Expert: Jim Avancena, CPM - 3/18/2010

Question
I was thinking about leasing a bar business. The owner was asking for $37,000.00 up front and $3,000.00 a month for rent. Is this a normal way of leasing a business. Any info that you can tell me would be of great help

Answer
Nancy-

I am not involved in leasing or selling "businesses", although there are specialists in that kind of commerce called business brokers.

I am definitely not the person that can help you the most with this purchase, but here is what I can tell you about your endeavor.  It will NOT be inclusive of the multitude of matters you should be aware of in your purchase.

First discover the rent being paid by the bar owner according to the lease, and make sure the rent has been paid current.  Then ask other merchants in the area what kind of rental rates that they are paying.  If $3,000 is too much in that market area, suggest a more reasonable rate.  If you don't think the bar will earn enough revenue to make the bar business profitable, don't buy it.    

Be certain that the actual original lease document the first owner is turning over to you allows the owner to transfer the lease to you as a "assignee", "subleasee" or in the role of a new majority entity of a corporation that may own the business or in the role of someone buying a majority partnership interest in the business.    The lease should describe whatever rights the original owner has to transfer his rights and/or also detail the rights that the owner does NOT have regarding a transfer.  Such lease language can be quite complex, and it may be necessary to have an attorney interpret the lease text for you.  

If a formal transfer of the lease is required according to the property owner and the original business owner make certain that you get a fully executed original copy of the sublease or assignment agreement that is fully signed by all parties - especially the property owner (i.e. the landlord).  You must review many of the terms in the details of the sublease or assignment carefully, and it would be much wiser to have a commercial leasing attorney review the document BEF0RE you sign it.  Don't allow anyone to rush you past the detailed review of the document. I am sorry, but I could write a book to you trying to cover all the details to be watchful of in the lease and this transaction.

There should be a contract involved in this transaction for you to take control of the business and all of the equipment, fixtures, liquor inventory, furniture, etc.  This will spell out in extensive detail what you are getting from the initial owner for $37,000.  If the owner/seller has said he will assist you in getting started for the first month after you purchase the operation, be certain that the specifics of his assistance are spelled out; it should address things like how many days a week the previous owner will be at the bar to help you get started, what hours of the day he will be in the bar, the kinds of things he will help you with(will he be a bartender until you know all the bar details, the patrons drinks, etc.?) and most of all, what rights do you have if the seller doesn't have some of the liquor you are listed as to be getting from him, or if he doesn't help your as the contract states.  For everything the lease or contract details that you are to get for your money - and make sure everything is in writing - be certain that the agreement describes exactly what happens if the former owner of the bar, or the property owner don't do what the agreements promise.

Have your attorney advise you if there are any liabilities of the initial bar owner that you will be responsible for and do whatever you can to eliminate those liabilities formally, in writing, in the appropriate documents.  For example, does the bar seller/owner own the ice machine that is sitting in the bar now?  Or did the landlord formally own the ice machine because it was left behind by a previous bar or restaurant owner, and the landlord let the bar seller/owner use the machine as long as he maintained the machine in good operation until his lease expires.  If the compressor in that ice machine is worn out and must be repaired at the cost of $800 one day after you purchase the business, are you liable for getting the ice machine repaired?  Or is the original bar owner liable to pay the $800 repair cost because the ice machine was transferred with a latent defect?  There are many of those kinds of details that you must be cautious of getting caught "holding the bag".  Business brokers that sell businesses are very skilled at advising you in such matters.  

You should be certain to do a background and credit check of the owner/seller and set up the contract and lease documents based on what you learn.  It may be that you should arrange a large security deposit be paid to you by the seller that you hold for three to thirty-six months to assure his performance on the sale.

I suggest that you retain either a business broker or attorney to advise in this effort. Even though you may know the bar business well, a very high percentage of bars fail.  I once went to a bar in St. Barths owned by a famous music performer and decided I had to have a bar in the tropics also.  I know the attraction.  It is always best to have an expert in these matters assisting you.

Good luck,

-Jim