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Texas Restaurant Law

5 Reasons You Think You Don’t Need a Lawyer to Buy a Restaurant

Posted in Alcohol, Contracts, Corporate Entity, Franchises

Bad on head

The truth of the matter is that you do not NEED a lawyer when you buy a restaurant or any business. Is it a good idea? Could it save you money in the long run? I believe that the answer to these questions is most certainly YES, but I’ll let you be the judge. Accordingly, let’s explore the 5 Reasons You Think You Don’t Need a Lawyer to Buy a Restaurant.

REASON 5:  You Already Have a Corporate Entity

Why does it matter? The formation of an entity matters because that entity (like a limited liability company or corporation) is all that stands between you and the jackals that will try to sue you once you start your restaurant. Why will people sue you? They will sue you for everything from letting them drink too much at your restaurant to the salt content of your food (just ask Denny’s, who was recently sued for exactly that). If you do not have a proper entity in place, these lawsuit-happy individuals could reach your personal assets each time they want to sue you.

If you already have a corporate entity, it is possible that you truly do not need a lawyer to form your entity. As we all know, there are a variety of web sites that charge very little for forming your LLC or corporation. Still, there are risks. The first risk is that the entity was not properly formed. After all, you get what you pay for. Further, each state has very specific state laws about what is required to form and how to go about forming these types of corporate entities. If state law is not followed, you may have paid, albeit less, for an entity that was not really formed.

Another risk is that the entity is not the right fit for you. Some entities come with higher tax rates. Some are taxed at the state level and others are not. Some affect your personal income, and others do not. Some you can leave gains in the entity to accumulate, some do not. If you use an on-line resource, the entity that the resource steers you to may or may not be the best fit for you, and as a result, you may end up paying more taxes or be forced into other legal situations you could have avoided.

REASON 4: You Already Have a “Deal” with the Seller, and You Trust Him (With Your Life)

At some point in a transaction, the parties must agree on the key points, like price, time for payment, and what the buyer is getting for his or her money. Honestly, you do not need a lawyer for some of these issues. After all, a lawyer cannot ethically inform you whether the price is right for your restaurant, unless they have some special knowledge outside of being a lawyer that makes them an expert on such a business point. Many people buy restaurants daily with only this information in place.

However,  there are quite a few other considerations. For instance, what if someone comes along later, after you purchase the restaurant, and wants to sue you for something that the last owner did? What happens if the restaurant you thought you were buying actually has bad equipment that you could not have discovered until after the fact? And these are just some of the examples of the risks you run. Therefore, unless the deal is properly structured through an adequate Asset or Equity Purchase Agreement, you run the risk that you’ll have paid the seller your hard earned money and they could have left you with a mess to clean up.

REASON 3:  There Is No Real Estate Associated with the Restaurant

Often times in a restaurant acquisition, the parties must transfer real estate, either in the form of a lease or through acquiring the land beneath the restaurant. In fact, I personally cannot fathom a restaurant transaction that does not include some portion of real estate. However, if you negotiate with the landlord on a lease outside of the restaurant transaction, for example, and you want to acquire the personal assets of the restaurant separately, then it could be argued that you do not need a lawyer for the restaurant acquisition.Of course, this is unlikely because you normally would not want the restaurant without being sure that the real estate was part of the deal.

Also, if you negotiate the real estate portion without a lawyer, there are risks. For instance, are you really getting the lease or ownership rights to the property that you think you are buying? Is the property permitted to allow restaurant operations? Can the landlord kick you out?

These are all possible risks, but if you can be comfortable knowing that they exist without checking them out, then a lawyer is unnecessary.

REASON 2: You Don’t Need a Liquor License

If you do not need a liquor license, then that is one less issue to be addressed with a lawyer. However, if you do need a liquor license, you should consider hiring either a permitting service (like Joe LaBarba & Co., here in Texas) or an attorney. Often, a permitting service is all that is necessary, and a lawyer is not needed. This can save valuable time and money.

AND THE NUMBER 1 REASON YOU DON’T NEED A LAWYER: No One Could Possibly Have a Claim Against the Restaurant

Why would anyone have a claim against the restaurant that you want to buy?  Unfortunately, there are many, many types of claims against restaurants, and it is important to know what they are before you buy. These types of claims include local, state and federal tax claims (for example real estate and income taxes), premises liability (like slip and falls), employment claims (like back wages that are owed or vacations that have not been credited), unpaid debts, unpaid rent, and mechanics liens (for work done on the premises, but not paid).

The claims mentioned above are just a few of the many potentially hidden liabilities that a restaurant could have. Without the proper “due diligence” or research on both the restaurant and the owners, you could be buying the restaurant subject to these liabilities. This means that you could still owe these amounts after you buy the restaurant. Finding out about these hidden dangers is one of the the most important functions of a lawyer when you are buying a restaurant.

Again, however, you may be able to find these liabilities on your own. After all, most of them are public information, but lawyers who buy restaurants are skilled at not only finding these liabilities, but also about knowing which liabilities to look for and which are really important. Nonetheless, if you are willing to take these risks, then you may not need a lawyer.

Conclusion

Despite the fact that much of this article has been devoted to showing you the risks associated with not hiring a lawyer, I am serious that there are situations where hiring a lawyer makes little sense. Accordingly, I wanted to provide you with the knowledge of some of the risks so that you could make an informed decision about when you really need a lawyer and when you do not. Hopefully, I’ve done that, but I welcome any questions or comments.

I should also mention that even if you do hire a lawyer, it is not insurance. There may still be risks that are impossible for an attorney to discover in his or her research on your prospective restaurant purchase. However, hiring a lawyer, especially one that deals in restaurants, will help most people find the majority (and hopefully the really big) risks in a restaurant acquisition.

As always, have a wonderful day!