Restaurant business transition/take-over while in escrow?

[jeromedawg]

Hey all,

By now, some of you are probably familiar with the situation and threads I've started related to my in-laws' restaurant business (or hopefully soon to be former, if things don't explode in their face).

Well, they're still in escrow with no foreseeable 'light at the end of the tunnel' in terms of how long things will take for the liquor license transfer to complete. They made the decision, by persuasion of the new owner and the broker (who also, scared them further by implying that the buyer would walk away if they waited too long), to hand over the keys and operations to the new owner. This was against our advice, as well as the advice for them to retain a lawyer and to involve their CPA earlier on for the financial stuff.

Meanwhile, my in-laws are in Taiwan (had to leave for a family emergency) and the new owner has been creating havoc at the restaurant. Just tonight, the head waitress called my wife and vented to her for like 15-20 minutes about how she's screwing up operations, closing early, not paying according to how things were before, etc. On Sunday she was venting to her for at least an hour or more regarding how bad this new owner is. It's really scary, considering that they're still in escrow. Anyway, it sounds like the staff is hating this new owner and I'm not sure where the new owner is with everything. What's super scary is that the waitress told us the new owner said something along the lines of "how am I supposed to know? I've never owned a restaurant before" - everyone was under the impression that this wasn't her first rodeo, so someone dropped the ball, heard wrong, or straight up lied on that side of things...

Given what we have to work with currently, what is the best course of action now? Should the broker get involved? It's already a conflict of interest because the broker, who works for the landlord who leases the space for the business, is representing both the seller (my in-laws) as well as the buyer. Should he be informed of what the waitress is telling my wife so that he can take that to the buyer and, in more or less words, urge her not to screw things up more and tank the business?

[AlexMar]

You are letting someone run the restaurant who doesn't own it and is not an employee? Woah!  Until closing, that person is nothing but a liability. How would insurance even handle this?

[jeromedawg]

You are letting someone run the restaurant who doesn't own it and is not an employee? Woah!  Until closing, that person is nothing but a liability. How would insurance even handle this?

Madness, right? My in-laws are *desperate* to sell their restaurant and this proves just how desperate they are. I can't believe the broker outright encouraged it too. Completely irresponsible. All the people they have been working with so far are incompetent. As far as insurance, I don't know... I'm not even sure if they signed a release of liability waiver, which would have addressed the insurance issue. The new owner has her own insurance setup for worker's comp/accident/injury type stuff with the employees though. The whole thing's a mess, and the longer it drags on the higher the risk of the new owner walking away/not signing as things slowly dissolve into chaos. We warned them about this *many* times over and we're starting to see it unfold before our own eyes. Now it's a matter of damage control and preventative measures...sigh

[AlexMar]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

[jeromedawg]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

Did you do a transfer to a new owner as well? And was this in CA? Apparently the new owner didn't fill everything out correctly on the form and they caught it late... which is puzzling - considering they do this day in and day out, you'd think they would have caught any issues like missing information up front...! The level of incompetence all around just amazes me.

The new owner is the owner/operator/manager basically - she's running the show and calling the shots. Really what my in-laws *should* have done (and we were telling them this largely ignored/brushed-off) was to retain a lawyer to help write an agreement/amendment that states the new owner cannot make any changes to any of the existing business operations in place until escrow closes, and that to the best of her ability she needs to continue running the business "as-is" until that point.
She has a temporary permit to operate and sell liquor but yea I don't know what liabilities come with that, if any. The broker mostly does commercial and residential real estate, and seems to have very little experience, if any, with business sales let alone liquor license sales/transfers. It's a huge PITA that probably could have gone smoother had they involved a lawyer and their CPA from the beginning. Now it feels like things are starting to burst at the seams.

[jeromedawg]

All that aside, do you guys think this situation (with the new owner behaving badly prior to escrow closing) warrants informing the broker?

[AlexMar]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

Did you do a transfer to a new owner as well? And was this in CA? Apparently the new owner didn't fill everything out correctly on the form and they caught it late... which is puzzling - considering they do this day in and day out, you'd think they would have caught any issues like missing information up front...! The level of incompetence all around just amazes me.

