How to buy a restaurant?
For some people, starting a business is the road path to freedom and wealth. But then, it may not always be the best to start a new business from scratch and grow it. Rather, taking over or buying an existing business can be your smarter move. The article below, as published by The Star, explains quite well about certain aspects you should look into when buying a business, in particular, a restaurant. To put in question, how to buy a restaurant?
To many people, being involved in a business is an appealing thought. This is especially so with a restaurant, where people are walking in and out, and leaving money at the till.
Those not already in a business may be thinking of getting involved in one on top of their present employment. Others may plan to do so when they retire. Some may also be involved in a part-time venture on a small scale.
There may be legal and ethical considerations for a person with a salaried job. An employee is expected to devote his full time and attention to his work, which of course does not necessarily mean just during office hours.
Therefore, it would be a breach on his part to get involved. If his involvement is discovered, he could face consequences such as termination of employment. Even otherwise, the question remains on whether it is morally right to do so.
The legal and ethical considerations would represent an even more serious breach if the person concerned was involved in a business activity, whether directly or indirectly, that was similar to his employer’s business and therefore creating a conflict situation.
One way to commence business is to start from the very beginning and build it up. This has its advantages. But in many cases a person would prefer to buy an ongoing business and continue running it rather than starting from scratch.
In such a case, a premium would need to be paid in addition to the cost of assets and stocks that exist quite apart from the goodwill. But, a person who has the resources may find it worth his while and the risk worth taking. But, could there be any pitfalls?
Merely viewing the restaurant and seeing the large number of people patronising the establishment may well indicate a good business decision to the buyer. However, that rosy feeling of inevitable success could turn into a minefield of problems if all aspects are not completely considered.
One important aspect is whether the property at which the business is carried out is also part of the business that is being sold. This, of course, would be the preferred position and a desirable one.
However, if the premises are rented from a third party, or for that matter, owned by the seller but not forming part of the sale of the business, then the terms of the tenancy have to be carefully considered.
A tenancy only gives a right to a person to stay on the premises for a specified period. In the absence of contrary provision, the fact that the purchaser has bought the business at a premium or has expended money to renovate the premises are no grounds to resist a landlord’s rights to retake possession.
Therefore, this is an important aspect to consider in the context of the buyer’s need to be assured of a reasonable time frame to pursue his business so as to recover the investment made and earn the desired profits.
One should not be lulled into complacency if told that even though the tenancy is coming to an end or has some time to run that there is an option to renew. This is because a mere reference to an option clause is no guarantee of continued occupation.
The right to continued stay is not assured by a mere option but the manner in which the option is worded. If the option clause gives a definite right to the tenant to extend the tenancy and prefixes the rent for the expected duration this would, of course, serve the interest of the buyer.
However, when an option clause merely states that the tenancy can be renewed on terms to be “mutually agreed” it hardly serves any purpose where the landlord has made up his mind or later decides not to renew the tenancy. A higher rental from another prospective tenant or a situation where the seller needs the premises for his own use would be highly detrimental to the buyer of the business.
Intellectual property rights
On a different note the business name may have acquired considerable goodwill in the course of time.
If a trademark has been registered earlier, it would be useful to know whether the seller is the owner. If so, this should be part of what is sold in the sale of the business and transferred to the buyer.
In other cases, someone else may be the registered owner of the trademark and the use of the mark may only have been licensed to the seller. In such a case the necessary action will be required to enable the continued use of the business name.
The enthusiasm and desire to sell the business is in many cases likely to be verbal and conveyed in the context of the eagerness to sell and the enthusiasm of the buyer to move on with his new acquisition.
But, once the business is sold and the purchase price has been paid, what is there to prevent the seller of the business from opening another restaurant a few doors away? Or, for that matter, next door, even though the buyer is assured of the tenancy and the use of the name?
The seller would be familiar not only with the customers but also with their tastes. He would also have built up a rapport with the customers over the years and be able to also provide food that they are used to and familiar with.
The buyer in such a situation may no doubt feel cheated but unless there is a restrictive contractual provision prohibiting this incorporated into the sale and purchase agreement, the buyer may find himself without a remedy.
These are some of the problems or aspects that should be looked into at a time that a business is purchased. Whether the business involves a different activity or a different product or service, the same principles would apply.
Large organisations would of course have a team of advisers, consultants and experts to look into all these matters. A person buying a small business will have to look into these himself. But, this does not mean that such problems do not otherwise arise.