financial data, for example, but only restaurant sellers must also align the transfer of a liquor license to fit the timing of the bank. For buyers, you must always provide personal tax returns but only franchise restaurant buyers must also fit training into the timeline before closing.

Some issues occur because of poor judgment or inexperience. We once had a deal delayed because the seller decided to change his corporate structure from an s-corporation to a c-corporation. While this is only a form with the IRS, it created complications for closing since getting the tax return on the business directly from the IRS while the change was pending, took an extra 60 days. That’s why an experienced lender is critical to buying a restaurant. They have seen the things that can derail a deal and provide guidance and mentoring to avoid certain roadblocks.

Financial Implications of Delays in Closing a Restaurant Deal

Financially, delays in closing a deal can be disastrous. Extended timelines result in multiple issues. The first is lost revenue opportunities, especially in seasonal markets. Consider a buyer who is acquiring a South Florida based restaurant and plans to take over in October. Instead, the lender pushes the deal multiple months until he is finally able to close, when business is at a valley rather than a peak. For restaurants, where timing is often critical to take advantage of seasonal trends or specific market conditions, such delays can disrupt expected cash flow significantly.

Financial implications can also occur for the seller who may have additional costs to extend licenses, pause his own plans to relocate, or lose out on investments due to timing. Prolonged transactions can strain the relationship between the buyer and seller, leading to frustration and, in some cases, the collapse of the deal. It's crucial for buyers to understand that the choice of lender is not just about securing the best interest rates but also about ensuring a smooth and timely process.

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Common Mistakes Buyers Make When Choosing a Lender

Choosing the right lender for a restaurant transaction is a critical decision that can significantly impact the efficiency and success of the purchase. Ask your restaurant broker for recommendations before simply blindly choosing a resource. The majority of restaurant loans are accomplished through SBA lending and while any bank in America can lend using SBA back guarantees, not all banks should. We have multiple horror stories of buyers who wanted to use their “big bank” who had been working with them for years that had no experience in lending. Months later, they realize, they should have trusted a resource that is familiar with the restaurant industry and has performed multiple deals.

Understanding these pitfalls can help prospective restaurant owners make more informed decisions and avoid unnecessary complications. Here are some frequent missteps to watch out for:

Select a lender with experience in the restaurant industry. We cannot overstate this advice. Restaurant transactions often involve unique financial intricacies, such as evaluating cash flow, understanding industry-specific risks, reaching non-compete agreements, liquor license transfer and other elements specific to the industry. Lenders who lack familiarity with these factors may struggle to accurately assess the financial health of a restaurant or navigate the complexities of the deal, leading to delays and potential issues down the line. A lender with a proven track record in restaurant financing will be better equipped to handle these nuances efficiently.

Another critical mistake is calling up your local hometown banker and asking him to handle the deal. Your local and longtime banker is going to be thrilled to handle the deal whether he is equipped to do so or not. Remember, all banks in America can process an SBA loan, but only certain banks are designated as a PLP or Preferred Lending Program banks. PLP lenders have the authority to underwrite locally rather than sending your paperwork out to California to the SBA hole where all deals go to die. I remember a specific instance where a buyer was purchasing four franchise restaurants from me and insisted that his personal banker and good friend could handle the deal. Unfortunately, the banker was practicing his very first SBA loan on his friend and every piece of paperwork had to go to California for review. As he was a novice, there were multiple errors. After months of delays, the sellers were within their rights and ready to walk. The buyer ultimately closed on the transactions but it took nearly 9 months rather than the 60 days or so it would taken with a We Sell Restaurants recommended PLP lender.

While competitive interest rates and charges are an important factor in choosing a lender, they should not be the sole criteria. Restaurant buyers sometimes fall into the trap of selecting a lender based only on the lowest rate, overlooking other crucial aspects such as whether they have industry experience and PLP authority to underwrite locally rather than using the SBA loan service center in California. A PLP lender will, in all cases, increase service quality, processing speed, and decrease overall time to close.

A lender offering the lowest rate might compensate by providing subpar service or imposing unfavorable loan conditions. It’s essential to balance costs with other factors like responsiveness, transparency, and the lender’s ability to meet your specific needs.

Finally, underestimating the amount and complexity of required documentation can lead to significant delays. Restaurant transactions involve extensive paperwork, including financial statements, tax returns, lease agreements, and more. Buyers who are unprepared for this documentation can experience holdups as they scramble to gather and submit necessary paperwork. Being well-prepared and organized can expedite the process and help avoid unnecessary delays.

Avoiding these common mistakes can make a significant difference in the efficiency and success of a restaurant transaction. By focusing on lenders with industry experience, carefully evaluating their reputation, considering all aspects of the lending process beyond just rates, obtaining pre-approval, and being prepared with the necessary documentation, buyers can navigate the lending process more smoothly and ensure a timely and successful restaurant purchase.

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👉How to Choose the Right Lender ?

Choosing the right lender is crucial to avoid costly delays in buying a restaurant. Start by conducting thorough research and seeking recommendations from Certified Restaurant Brokers who have done dozens of deals and can offer valuable insights. Evaluate each lender’s experience specifically with restaurant transactions, as this expertise can significantly impact the efficiency of the process. Ensure that the lender provides clear and open communication, as transparency is key to preventing misunderstandings and unexpected setbacks. Ask for client references. Look for lenders who offer comprehensive services, including pre-approval and efficient processing, to streamline your purchase. Finally, review client testimonials and feedback to gauge the lender’s reliability and service quality, ensuring you make an informed and confident decision.

In conclusion, choosing the wrong lender can have far-reaching consequences, delaying your restaurant purchase and potentially derailing your plans altogether. To avoid these pitfalls, it’s essential to thoroughly research and select a lender with specific experience in restaurant transactions. Look for those who offer comprehensive services, maintain clear communication, and provide positive client testimonials.

If you’re ready to start your journey in finding the perfect restaurant, We Sell Restaurants can help. Our platform not only offers a curated selection of restaurants for sale but also connects you with lending options from experienced professionals who understand the unique needs of the restaurant industry. Don’t let lending mistakes cost you valuable time and opportunities—explore our listings today and get in touch with our team to find a lender who can make your restaurant purchase smooth and successful. Visit We Sell Restaurants to see our current listings and start your path to restaurant ownership with confidence.

Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.