The new owner is the owner/operator/manager basically - she's running the show and calling the shots. Really what my in-laws *should* have done (and we were telling them this largely ignored/brushed-off) was to retain a lawyer to help write an agreement/amendment that states the new owner cannot make any changes to any of the existing business operations in place until escrow closes, and that to the best of her ability she needs to continue running the business "as-is" until that point.
She has a temporary permit to operate and sell liquor but yea I don't know what liabilities come with that, if any. The broker mostly does commercial and residential real estate, and seems to have very little experience, if any, with business sales let alone liquor license sales/transfers. It's a huge PITA that probably could have gone smoother had they involved a lawyer and their CPA from the beginning. Now it feels like things are starting to burst at the seams.

Florida for me.  And yes, totally new owner.  We went in with the broker, signed paper work, I handed the key over.  Done.  Business was sold.  Yes there was a little bit in escrow but at this point I didn't own the business and they couldn't back out either.  I had to do 2 weeks of training with them and work with them to transfer everything over.  That's all the escrow was for and it was minimal.  I think $5k - $10k or so.  About the value of my training basically but certainly nowhere near the value of the restaurant.  It was their problem getting their license. That has nothing to do with me and it was never a stipulation in the deal.  They can review requirements to get a license, ie... can't be a felon, etc.  That's part of their due diligence before the closing.  Once they signed paperwork and took over, it was their business, period.  That's how it's supposed to work.  I set them up with the same liquor license broker I used as a courtesy and they had no difficulty at all.  It was all pretty darn simple really.  And as you said, the new owner has their temporary license.  So why can't you close escrow?  This whole situation makes no sense at all and it makes me question what the heck your broker is doing.

[jeromedawg]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

Did you do a transfer to a new owner as well? And was this in CA? Apparently the new owner didn't fill everything out correctly on the form and they caught it late... which is puzzling - considering they do this day in and day out, you'd think they would have caught any issues like missing information up front...! The level of incompetence all around just amazes me.

The new owner is the owner/operator/manager basically - she's running the show and calling the shots. Really what my in-laws *should* have done (and we were telling them this largely ignored/brushed-off) was to retain a lawyer to help write an agreement/amendment that states the new owner cannot make any changes to any of the existing business operations in place until escrow closes, and that to the best of her ability she needs to continue running the business "as-is" until that point.
She has a temporary permit to operate and sell liquor but yea I don't know what liabilities come with that, if any. The broker mostly does commercial and residential real estate, and seems to have very little experience, if any, with business sales let alone liquor license sales/transfers. It's a huge PITA that probably could have gone smoother had they involved a lawyer and their CPA from the beginning. Now it feels like things are starting to burst at the seams.

Florida for me.  And yes, totally new owner.  We went in with the broker, signed paper work, I handed the key over.  Done.  Business was sold.  Yes there was a little bit in escrow but at this point I didn't own the business and they couldn't back out either.  I had to do 2 weeks of training with them and work with them to transfer everything over.  That's all the escrow was for and it was minimal.  I think $5k - $10k or so.  About the value of my training basically but certainly nowhere near the value of the restaurant.  It was their problem getting their license. That has nothing to do with me and it was never a stipulation in the deal.  They can review requirements to get a license, ie... can't be a felon, etc.  That's part of their due diligence before the closing.  Once they signed paperwork and took over, it was their business, period.  That's how it's supposed to work.  I set them up with the same liquor license broker I used as a courtesy and they had no difficulty at all.  It was all pretty darn simple really.  And as you said, the new owner has their temporary license.  So why can't you close escrow?  This whole situation makes no sense at all and it makes me question what the heck your broker is doing.

Interesting...maybe the process is different there than it is here. The thing about this transaction is that ABC told us they wouldn't allow escrow to close until the transfer of the liquor license was complete. And here in CA they tell you that it could take anywhere from 60-90 days for the transfer to complete! That's why it's taking so long. I don't know why there's so much more red tape but it seems there is. I question the broker too - it seems pretty obvious he doesn't know a lot of things. His canned response when he wants to alleviate fingerpointing is "I'm not a tax professional or lawyer so I don't know" and won't even take the extra step to find out. He's really bad and is all talk. Even during the process before they got into escrow, he was sort of acting condescending towards my wife regarding my in-laws, saying things like "your parents really had it good with the landlord when he gave them discounted rent. They should be happy that this offer came up because they would have nothing else otherwise" - smh... BTW: they don't own the real estate either, so not sure if that has anything to do with causing additional delays.

