The 2025 Comprehensive Guide for Buyers and Sellers Evaluating the Acquisition or Sale of a Food and Beverage Enterprise

Despite the challenges faced by the food and beverage industry, there remain numerous opportunities for success.

Food and beverage operators with substantial capitalization, a distinctive concept that offers value for money, and a strong location with favorable lease terms can achieve significant success.

BUYERS:

1) Analyze the sales trend of the business over the past three years. In some instances, you may observe a decline in sales in 2024 compared to 2023 due to the reduction in consumers’ disposable income in most markets. If this trend is evident, consider evaluating the purchase as an asset sale, where you introduce your own concept to the location if it is strong.

2) Conduct thorough market research to identify potential new competitors entering the area. Select a location that is well-established and has minimal chances of attracting new competition that could potentially cannibalize your sales.

3) Analyze the demographics of the location to determine if the disposable income of the local population aligns with the menu pricing and selection you intend to offer. Additionally, assess the availability of the labor market in the area. In certain regions of the state, there may be a shortage of labor.

4) Utilize a Bulk Sales Escrow to facilitate the sale. In California, buyers are subject to successorship tax liability, which applies to any taxes the seller owes for state sales tax (CDTFA), franchise tax (FTB), and employment tax (EDD). By employing a Bulk Sales Escrow, the buyer will obtain tax clearances from the relevant agencies.

5. Negotiate a Favorable Lease:

Ensure you secure a lease with a minimum 5-year base term and a 5-year option to provide sufficient time for investment amortization and return generation. To avoid overpaying market rent and ensure reasonable terms, consult a restaurant broker who can advise on the lease’s conditions. Seek legal counsel from an attorney to address any potential legal aspects.

6. Understand Due Diligence Processes:

During the purchasing stage, thoroughly review financial books and records, conduct physical inspections, and analyze the lease. Transfer relevant licenses and obtain franchise approval, if applicable. Seek financing options to complete the due diligence process. Collaborating with a professional restaurant broker can assist in ensuring the business is priced appropriately.

SELLERS:

1. Retirement Planning:

If you plan to retire after the sale and rely on the sales proceeds to significantly contribute to your retirement funds, have your accountant thoroughly analyze the after-tax sales proceeds before listing your business.

2. Lease Assignment:

If your sales transaction includes a lease assignment and you personally guarantee the lease, ensure that your personal guarantee is removed promptly after the sale or shortly thereafter. In California, sellers’ lease liability in a lease assignment persists unless the lease expires or a clause terminates the seller’s liability at a specific point.

3. Tax Loss Management:

If you have accumulated tax losses in previous years and your business ownership is a legal entity (e.g., corporation, limited liability company), refrain from terminating the entity after the sale until you have exhausted the tax loss carryforward to offset future tax liabilities.

4) If you are providing seller financing, ensure that the buyer possesses sufficient financial strength and substantial equity in their real estate. In the event of a loan default and subsequent legal action against the buyer, you will have a stronger chance of recovering your damages.

5) Collaborate with a seasoned restaurant broker to ensure accurate pricing of the business. Avoid either underpricing or significantly overpricing the establishment. A slight margin of flexibility is necessary to accommodate negotiation when required.

6) Be cognizant that the current market conditions, similar to those in 2024, may persist into 2025. This is primarily attributed to reduced profit margins for operators due to increased operating costs over the past few years. The impact has exceeded the ability of operators to raise menu prices due to the decline in consumers’ disposable income.

Any inquiries regarding the aforementioned topics or any other questions pertaining to the acquisition or disposition of food and beverage establishments, please do not hesitate to contact me at 949-237-2824 or michael@restaurantrealty.com