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Texas Restaurant Law

The Single Biggest Mistake Made When Selling A Restaurant

Posted in Acquisitions, Contracts, Liability, Litigation, Negotiation

Now that we’re all stuffed and overweight after Thanksgiving, I thought that I would mention another type of over-doing it: your representations to a potential buyer when you decide to sell a restaurant. These representations are critical to the success of a sale, both before negotiations begin and after you close on the sale. With that in mind, let’s quickly analyze how restaurant owners get themselves in trouble and how to avoid these issues.

Here’s The Problem

After you have worked and slaved to make your restaurant great, sometimes for decades, it’s only natural that you want to proclaim to the world how great your restaurant is. It may not be like your children, but this restaurant may have helped to feed and clothe those children. Thus, it’s understandable that you think very highly of it when it’s time to sell.

Couple that with the fact that the better you make your restaurant sound, the higher someone will be willing to pay for it. While understandable, you, as the restaurant owner/operator, must avoid the temptation of overselling your restaurant. Here’s why.

I tell many clients that the key issues in any restaurant purchase agreement are the representations and warranties. That may sound counter-intuitive. After all, isn’t the key issue the purchase price along with when the buyer will pay? The answer is yes, but the buyer may be able to claw back that great purchase price if they can allege that there were any improprieties in the disclosures or representations made when they bought the restaurant. Even if there is no written agreement (and arguably it applies even more without such an agreement), claims that the seller lied or misrepresented the status of the restaurant can completely unravel any restaurant sale.

The Fix: Strategies For Avoiding Claims Of False Or Negligent Misrepresentations

There’s no perfect formula for avoiding claims by the buyer that a seller overstated the value of a restaurant in a sale. However, by following these strategies, you can give yourself every chance of avoiding such claims.

  • Have A Written Purchase Agreement – This may seem like common sense. I hope it does. However, I constantly receive requests to defend sellers against claims of fraud when the parties chose not to use a written agreement. This becomes a very costly and time-consuming dispute without a written agreement. Therefore, if you’re selling, do yourself a favor and spend a few extra dollars to protect yourself with a properly drafted purchase agreement.
  • Negotiate A Waiver Of Fraud In The Purchase Agreement – Significant issues have recently brought the terms of waivers into the forefront of legal claims. These days, it’s not just enough to have a purchase agreement – you need it drafted by a professional who is up to speed on the recent changes in Texas on the law of waiver. You can obtain a waiver of fraud by the buyer, but it must contain certain language for such a waiver to be valid.
  • Ensure That All Documents Delivered To A Buyer Are 100% Accurate – Many owners believe that they can throw out generalizations in their initial negotiations, and that any errors can be resolved later. This is not true. Before you say a single word to the buyer, you need to double check that you are being completely accurate in every conversation and phone call, and especially in any email or document. This applies to your representatives as well, who may be considered to be your agents. If they are, they can bind you by what they say as well, and if your agents are not accurate, you may suffer. Therefore, consider that everything you or your agents say to a buyer may indeed be held against you later.
  • Use An Accountant And A Lawyer, And Direct All Representations Through Them – This may seem self-serving, it’s important for you to have qualified legal and accounting representation when dealing with a buyer. Each word and number is very important to a buyer, and for that reason, it should be important to you as well.

With the above in mind, don’t let little slips spoil an otherwise fantastic sale.

Have you sold a restaurant? Were the representations and warranties a big issue? Have any war stories? Please share!

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.