In a long mediation/arbitration career I periodically encounter disputes between the seller and purchaser of a restaurant. These disputes are especially difficult for several reasons and usually only involve the sale of the business and not the real estate where the restaurant is located. Chief among these problems is that litigation costs piled on to an already non-performing purchase and sale creates an additional obstacle to a reasonable settlement. How do sellers and buyers reach such an impasse?
Most lawsuits involving restaurant sales feature a seller suing a buyer for non -performance of a purchase and sale agreement that is usually an installment agreement in which the purchaser has agreed to make periodic payments to the seller over an agreed period after having paid a down payment at closing. It is rare for a restaurant buyer to secure bank or other financing to cash out the seller. Banks know that running a restaurant is very difficult and that many borrowers end up defaulting on their purchase loans.
Sellers financing sales of their restaurants sometimes fail to obtain personal guarantees from the purchaser, file security interests in inventory, fixtures and equipment or otherwise take effective steps to secure the buyer’s performance. When these missteps occur, it is often because there isn’t a strong market for a particular restaurant or the seller is in a hurry to sell.
In addition, some sellers don’t want to incur the expense of hiring an attorney to structure the sales transaction, especially if the business has been lagging at time of sale.
The penalty for a restaurant seller’s failure to secure a buyer’s performance upon default is usually harsh. Either the seller must take the business back, usually in worse condition than when initially sold, continue to litigate and hope that they can collect a judgment, or close the business. If the buyer is a corporation and there are no shareholder personal guarantees, the buyer will often go bankrupt, leaving the seller in possession of the business anyway but with less money than when litigation commenced.
For sellers to avoid the disastrous scenarios described above, hiring a lawyer experienced in restaurant sales to properly structure the deal makes sense. A properly structured transaction that includes well drafted security agreements for real or personal property and one or more personal guarantees or other security from the buyer makes sense for the seller. Such security for the buyer’s performance may also motivate the buyer to perform. If a prospective buyer balks at some or all of the seller’s requirements to secure buyer performance, the seller should probably pass on the deal.
Selling a Restaurant? What Could Go
Wrong?
by Gregg Bertram M.A., J.D., LL.M.
President, Pacific ADR Consulting LLC