We Do Deals In Many Industries. For Restaurants, Watch Out.
Few businesses contain as many hidden dangers and pitfalls as a restaurant. Setting aside for the moment the risks and concerns relating to franchising or construction which may be involved in a restaurant, lets consider simply the restaurant operations and take a closer look at those risks. If you are thinking about buying a restaurant business keep in mind the following.
Employment Law Violations
Restaurants are notorious violators of employment and labor laws, and these laws have been tightened up recently. You may often find illegal aliens working in the back, and discover that workers are misclassified as independent contractors, or that wage and hour laws are being ignored. Often times there are games being played regarding tips and tip pooling, or wrongful tip retention by management. Sexual harassment claims are a particular concern in this industry, where the average worker tends to be in the younger segment of the workforce. If you are buying a restaurant, it is crucial to have a contract which holds back a significant portion of the payment until you have operated the business for at least a year, to fund the seller's warranties and promises that no hanky panky of this sort is going on. Otherwise, you may find it impossible to profitably operate your new business without continuing to violate the law as did the previous owner.
Cash Business and IRS Underreporting of Income
Businesses with a significant cash component are normally found to be underreporting income to the IRS and State. They are breaking the law. If you buy a company which does a significant cash business, you should be wary of the financial statements and data provided to you. You may find that the figures don't agree with the seller's reported tax earnings. Again, restaurants are a constant source of tax evasion headaches for the unsuspecting buyer. Other taxes typically unpaid or underpaid include retail sales tax, liquor tax, and withholding taxes.
The Tyrrany of a Maitre 'D
You may be surprised to discover that the popular restaurant you bought is dependent on a particular host or other personality, who threatens to leave unless you pay him an exorbitant amount of pay. Or you may have a cook who has a similar power, especially in a sushi restaurant or other situation where the food preparer has great rapport with customers. Avoid these kinds of key-man problems and try to see them coming.
Coupons, Gift & Discount Cards.
Another issue which confronts the buyer of restaurants is the existence of undisclosed or under-disclosed coupons floating around in the hands of the general public, or prepaid gift cards, or enrollment in various discount card clubs. In many cases, the seller has issued prepaid cards, collected the prepayments, and then tries to sell the business to an unsuspecting buyer who must then provide the dining services without compensation. When conducting your due diligence on a restaurant purchase, look hard into these issues. You'll be glad you did.
If you are considering buying a restaurant in the Denver, Colorado area contact a Denver business lawyer at The Vasilco Law Group, P.C. for legal counsel and litigation representation.