7 Things to Consider When Purchasing a bar
For most aspiring bar owners looking to get into the bar business, whether they are looking to purchase a neighborhood bar, sports bar, wine bar, or gastropub, purchasing an established bar is the easiest, cheapest, and often smartest way to become a bar owner. Not only are you buying all of the used equipment you need at once, but you are also purchasing what is hopefully a successful bar concept in a great location and with a solid customer base. Plus, you should have some standards and procedures already in place, so you don’t have to build everything from scratch. However, there are a few key things you should always remember to investigate when looking at bars that are available for purchase.
First, a quick reminder. I am not an attorney or accountant. While the information here is good general information, everyone’s financial, tax, and legal considerations are different. Make sure to engage local, qualified professionals familiar with your circumstances to advise you on your purchase.
WHAT DO I NEED TO CONSIDER WHEN PURCHASING A BAR?
If you research purchasing a business, you will come across the term due diligence a lot, but it isn’t always well-defined. Oxford defines it as: “a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.” In simple terms, you need to know everything about what you are stepping into before you lay down significant money to purchase a business. Think about buying a car. You wouldn’t just read a few articles online and write a check for $45,000. You want to see the car, drive it and understand how it feels, check if the seats are comfortable, and know exactly what you are purchasing. If you are buying a bar, you are spending a lot more than $45,000, so you need to investigate even more.
CONSIDERATION 1: WHAT ARE YOU BUYING?
One of the first things you need to figure out when purchasing a bar is what are you buying. In general, there are two types of purchases of a business, purchasing the shares/stock of a company or purchasing the assets of a company.
When you purchase the shares/stock of a company, you are buying the existing corporate entity. That means that the licenses, contracts, debts, receivables, and everything related to the company are transferred to the new owner. This can be a benefit if you are in a jurisdiction that makes it difficult to transfer licenses, or an issue if you are buying a business with outstanding payroll or sales taxes.
An asset purchase is just that, you are purchasing the assets of the company, but not the company itself. This is the more common way that bars are sold. It avoids any issues with liabilities that the company still has, since those contracts, back taxes, or other issues are still with the old owner and their company not on your new company. However, this means that all licensure, contracts, and so on must be transferred or redone. You may get different contract rates than the prior owner had with suppliers, insurance companies, and other vendors.
While asset sales are seen as being safer, you need to work with your personal accountant and/or attorney in determining the proper way to buy the business you are looking into. There are pros and cons to either type of purchase. Make sure that if you purchase a business through a company stock sale you are doing in-depth reviews of all existing contracts, ensuring there are no outstanding tax liabilities, and that all compliance requirements are currently being met.
CONSIDERATION 2: THE BOOKS
When purchasing any business, especially a bar, you must understand the current state of the business. One of the best ways to understand what a bar is currently doing is to do a detailed analysis of their books. You need to review the financial statements to see if they are in line with industry averages, and if anything appears to be an outlier.
Keep in mind that with any small business purchase, the books are not going to be as clean and well organized as what you would see in an example in a textbook. They will always be a bit messy, and frequently there will be accounts – a bookkeeping term for categories in the chart of accounts which are what you see as line items on a financial statement – that seem to not make sense or where the numbers seem off.
One common reason why something may seem out of line with industry norms is that the owner is including some expenses that are directly related to the business, but not required for the operation of the business on the books. For example, maybe the owner has a truck that they use for getting items for the bar when they need to. If this truck is not included in the sale of the business, then the expenses related to the truck do not need to be considered when you review the financials. Another example could be the owner including travel to industry events or conferences. While industry events can be fun, attending them is generally not required for the business to operate. You need to adjust the books to only reflect the true, required operating expenses to get a better idea of the income.
Sometimes, when reviewing the financials of a bar that is for sale, the revenue can seem off. One great way to double-check the revenue figures, you are seeing in the books is to request bar POS system data, so you can see exactly what was rung in and merchant services statements since those will show you the exact volume of credit card transactions.
There is one other thing you should always do when evaluating the books for a potential bar purchase, have your advisors review them. Coaches, consultants, and accountants with bar industry experience often can see things in financial statements that may not immediately present themselves to someone with less experience reviewing them. Having looked at the books of thousands of companies over the years, I can tell you that experience makes any potential issues much easier to spot. So, make sure you have someone with a wealth of knowledge review the financials to see if there is anything off.
CONSIDERATION 3: BUSINESS LICENSES AND GOVERNMENT COMPLIANCE
You cannot operate a bar without the proper licenses and without complying with all relevant laws and regulations. Depending on where you are located these can include many different governmental and regulatory bodies, from the country level down to the city or even a local district. That means you need to know exactly what is required for your specific location.
