What To Look For Before Buying An "Off-The-Books" / "All-Cash" Restaurant
QUESTION From: Jackie in NY
“The owner of a small local lunch spot is looking to retire and sell. He does everything pen and paper. No POS, no quickbooks, nothing. What are some things I should be asking/looking for so I can make a well informed decision to buy this or not.”
Generally speaking, unless the location is a hot commodity in a prime area and/or the business is a cash cow; the business itself isn’t worth anything more than the value of the FF&E (Furniture, Fixtures and Equipment)...especially if you’re going to change the concept...and if the seller is expecting you to value “off-the-books cash flow” then I must assume that they are willing to hold paper (offer seller financing) and no outside third party lender (i.e., bank or SBA program). If that’s not the case, I’d run (not walk) away.
If you’re not planning on changing the concept and want to capitalize on the brand equity this existing operator has built over the years, there aren’t many ways of determining value other than
by hanging out and watching every day part for a week or two to see what’s going on there. Especially if you’re given access to the Invoices/receipts (to determine how COGS match up with quoted “actual” sales) BOH observation, payroll books, vendor lists and all utility bills. These items should create a pretty clear picture and tell you whether or not the seller is “stocking the pond” with friends and family to pose as customers during your on-site due diligence.
Don’t even bother asking to see their tax returns. Not to say that they aren’t honest but an “all cash” business likely has owner(s) pulling cash out regularly that may not be regularly (or accurately) accounted for.
There’s a saying in business brokerage: “If a seller receives cash and doesn't show it on their tax returns, then they can't expect it to be included as part of the sale of their business and therefore be paid twice.”...but most sellers willing to be dishonest with the IRS are willing to be dishonest and illogical with you so I wouldn’t necessarily bring that up.
Other major concerns in a deal like this would be: L&I issues (call the local municipality to see if there are any), outstanding vendor invoices (you can get a good idea by calling all of the local vendors and inquiring about your interest in possibly setting up new accounts), any existing liens, unpaid/back taxes, pending lawsuits, real estate issues, pending or delinquent assessments, zoning issues*, upcoming plans for the immediate area (think public works, sewer, etc... as well as plans submitted or permits requested by potential future neighbors). A competent attorney should be able to help you navigate most, if not all, of these potential issues.
*If the Seller is operating under a conditional use or zoning variance- that could pose a serious problem since, in many municipalities, that approved use goes away when ownership changes (sometimes immediately and sometimes after a defined period of time).
That doesn’t make things impossible it just means you may have to consider alternative business structures where the current owner remains involved / invested.
While these are all issues to be discussed with a practicing lawyer (which I am not); I would assume/hope that any conditional use would be tied to the building rather than to the business since each can be treated and leverages independently...so long as there is no interruption in business operations and a break in title only. You’ll also want to make sure that there are no restrictive terms or conditions in the deed or defects / exceptions in the title either (e.g., / easements or restricted uses).
If you are satisfied with the deal but zoning, title or deed restrictions pop up, the owner could theoretically keep the building and lease it to you for 30+ years (you could treat a Lease like that as a capital asset).
That might actually be a more attractive scenario for both of you unless the owner is looking to fully cash-out now.
As far as the liquor license goes… that could prove to be even more of a sticking point. You would need to consult with a local liquor license attorney to find out precisely how that works in your local municipality as rules change from place to place just as they do with zoning. In some areas of Pennsylvania I’ve been successful in either having the parties form a corporation/LLC for the license and/or assign one party as management (liability could present an issue in the event of an incident) or having the license contractually bound to the building which would mean that once your Lease ends (or is broken) the license would revert/be returned back to the building owner or a sale for the same price it was orig sold to you (or more) could be pre-arranged within the Agreement well.
Keep in mind that these potential solutions are all predicated on assumptions that might not even be true.
Just saying that looking into these potential issues, as well as the other items mentioned above, are what I would consider to be the precursor to negotiating any purchase or assumption of an “all-cash” business.
Good Luck and let me know if I can help directly with the vetting and evaluation,