BTW: when you sold, I'm assuming you paid unsecured property taxes for equipment/fixtures/etc right? Did you end up agreeing to split/pro-rate the taxes with the buyer in escrow? Here in CA they want the current owner to pay taxes, which is what my in-laws are doing, and then pro-rating the tax costs in the escrow so that the buyer pays her share. However, the new owner/buyer is refusing this saying she has already paid all her taxes (but I think she's confusing or conflating "tax" as the city business taxes versus property taxes... smh - this is another example of the incompetence we've been putting up with) 

[AlexMar]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

Did you do a transfer to a new owner as well? And was this in CA? Apparently the new owner didn't fill everything out correctly on the form and they caught it late... which is puzzling - considering they do this day in and day out, you'd think they would have caught any issues like missing information up front...! The level of incompetence all around just amazes me.

The new owner is the owner/operator/manager basically - she's running the show and calling the shots. Really what my in-laws *should* have done (and we were telling them this largely ignored/brushed-off) was to retain a lawyer to help write an agreement/amendment that states the new owner cannot make any changes to any of the existing business operations in place until escrow closes, and that to the best of her ability she needs to continue running the business "as-is" until that point.
She has a temporary permit to operate and sell liquor but yea I don't know what liabilities come with that, if any. The broker mostly does commercial and residential real estate, and seems to have very little experience, if any, with business sales let alone liquor license sales/transfers. It's a huge PITA that probably could have gone smoother had they involved a lawyer and their CPA from the beginning. Now it feels like things are starting to burst at the seams.

Florida for me.  And yes, totally new owner.  We went in with the broker, signed paper work, I handed the key over.  Done.  Business was sold.  Yes there was a little bit in escrow but at this point I didn't own the business and they couldn't back out either.  I had to do 2 weeks of training with them and work with them to transfer everything over.  That's all the escrow was for and it was minimal.  I think $5k - $10k or so.  About the value of my training basically but certainly nowhere near the value of the restaurant.  It was their problem getting their license. That has nothing to do with me and it was never a stipulation in the deal.  They can review requirements to get a license, ie... can't be a felon, etc.  That's part of their due diligence before the closing.  Once they signed paperwork and took over, it was their business, period.  That's how it's supposed to work.  I set them up with the same liquor license broker I used as a courtesy and they had no difficulty at all.  It was all pretty darn simple really.  And as you said, the new owner has their temporary license.  So why can't you close escrow?  This whole situation makes no sense at all and it makes me question what the heck your broker is doing.

Interesting...maybe the process is different there than it is here. The thing about this transaction is that ABC told us they wouldn't allow escrow to close until the transfer of the liquor license was complete. And here in CA they tell you that it could take anywhere from 60-90 days for the transfer to complete! That's why it's taking so long. I don't know why there's so much more red tape but it seems there is. I question the broker too - it seems pretty obvious he doesn't know a lot of things. His canned response when he wants to alleviate fingerpointing is "I'm not a tax professional or lawyer so I don't know" and won't even take the extra step to find out. He's really bad and is all talk. Even during the process before they got into escrow, he was sort of acting condescending towards my wife regarding my in-laws, saying things like "your parents really had it good with the landlord when he gave them discounted rent. They should be happy that this offer came up because they would have nothing else otherwise" - smh... BTW: they don't own the real estate either, so not sure if that has anything to do with causing additional delays.

BTW: when you sold, I'm assuming you paid unsecured property taxes for equipment/fixtures/etc right? Did you end up agreeing to split/pro-rate the taxes with the buyer in escrow? Here in CA they want the current owner to pay taxes, which is what my in-laws are doing, and then pro-rating the tax costs in the escrow so that the buyer pays her share. However, the new owner/buyer is refusing this saying she has already paid all her taxes (but I think she's confusing or conflating "tax" as the city business taxes versus property taxes... smh - this is another example of the incompetence we've been putting up with)

We don't have unsecured property taxes.  We are a tax friendly state unlike CA which is a disaster (as you can tell already).

