A BizBen blog reader emailed me this question:
"I am starting due diligence this week on buying a cocktail bar With a 48 license what should I be asking for, thinking about, watching out for? Is there a list of items I should ask for?"
Here are some great answers, suggestions, things to think about from some business brokers & advisors:
From James Kwon, Business Broker at America Realty:
1. ABC license transfer Contingency: Buyer must put this in purcashing offer. No matter how good seller and buyer, no matter how good landlord who transfer the lease. ABC is 3rd party who get involved - ABC license related business transaction. MUST PUT ABC LICENSE TRANSFER CONTINGENCY - MUST.
2. ABC license condition time restriction, outside patio restriction ( if any appicable ) any violation or citation or any suspension information and when and why. Need confirm ABC office
3. C.U.P. Condition - if any applicable C.U.P. = Conditional Use Permit. Every each city in California, recently city increasing numbers of Conditional Use Permit. which city would like to control more licensees in their city boundry, increase more city permit incomes, forced decreasing criminal violations. C.U.P. control by city Planning Department. Buyer have to stop by city Planning Department to check C.U.P. and expiration date, renewal fee, etc.
4. Sales revenue check point i.e. vary. Here's the basics: P.O.S. System or cash register tape verification. All Alcohoric Beverage must purchase from wholesalers and distributors, so retailer have to keep purchasing invoices 3 years and wholesaler must keep invoices 7 years. Buyer must request seller for purchasing invoices for Alcoholic Beverages, supplies, food, and everything.
5. Entertainment Permit. Controled by city Police Department/ Buyer must confirm and check at police dept. Right before close of escrow after 30 days posting period is completed, then go to police department because at the same time ABC Sacramento should be ready to issue new license.
6. Other city business licenses.
7. Health Department/ Health Permit verification. As long as escrow successfuly closed then county health department will be come to business location for new health permit issue purpose.
8. Lease Transfer Contingency. Taking over existing lease and add on option years or new lease negotiation - whatsoever this item must be CONTINGENCY Same as ABC License Transfer contingency, because it is not belong to seller and buyer's agreement only control and accepted by landlord LEASE TRANSFER MUST BE A CONTINGENCY BECAUSE 3 RD PARTY GET INVOLVED
I do believe this is pretty much of everything buyer's MUST
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From Lee Petsas, President & Business Broker at UBI Business Brokers:
The biggest problem you will encounter in your due diligence is verification of sales. The bar business is one of the few businesses left that still takes in most, if not all its revenue in cash (especially 48’s). Therefore many of these owners shall we say “don’t keep good records”. How do you verify the income?
Income Verification: First of course ask for tax returns and sales tax returns. You will get some resistance here and if you get them you probably won’t find satisfaction in the numbers reported. If your seller does report a reasonable amount get cancelled checks for the Sales Tax Returns. Do they have a point of sale system? If so get sales reports from there.
Early on in the process ask the seller to contact the liquor suppliers. You will find the beer sales are close to 50% of the total sales. Depending where you are located, there will be about 3 major beer suppliers, and 2 major hard liquor suppliers. They will supply 95% of the liquor to the bar. Have them all prepare a sales report for what they supplied that location. The report should come from each distributor and generally will have this year to date and all of last year’s purchases. The total dollar amount of liquor purchased will translate into an approximate sales volume. A very ball park number will be to take the total amount of liquor purchased and multiply it by 4 to get your sales. This multiplier will change according to the price the bar charges for various drinks. Does this location do a lot of happy hour specials, low prices, or is it a Night Club that gets high prices for their drinks. The multiplier will vary accordingly (from 3-5). Understand this bars cost of goods to use the proper multiplier.
Net Income: After being confident in the gross income, starting deducting business expenses to arrive at net income.
ABC License Conditions: It is very important to get a copy of the conditions up front. Don’t be surprised later in the process. See if there are any problems with the operating conditions. Some conditions can severely restrict the bar and therefore lower the value of the business. The existing conditions will follow to you when you buy the bar.
Game Vending Income: It’s all cash. Almost impossible to verify. The average bars gaming income will fall between 5 – 10% of the total gross sales.
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From Willard Michlin, Due Diligence Consultant & Service:
There are 12 specific actions to take when doing due diligence.
The key information to get when looking at a bar is to get the history of actual gross sales from this month back at least 1.5 years. The reported income on financial statements is unlikely to be true. The way to prove what the actual sales are is to pull the history out of the computerized point of sale cash register.
If this was mysteriously deleted do not buy the business, because they do not want you to see the terrible truth. The backup method is to physically review the printed daily tapes that are printed from the cash register, daily.
Under no curcumstances do you accept anything the seller tells you that can not be verified no matter how logical it sounds. It is very common for a seller, when selling the business, to stop taking cash out fo the business in order for the reported figures to look as good as possible to a buyer. Of course they still tell you there is cash.
Also make sure that the rent is not too high, based on the current monthly sales. Many businesses could afford the high rent when they had high sales, but when income drops the rent doesn't. Rent can kill you and closes a lot of businesses.
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From Joe Sandbank, Attorney Represention For Buyers, Sellers, & Brokers:
You should thoroughly investigate all aspects of the business as part of your due diligence investigation. When I work with business buyers, I work with the buyer and the buyer's financial advisor to prepare a due diligence list and questionnaire. The due diligence list includes all documents that the seller will provide as part of the investigation; the questionnaire asks the seller all questions that the buyer would like answered in writing.
One critical aspect of due diligence is the financial "book check", where a CPA or bookkeeper with experience in conducting financial due diligence verifies the financial statements against source documents (receipts, bank statements, general ledger, etc.).
In additional to this financial "book check", due diligence should include an investigation of the business assets, liabilities, contracts, employee records and history, organization structure, employee responsibilities, regulatory history (in your case, the business's past history with ABC would be important), customer and vendor relations, and computer systems.
Your due diligence period is not a time for shortcuts or blind faith in the seller's representations. Due diligence is your final opportunity to determine whether or not the proposed purchase is really in your best interest. Many deals fall apart during due diligence because the buyer discovers something that was misrepresented in, or omitted from, marketing materials prepared by the seller or seller's broker.
A healthy level of suspicion is entirely appropriate during this period, and I strongly recommend that you consider hiring the appropriate professionals to assist you with your investigation."
Posted on June 5, 2010 | 
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