A Seller's Dictionary of Restaurant Brokerage Terms

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In the field of restaurant business brokerage, there are words, terms and phrases that are either unique to our endeavors or have special interpretations.

During the course of a restaurant sale, sellers may encounter real estate terms that must be thoroughly understood in order to appreciate the implications and legalities and responsibilities of the process. The understanding of these items by sellers assists with the directing of brokers, accountants, lawyers and other business advisers.

What follows now is an abbreviated list of words and their definitions that brokers and sellers encounter in business brokerage.

The explanation of these terms are purposely non-technical in order that they are easy for all to understand. This information is taken from a book authored by our Associate Broker, Brian Harron, called TIPS FOR SELLING A RESTAURANT BUSINESS, which is currently being revised and will soon be republished. All terms given are from a seller's perspective.

A caveat before you begin. Restaurant brokerage is primarily about the sale of personal property, not real property. A sale might include the name, the goodwill, leasehold rights, furniture, fixtures and equipment, production formulas, existing contracts, etc.

ANNUAL DEBT SERVICE - If you choose to carry back part of this purchase price, this is how much payment you can expect annually from your buyer - your responsibility is to be sure that your buyer is properly capitalized when buying your business and that the business will cash flow adequately to assure your buyer's ability to make all necessary payments.

APPRAISAL - Many times it is wise to have a business appraisal or valuation done before you put your business up for sale to establish realistic expectations of what your restaurant is worth. The appraisal can also be a wonderful sales tool. Appraisals estimate the worth of real estate or a business. Appraisals do not establish the price - negotiations between buyers and sellers do this.

ASSIGNMENT - Your right to transfer your rights to mortgages, lease options, contracts for deed, etc. REMEMBER, in any assignment, you pass the responsibility for payment to another individual and you remain secondarily responsible, unless there is an agreement between you and the landlord that specifically removes you from all responsibility.

ASSIGNMENT CLAUSE - Hopefully one exists in your lease, which allows you to assign your leasehold interest to another party. If the lease has an assignment clause requiring the consent of the landlord, look for a statement such as "consent cannot be unreasonably withheld". Watch out for leases that very specifically define who you can sell to; they will make your sales job difficult and your relationship with the landlord potentially contentious.

BULK TRANSFER - In some states, when you sell your business you will be required to send a bulk sales notice to your creditors to make sure that they have ample notice and time to collect the monies that you owe them. Bulk transfer notices are required by the U.C.C. and in some cases failure to comply can mean that the sale is ineffective in respect to the claims of any creditor.

CAPITALIZATION RATE - A method for determining the worth of the business by using a cap rate or yield rate. The cash flow of the business is capitalized to give an indication of the business's worth.

CONTINGENCY - In your purchase agreement the buyer will surely list some contingencies upon which the completion of the sale will depend. One common contingency is the buyer's ability to obtain financing. The offer also may be contingent upon review and acceptance by the buyer's legal and financial advisers. Make sure all contingencies are reasonable. Make sure all contingencies have a satisfaction date by which the contingency must be satisfied and removed. Make sure upon the satisfaction of the contingencies that you get a written statement from the buyer that acknowledges their satisfaction.

CORPORATE RESOLUTION - If you are a corporation when you sell your business you will be asked to provide a resolution from your Board of Directors authorizing the listing and the subsequent sale.

COVENANT NOT TO COMPETE - Most astute buyers will ask for a covenant not to compete which will restrict for a reasonable length of time your right to do business in a similar business to that which you have sold and within a reasonable distance of your former business. Notice the use of word reasonable - all covenant not to compete restrictions must be reasonable or they will not generally stand up in a court of law.

CREDIT RATING - As a seller you should give serious consideration to running a credit check on your buyer, particularly if you will be carrying back a loan as part of the sale.

DEPOSIT - Sometimes called earnest money. Buyers like to put down as little as possible while sellers want to get as much as possible. The amount should reflect a serious offer and commitment to the deal. As a seller you want the money to go "hard" or become non-refundable as soon as possible which normally means that you want a short time period to clear all contingencies.

ENCUMBRANCE - A term which refers to any lien, charge or liability attached to the property or business that you are trying to sell. Most purchase agreements will require a seller to warrant or guarantee that there are no encumbrances except those described. You will be asked to disclose all encumbrances. Business liens will generally be revealed through a U.C.C. search.