One of the most important licensing requirements is that in most areas you will need a liquor license to sell alcoholic beverages. In the US these are regulated on a state-by-state basis, with different requirements, license types, and restrictions in each state. Some states regulate the issuance of liquor licenses at the state level but also require county and/or local approval of all licenses that are issued. This means that transferring a liquor license may require multiple approvals at multiple levels of government. You need to know the exact process for your specific location, and that you can transfer the existing bar’s liquor license without any anticipatable issues. You will also normally need a food service license from your local health department to be able to sell food to the public. Depending on your local laws you may require other business licenses as well.
When it comes to laws and regulations, you need to make sure that you are fully aware of all requirements for a bar or food service establishment and that the bar you are purchasing is currently in compliance. This could include requirements such as having a proper grease trap, maintaining a proper fire suppression system, or health code compliance with lighting. Many little details are regulated, and once you purchase a business, you are now the responsible party for fixing any issues that may exist. That is why it is key to know and understand all of the various compliance requirements and to ensure that the business you are purchasing currently meets those requirements.
One other note of caution. If you are purchasing a business through an asset sale, where a new corporate entity is taking over the assets and operations, you may have different compliance requirements than the prior bar owner. For instance, if a new law regarding grease traps was passed while the prior owner operated the business, they may have been grandfathered in and were not required to meet the new standards. However, a new business operating in the same location may be required to do so. It is important to work with a qualified local attorney on these sorts of issues. Each jurisdiction will treat these differently, and not knowing what may need to be updated for compliance reasons as part of a sale can lead to bad surprises. No one wants to purchase a business and then be told that they must shut down and spend tens of thousands of dollars on updating the facility and equipment to open the business back up.
CONSIDERATION 4: THE LANDLORD
Most bars have landlords. If you are lucky enough to purchase the building a bar is in, along with the business, you are one of the lucky few. But for everyone else, having a landlord is just part of the deal.
Your relationship with your landlord is one of the most important of all of your business relationships. How well the two of you get along can be a driving factor in your ability to update your facility, change your signage, or even have the hours that you want. You always want a landlord that you can have a good relationship with. I would avoid renting from someone who has a reputation for being difficult to deal with and whose current tenants are unhappy. You can always talk to other small business owners in the area to gauge what they think of your potential new landlord. Most business owners will be very direct in their thoughts.
Most business sales do not come along with a new fresh lease, but an assignment of the current lease. This means you are taking over whatever lease the current bar owner has with the same terms, conditions, and length that currently exist. You need to have your attorney review the lease and see if any unusual terms need to be re-negotiated before an assignment.
You also need to make sure that there is sufficient time remaining on the lease. It isn’t a good idea to purchase a business for hundreds of thousands of dollars and only have the rights to the space the business is in for a year or two. You will never be able to make back your initial investment before you potentially lose access to the space. While I am a huge fan of doing business on a handshake, you need contractional access to the space for at least eight to ten years to make sure that you have time to make your initial investment back. Even if you have a great landlord who says they want you in that business for decades, people sell properties and landlords change. Without the contractual right to the location for a longer period you cannot ensure that your business will be allowed to operate in that location.
On a side note, it is generally not smart, unless you are in an area where this is commonplace, to sign an initial lease term over five years. You want to limit your potential liability if things don’t go well. However, you need to make sure that you have contractional options to extend the lease. For instance, an initial three-year term, with four, three-year options would give you the rights to the space for 15 years, but limit your liability exposure to only three years at a time. Most landlords are going to want longer terms than three years, such as a five-year lease with two five-year options, but everything is negotiable. Your attorney should be able to help you in negotiating the best lease terms based on what is standard in your area.
CONSIDERATION 5: EQUIPMENT
When purchasing an existing bar, most of the liquidatable value of what you are buying is in bar equipment. This includes all of the appliances in your kitchen, refrigeration both in the back-of-house, your walk-in and reach-ins, and front-of-house, like your draft system and bottle coolers.
One good thing about most commercial bar equipment is that it lasts a long time. It is not uncommon in an older bar to have refrigeration units that are 30 or 40 years old and run great. However, those systems can be very expensive to replace. You cannot just take the current owner’s word that everything is in great shape. You need to have the critical and more expensive systems evaluated by a professional. If the current owner is using a company that regularly comes in and performs preventative maintenance on their equipment, they should be able to provide you with a statement from that company detailing the expected future usable life of that equipment. If not, you need to have your own expert come in and make an evaluation.
