This is part one of a two part series on the buyer’s due diligence process that is necessary for a buyer to follow in determining the viability of purchasing a restaurant, bar and/or club business.
Typically, the buyer has somewhere between 10 and 20 calendar days from the time the asset purchase contract is accepted to complete his due diligence. The due diligence includes the items indicated below:
Inspections
- Physical Inspections – The buyer should hire a general contractor or building inspector who is capable of evaluating all the mechanical systems—plumbing, refrigeration, electrical and heating, ventilating and air conditioning—to make sure they are working correctly, and have a reasonable life remaining. Additionally, all the equipment and fixtures should be inspected to make sure they are in good working condition. The recommended procedure is that, upon the initial inspection of the equipment and fixtures, the buyer and seller walk through the business and check off all the equipment to make sure it is there. This list is prepared by the seller immediately after listing the business for sale, and the equipment list is signed by both buyer and seller at the time the purchase contract is executed. The equipment list is also signed again by both buyer and seller after the final walk thru is completed by the parties, immediately before the close of escrow.
- Health Department Inspection – In most counties in California, before a business license is issued to a new owner, a change-of-ownership health department inspection must be signed off by the county health inspector. This means that before the sale is completed, the health department does an inspection for a change of ownership, and this has higher standards than a routine health department inspection that was done periodically while he was operating the business. On a change-of-ownership health department inspection, the inspector will call out all items that are now required as a result of code-upgrade changes and are typically required for a change of ownership—such as three compartment sinks, mop sinks, hand sinks, special floor drains; all surfaces including walls, floors and ceilings must be smooth and washable, etc. It is usually the buyer’s responsibility to pay for the inspection report, which is a couple hundred dollars, and it is the seller’s responsibility to clear all these items before the close of escrow. If the seller does not want to clear these items, usually the price is adjusted downward accordingly for an “as-is” sale, making the buyer responsible for these changes. If the buyer plans to undertake a major remodeling of the business after the close of escrow, then the health department inspection is not that meaningful. The buyer’s remodeling plans will have to be approved by the health department.
- Fire Department Inspection – If you have a type 1 hood (a hood system for a full kitchen with open flame cooking), you need to have a fire suppression system built into the hood system. If a fire occurs over the cooking area, the fire suppression system will activate, and hopefully extinguish the fire.
- All of the fire extinguishers need to be checked and filled regularly.
- You must have proper egress and ingress areas for customers and employees.
- The duct system which connects between the hood and roof needs to be cleaned out quarterly by a professional hood-cleaning company.
- Your electrical system must be up to code, and have the proper electrical work completed throughout, including updated circuit breaker systems. American Disabilities Act (ADA) – This is the Federal law set up to assure that you have the proper facilities for disabled customers. Such areas as entry ways, front doors, restrooms, parking spaces, table heights, and seating areas must be properly adjusted to accommodate disabled customers. If you are buying an existing restaurant which does not accommodate disabled customers, you need to check with the local building and planning department to see what the requirements are to comply with ADA. In some cases, you may be grandfathered in, which means that as long as you don’t make any major changes to the restaurant, the existing conditions will be acceptable. However, it is best to update your business to accommodate disabled customers, as society is becoming more conscious about incorporating the disabled, and you want to minimize any exposure to possible litigation for non-compliance.
- Other Areas to Inspect – If you have a NNN lease, it means you are usually responsible for taking care of the entire building, rather than just the foundation and side walls. It is likely that you are then possibly responsible for maintenance of the roof, parking lot, and other parts of the building. Therefore, make sure you have the roof inspected by a roofing company, the parking lot inspected by a paving company, etc., so you know the condition of these areas, and won’t have any surprises after you close escrow. If work is needed, make sure the work is done before the close of escrow, or that you receive the proper credits from the seller towards the purchase price to cover this corrective work.
Restaurant Realty works closely with its clients throughout the due diligence process to assure that all of the above items are reviewed.