If you are in the market for buying a restaurant, you will likely encounter legal documents known as "confidentiality agreements" or "non-disclosure agreements." These are legal agreements between the buyer and seller used by a restaurant broker to protect the interest of the seller.
Generally, these agreements are signed before the buyer is provided with the name and address of the restaurant for sale and always before any sensitive financial information is disclosed. A competent and professional restaurant broker is generally quite firm on this issue since he has a separate contract with the seller to protect information about the restaurant from sale from becoming known except to qualified buyers. Expect strong pushback from any broker if you wish to circumvent this step when buying a restaurant.
A confidentiality agreement or nondisclosure agreement lays out the rules of discussion about the restaurant for sale for the buyer. Usual terms include:
This is a specific agreement that the buyer will not disclose the fact that the business is for sale to any third party (except professional advisors such as a CPA or attorney and even then a buyer may have liability for their actions). This is the most important element of the agreement since most sellers believe their business could be harmed if it is generally known that it is on the market. If you’re buying a restaurant, you may not consider the impact that public knowledge about the listing could have on the business but the impact on a seller can be dramatic. Employees may become frightened about their security and leave for another job. Corporate customers may fear the business is in financial trouble so they may not book a holiday party or other large events in advance. Suppliers who learn a business is for sale may change payment terms or request cash on delivery. All of these issues are very damaging for a business and it is no wonder sellers want news they are selling a restaurant treated in a confidential manner.
Representation for Buying a Restaurant
The confidentiality agreement for many restaurant brokers also designates an agency relationship between the buyer and the listing agent. This is governed by real estate law in each state so read the agreement carefully since this will confirm who the restaurant broker works for in the deal. Depending on the law or his business practice, a restaurant broker may be representing the buyer only, the seller only, both parties in some variation, or in some cases, neither party. In some states Dual Agency or Dual Representation is legal and brokers will represent both parties. In other states, it is not legal to practice dual agency so brokers represent the transaction only and neither party. This is important for you to know.
The amount of time covered by the agreement and any survival of the agreement is also part of most confidentiality agreements you sign when buying a restaurant. This keeps the buyer from waiting until a listing agreement expires and then going directly to the seller to exclude the broker. This is not only unethical but in most agreement, places liability for commission against the buyer for a period of time (typically one year or more).
Rules of Engagement
One other standard element of a confidentiality agreement is your ability to visit the business, approach the owner or otherwise engage the seller. In almost all cases, an agreement will restrict a buyer’s interaction to working with the restaurant broker, not the seller. A sure way to get a legal notice from a broker is to approach a seller directly and attempt to negotiate a deal for buying a restaurant.
Talking to Other Parties
Often the confidentiality agreement will allow you to speak to advisors about the buying the restaurant but generally it does not extend to friends and family. You can be liable to breaching the agreement by sharing the information with others. If you are discussing the opportunity with your wife who understands this is confidential but it is overheard by your 15-year old son who tells everyone at school his local pizza joint is on the market, you are creating an avoidable issue.
The standard for of the confidentiality agreement used by the Certified Restaurant Brokers at We Sell Restaurants does not allow you to approach the landlord or other third parties either. This is important since the seller's landlord may not be aware he is selling and that is part of the process later in the transaction.
Signing the Agreement Personally
If you sign a confidentiality agreement for buying a restaurant personally and later form a company or LLC this does not waive any obligations you had under your personal signature. If you purchase a portion of the business or go into partnership there are also clauses in most agreements to reference these conditions you should be aware of when buying a restaurant.
Signing a confidentiality agreement is a commitment to proceed professionally without interrupting the seller's business. It should not be undertaken lightly and some documents have enforceable clauses for liquidated damages for each instance of the breach.
A confidentiality agreement is a legal document whether signed in person, via fax or through electronic signature. Make sure you understand what you’re signing if you’re in the market for buying a restaurant.
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.