You also need to make sure that you have the electrical, plumbing, and HVAC inspected. Not only will this help you make sure you don’t have any surprise expenses, but it can also help in ensuring that everything is up to the current code. The extent to which you need these systems inspected will depend on your lease if you are not purchasing the building. Some leases will have the lessee responsible for all repairs and maintenance of HVAC systems, for example, but not responsible for replacement, others will have the lessee responsible for maintaining and replacing the system if there are issues or have the landlord fully responsible for all maintenance and replacement. You need to make sure that whatever your lease responsibilities are, you have inspected and confirmed the condition of what you are on the hook for taking care of.
CONSIDERATION 6: FURNITURE AND FIXTURES
You must evaluate the condition of all furniture and fixtures you are buying. Tables, chairs, bar tools, and the like all have a serviceable life. You need to get some idea of how long the items you are purchasing will be usable.
The single biggest thing to evaluate when it comes to bar furniture is the bar top itself. You need to make sure that the underlying structure is sound. Many bars are constructed out of wood. This means that they are prone to rotting over time since bars tend to come into contact with a lot of moisture. Depending on the material of the bar top itself and how it is sealed, there could also be structural and rotting issues in the top itself. Replacing physical bars tends to be expensive, so you need to know exactly what you are buying and any issues that come with it.
When it comes to seating, you need to check that the seats, if they are upholstered, are not torn or worn to the point that they need replacement. Many bars use relatively standard seating, and you can buy a seat for a chair relatively inexpensively and replace it. But if you are purchasing a successful bar with more unique furniture what was a fifty-dollar, one-hour fix for a common chair or bar stool, could be a lengthy custom carpentry job.
Always carefully inspect banquets or booths to make sure that they are structurally sound. If you notice issues with seats sagging, or booths generally being wobbly, you may need to work with a local carpenter to see if it will be easier and cheaper to replace those booths and banquets or to fix them.
When it comes to tables, you need to look at both the tops and the bases of each table. Just like with seating, most restaurant tables are relatively standard, so finding replacement tops or bases shouldn’t be too difficult. But, if you have something unique, you need to make sure that your tables are structurally sound and in good condition. The more unique something is, generally the harder and more expensive it will be to fix or replace.
CONSIDERATION 7: STAFF
Most people purchasing a bar are planning to continue operations as they are with some tweaks, rather than changing the bar concept. That normally means that maintaining the current staff in their current positions is important to the sale of the business.
You need to work with the current bar owner to see who they expect to stay with the business after the sale and who they expect to leave. It is not uncommon for employees to leave a bar when it is sold. This is especially true when the seller owns multiple bars, and the employee is going to transfer to another establishment that their current boss operates.
Losing servers is generally not a hard hurdle to overcome, however losing key employees like lead bartenders, the bar, kitchen, or general manager can be very difficult. The last thing you want to do is purchase a bar and then walk in, only to find out that the management staff no longer wishes to work there.
The current owner should be able to give you a decent idea of who is going to stay. It is common for employees of the bar to not be made aware of an upcoming sale until close to the closing, so what you are told can change over time. You just need to get all of the information that you can to plan as much as possible for any staffing needs you will have in the first week or two of ownership.
There are a few instances where you may not want to retain staff or need to bring additional staff in with you when you take over the business. These are most common around management. It all depends on if you plan to operate the bar as the manager or not. The goal of every owner should be to free themselves up to work in and not on the bar, but especially in the early stages working as the general manager can be helpful to gain an understanding of the business and work on perfecting the standards and procedures.
If you intend to be the day-to-day manager, and there is already a general manager in place, you may not want to employ that manager after the sale. Conversely, if you intend to have a general manager, and the current owner is filling that role, you may need to have a manager ready to go as soon as you take over. This means that you will need to find, interview, and work towards hiring a manager while you are doing your due diligence and investigating the purchase.
PUTTING IT ALL TOGETHER
Anytime you are purchasing a business there is a lot to consider, far more than can be included in one article. It is important to have qualified advisors who can assist you in identifying potential pitfalls and who know the common problems that bar buyers run into. You have to check every facet of the bar business you are buying. The last thing you want is to purchase a business only to be hit with multiple costly and unexpected issues. You also need a business plan to help guide your operations after the sale.
If you are looking for additional information on what to look for when you buy a bar, or guidance related to a purchase you are currently investigating, sign up for a free 30-minute strategy session with The Bar Business Coach to gain more insights and see how we can assist you with your business purchase and future operations.