Is the restaurant SOLD and escrow is pending release based on the liquor license?  Can the buyer actually back out otherwise?  My buyer couldn't.  I received a check for nearly the entire sale when I sold it, and waited on the small amount once training was done.  Maybe the escrow is larger in your situation, but is the situation really that much different?  The whole thing doesn't make a lot of sense to me.

[jeromedawg]

I don't even understand why the liquor license is taking so long.  When I sold my restaurant, the liquor license was super easy/fast to do.  Is the new owner technically a "manager" at the moment, then?  I'm wondering if there are also liabilities with the liquor license doing it this way.  Not sure. We have liquor license brokers who deal with it all the time so know exactly where to go and who to talk to and speed it along.  Our closing was easy as can be.  It's wild how difficult this is for you guys.  I wish you the best.

Did you do a transfer to a new owner as well? And was this in CA? Apparently the new owner didn't fill everything out correctly on the form and they caught it late... which is puzzling - considering they do this day in and day out, you'd think they would have caught any issues like missing information up front...! The level of incompetence all around just amazes me.

The new owner is the owner/operator/manager basically - she's running the show and calling the shots. Really what my in-laws *should* have done (and we were telling them this largely ignored/brushed-off) was to retain a lawyer to help write an agreement/amendment that states the new owner cannot make any changes to any of the existing business operations in place until escrow closes, and that to the best of her ability she needs to continue running the business "as-is" until that point.
She has a temporary permit to operate and sell liquor but yea I don't know what liabilities come with that, if any. The broker mostly does commercial and residential real estate, and seems to have very little experience, if any, with business sales let alone liquor license sales/transfers. It's a huge PITA that probably could have gone smoother had they involved a lawyer and their CPA from the beginning. Now it feels like things are starting to burst at the seams.

Florida for me.  And yes, totally new owner.  We went in with the broker, signed paper work, I handed the key over.  Done.  Business was sold.  Yes there was a little bit in escrow but at this point I didn't own the business and they couldn't back out either.  I had to do 2 weeks of training with them and work with them to transfer everything over.  That's all the escrow was for and it was minimal.  I think $5k - $10k or so.  About the value of my training basically but certainly nowhere near the value of the restaurant.  It was their problem getting their license. That has nothing to do with me and it was never a stipulation in the deal.  They can review requirements to get a license, ie... can't be a felon, etc.  That's part of their due diligence before the closing.  Once they signed paperwork and took over, it was their business, period.  That's how it's supposed to work.  I set them up with the same liquor license broker I used as a courtesy and they had no difficulty at all.  It was all pretty darn simple really.  And as you said, the new owner has their temporary license.  So why can't you close escrow?  This whole situation makes no sense at all and it makes me question what the heck your broker is doing.

Interesting...maybe the process is different there than it is here. The thing about this transaction is that ABC told us they wouldn't allow escrow to close until the transfer of the liquor license was complete. And here in CA they tell you that it could take anywhere from 60-90 days for the transfer to complete! That's why it's taking so long. I don't know why there's so much more red tape but it seems there is. I question the broker too - it seems pretty obvious he doesn't know a lot of things. His canned response when he wants to alleviate fingerpointing is "I'm not a tax professional or lawyer so I don't know" and won't even take the extra step to find out. He's really bad and is all talk. Even during the process before they got into escrow, he was sort of acting condescending towards my wife regarding my in-laws, saying things like "your parents really had it good with the landlord when he gave them discounted rent. They should be happy that this offer came up because they would have nothing else otherwise" - smh... BTW: they don't own the real estate either, so not sure if that has anything to do with causing additional delays.

BTW: when you sold, I'm assuming you paid unsecured property taxes for equipment/fixtures/etc right? Did you end up agreeing to split/pro-rate the taxes with the buyer in escrow? Here in CA they want the current owner to pay taxes, which is what my in-laws are doing, and then pro-rating the tax costs in the escrow so that the buyer pays her share. However, the new owner/buyer is refusing this saying she has already paid all her taxes (but I think she's confusing or conflating "tax" as the city business taxes versus property taxes... smh - this is another example of the incompetence we've been putting up with)

We don't have unsecured property taxes.  We are a tax friendly state unlike CA which is a disaster (as you can tell already).