FIXTURE - Something that was personal property that is now affixed to the real property and thus judged to be real property. Fixtures do not belong to you unless you own the building. An example would be a furnace or air conditioning system that you as the owner of the business have added to the building to improve it.

FULL DISCLOSURE - You will be asked to provide full disclosure of all material facts affecting your restaurant. The broker is required by law to disclose in full to a client all material facts affecting the property.

GOODWILL - An intangible asset that you can sell that has a material influence on the price you can get for your restaurant. Goodwill carries the expectation of continued good reputation and business success. Goodwill is a capital asset and a relatively high goodwill value may be valuable to you as the seller.

GROSS LEASE - A lease wherein the tenant pays a fixed or flat rent and the landlord pays all taxes and insurance, as compared to a net lease in which the tenant pays the taxes, insurance and perhaps building repair and maintenance as well.

INVENTORY - In a restaurant business sale, you will have to provide two or more inventory lists. One will be for all personal property included in the sale and the other will be for the food and/or beverage inventory. Incidentally, it is quite common for product inventory to not be included in the restaurant's sale price.

NEGATIVE CASH FLOW - A situation that materially and adversely affects the worth of a restaurant business. Negative cash flow (for business valuation purposes) means that all expenses (except depreciation, debt service and "perks" to the owner) exceed the level of sales. Cash flow, when capitalized, is a primary determinant of a restaurant businesses' worth. Thus negative cash flow will seriously damage your prospects for a desirable sales price.

NET LEASE - A lease where the tenant pays not only rent but also maintenance, taxes, insurance and utilities for the space rented. This is the common form of restaurant lease in urban areas. Also, called a triple net lease.

PERCENTAGE LEASE - A lease in which the tenant typically pays a percentage of gross sales to the landlord as rent. Typically, restaurant leases contain a minimum rental figure in dollars below which the percentage rent will never be allowed to fall.

PERSONAL PROPERTY - Basically anything that does not fit the definition of real property. This is one of the principal things you sell when you sell a restaurant business. Examples of personal property would include anything movable such as tables, chairs and trade fixtures.

PURCHASE CONTRACT - Also called a contract for sale or sales contract. A purchase contract is for the sale and purchase of real property or a business opportunity such as a restaurant. A purchase contract may also be the offer that the seller receives; when signed, it becomes the purchase contract. The purchase contract will spell out the price, terms, conditions and timing of the sale. If the price is paid and all terms, conditions and required timing met, the sale will close. Normally a closing will take place in 30-60 days.

SECURITY DEPOSIT - Funds given to a landlord by a tenant to protect the landlord against damage caused by the tenant and to provide damages for a landlord when a tenant wrongly vacates a lease. Security deposits may bear interest either as required by state law or by written understanding between landlord and tenant.

SPECIAL CONDITIONS - Also see Contingencies. These are the special conditions inserted into a real estate or business opportunity sales contract which must be satisfied before the contract is binding. Examples of contingencies or special conditions could be:

Subject to financing
Subject to legal adviser's approval
Subject to review of books and records
Subject to landlord's approval
Subject to obtaining a liquor license
Subject to inspecton by Health Department

STRAW MAN - May also be called a Nominee. As a seller you might receive a contract for purchase from John Smith and/or Nominee. The purpose of the straw man may be to conceal the identity of the real purchaser of your business or to allow time for the buyer to form the business entity that will be the actual owner.

TRADE FIXTURE - A fixture that is unique to the business and is therefore considered to be removable by the person who owns the business. It is prudent to always stipulate in your lease the specific items that are the trade fixtures. Examples of trade fixtures could include certain kitchen equipment such as ovens, walk-in freezers and walk-in coolers.

UNIFORM COMMERCIAL CODE OR U.C.C. - A body of law designed to create uniformity in commercial transactions across the country. A chattel mortgage used for restaurant equipment would be affected by the U.C.C. When you buy on credit, the financing is recorded with the county recorder's office. An astute buyer will do a U.C.C. search to see what liens exist against the property you are trying to sell.

Please feel free to call us if you have any questions on this information.

We're happy to assist you.

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Tempe, AZ 85282
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