Author Topic: Sale of business (restaurant) escrow process and finicky seller  (Read 514 times)

jeromedawg

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Sale of business (restaurant) escrow process and finicky seller
« on: December 26, 2018, 11:09:39 PM »
Hey all,

My in-laws are [finally] in the process of selling their restaurant business. This is the furthest it has gotten and they are currently in the escrow process after signing the purchase agreement. There are some hold-ups however, part-in-due to the fact that my father in law blindly signed the contract without having anyone else review it beforehand.

The business is in a leased space and the landlord has been somewhat picky about bringing in a new tenant and prefers someone who will just take over the business and improve efficiency. At the same time, he is supposedly looking out for my in-laws and could have taken many other 'favorable' offers (presumably in terms of charging higher on the lease). Anyway, the buyer they found *seems* serious. She seems to have gotten a pretty good deal, offering $180k ($120k down and $60k of it seller financed) for the business and my FIL immediately accepting without negotiation. I can say that in short, the broker (who is the landlord's broker) ultimately isn't really looking out for them - he just wants to close the sale and walk away with his cut. Whatever my parents come up with, if it's the short end of the stick, he could care less... that's the idea we get beyond on the fluff he puts out - he has stayed very hands-off in terms of guiding or advising them on anything. He is also acting as the broker for the buyer.

At this point, the buyer has only put down $5k of the deposit. We never saw the purchase agreement until *after* my FIL signed it (*sigh*) and so I'm not sure how much of it really weighs in favor of protecting him. The new buyer wants to take over operations on 1/1/19 and still hasn't put down the remaining $115k into escrow, which is concerning. She also just requested that the interest rate be lowered to 5% from 5.4% - I think that's a relatively small change on $60k but it's irritating nonetheless. She seems to be holding back and it feels like she has become a little non-committal, especially asking about the interest rate. My in-laws are scared to say "no" because it could mean losing the sale... at the same time, we want to make sure this buyer isn't trying to pull a fast one especially because she barely has any "skin in the game"

What complicates things more is that the liquor license process isn't expected to close out until Feb or Mar, and the restaurant sale cannot close until that time. So this means that she will be operating the restaurant while still in escrow - isn't there a risk of her backing out due to buyer's remorse?

The purchase agreement is not something my wife and I have ever dealt with before so the language is a bit over our heads and quite legalese. A lawyer friend of ours recommended that a release of liability be provided to the buyer if she is going to take over operations. We may just ask her to review the contract but we feel awkward asking that since it kinda feels like a "don't do business with friends" type of things.

All of this is very overwhelming and we are just trying to look out for my in-laws, as they will blindly sign anything without scrutinizing or having someone else scrutinize because "they don't want to bother them" - yet this is a pretty huge milestone for them and would mark the start of their retirement. We just don't want them to get screwed in the end.

Can anyone offer some advice or pointers on things we can tangibly help with? They don't have a lawyer, which I think would help a lot here. But it sounds like it could get quite expensive. What do other small mom & pop shops do when selling their restaurant business?
« Last Edit: December 26, 2018, 11:41:39 PM by jeromedawg »

plog

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Re: Sale of business (restaurant) escrow process and finicky seller
« Reply #1 on: December 27, 2018, 07:37:04 AM »
Quote
They don't have a lawyer, which I think would help a lot here. But it sounds like it could get quite expensive

Yeah, I was in the exact same situation with my appendectomy.   Instead, I decided to post on an internet forum and random strangers not versed in medicine successfully guided me through the surgery myself. 

Get a lawyer. 


Rufus.T.Firefly

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Re: Sale of business (restaurant) escrow process and finicky seller
« Reply #2 on: December 27, 2018, 08:06:29 AM »
I am a business broker for the past 8 years. I can help answer a couple of concerns.

RE: 115K in escrow. This is not common for this money to be placed in escrow. Typically it is placed in the closing attorney's trust account and then disbursed on the closing day. Sometimes the buyer brings a certified check instead. The 5K earnest money should be relatively "hard" at this stage. The buyer's due diligence period should be over, which is the time that allows them to walk away without cause. 5K is a common amount for this size of transaction. This part doesn't concern me too much.

RE: purchase agreement. It may be a little late to revise the purchase agreement since everyone signed. Your in-laws should hire an attorney for the closing - the draft of the promissory note is particularly important in their case. I would be expecting that the buyer will sign a personal guarantee and the business assets will be collateral for the loan.

RE: liquor license. This is concerning. In the states I work in, it is illegal to "work off of" someone else's alcohol license. I strongly urge all of my clients to make a clean break at the closing. It is in both parties' best interest to do this properly. The buyer takes a great risk that they will be caught and never allowed to have their own license in the future. With some forethought and planning, you should be able to do the closing and the buyer obtain a new license nearly simultaneously. Unless your state laws are very different than what I am accustom to, I would post-pone the closing until the Feb/Mar time frame.

RE: operating the business in escrow. I don't know exactly what you mean by this, but if you mean the buyer will be allowed to operate the business before signing the closing documents ... NEVER DO THIS. The buyer should start operations on the day-of or day-after closing. I have only ever seen bad things come from allowing a buyer in the business early.
« Last Edit: December 27, 2018, 08:32:50 AM by Rufus.T.Firefly »

Car Jack

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Re: Sale of business (restaurant) escrow process and finicky seller
« Reply #3 on: December 27, 2018, 09:48:39 AM »
As Rufus mentions, the buyer can want to move the rate from 5.4% to zero percent.  Too late, the P & S has been signed.  Would the buyer entertain changes to the price to move it up to half a mil?

The buyer has put in $5k.  How long do they have to complete the agreed escrow?  If they miss that, I'd think they lose the $5k and it's time to find another buyer.

A real lawyer should ALWAYS first review any P & S, explain it and give advice on it.

My predictive thoughts are that this buyer won't complete.  So it's probably good to have the next potential buyer lined up when the excuses start.