Is the restaurant SOLD and escrow is pending release based on the liquor license?  Can the buyer actually back out otherwise?  My buyer couldn't.  I received a check for nearly the entire sale when I sold it, and waited on the small amount once training was done.  Maybe the escrow is larger in your situation, but is the situation really that much different?  The whole thing doesn't make a lot of sense to me.

Ah I see... yep, more money more problems LOL

The restaurant isn't considered sold afaik - it's only considered sold once escrow closes. The broker tried to arrange separately selling the business apart from the liquor license but ABC didn't allow for that and required that the transfer occur before the sale of the business can complete - seems as though it's a contingency ABC imposes. Right now the buyer *can* back-out - she can choose not to sign the closing documents I'm pretty sure. The only 'recourse' in that is that the landlord will likely sue her. And possibly my in-laws because she likely won't agree to whatever the 'liquidated damages' are from everything she has screwed up thus far in the case that she does back out. The restaurant agreed upon sale price was $180k - buyer requested $60k in seller financing and my in-laws agreed. Buyer basically put down a $5000 earnest money deposit to escrow initially, then put in the remaining $115k into escrow right before the business operations were handed over to her (this was back in mid-January). There are a bunch of items that have been calculated as coming out of the $120k proceeds in terms of back-taxes and other fees paid to the broker, escrow, other taxes, expenses and credits between the buyer and seller *when* escrow finally closes. Again, it was somehow mandated that escrow *cannot* close until the liquor license has been transferred. Maybe there's a different/more stringent law here in CA that stipulates that... I don't know. Either way, they're not going to get the money out of escrow until the liquor license transfer has completed AND all closing documents have been signed and approved by the buyer and seller.

[bwall]

Is it possible to give the new owner a training course on restaurant management? Did the in-laws do that before they left? If not, is there a way to use the feedback received as a way to have that conversation?

[jeromedawg]

Is it possible to give the new owner a training course on restaurant management? Did the in-laws do that before they left? If not, is there a way to use the feedback received as a way to have that conversation?

Since she took it over on 1/21, my in-laws were helping and hand-holding up until they left in early Feb. I guess not enough time but my FIL's brother was dying of cancer (and actually passed while they were on the flight to Taiwan). Before 1/21 though she had already gotten an idea of the operations, etc as she was regularly visiting the restaurant and learning all the logistics, etc. The assumption everyone had was that the new owner had prior experience; this is a big reason why the landlord and his broker *approved* her - they felt most comfortable with her because of her talk of business sense and ownership. She seems very careful and tedious about things but to the point that she's micromanaging. Good as a high-level executive type leader but operations wise, she sounds like a nightmare. At this point, we're just *crossing our fingers* and hoping the transfer of the liquor license happens ASAP and that there are no further hold-ups. The longer this gets drawn out and the more she makes a mess of the business, the more uncomfortable things get.

[jeromedawg]

Just a quick update but it sounds like the liquor license transfer is near completion - they're planning to make it official in the next couple of days. So good news on that front.

But now the buyer is holding this whole unsecured property tax issue over my in-laws. She is flat-out refusing to pay and keeps asking the escrow officer to remove the line items from her bill (and the escrow officer is doing it!) despite the SIGNED purchase agreement *clearly* indicating that property taxes are to be pro-rated between the buyer and seller. It's not even that she disagrees with the amount of pro-ration, is that she doesn't think she needs to pay them!

I don't understand if she's trying to use this as a 'bargaining chip' or if she really doesn't understand the concept of pro-ration and that she owes per the signed and binding purchase agreement.

How would something like this even be enforceable? Letter from an attorney?

[jeromedawg]

The broker has stepped in and is going to foot the cost of the taxes per an amendment, then deal with the buyer on his own as far as being reimbursed back but he's basically stepping in to deal with that. Liquor license is complete so now it's a matter of signing off on everything for escrow to close. I think they're just about out of this one, thankfully...

[CheezM]

The broker has stepped in and is going to foot the cost of the taxes per an amendment, then deal with the buyer on his own as far as being reimbursed back but he's basically stepping in to deal with that. Liquor license is complete so now it's a matter of signing off on everything for escrow to close. I think they're just about out of this one, thankfully...

Happy it's working out for you.  Reading through this and what a mess.  Learning experience!