Home  >  Blog Posts & Articles  >  Buying A Bar - Due Diligence Issues & Tips

Buying A Bar - Due Diligence Issues & Tips

Buying A Bar Due Diligence Issues And TipsA 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?"

I reached out to numerous resources in California - business brokers, agents, consultants, and other resources to answer these questions. If you have a question relating to buying or selling a California business - feel free to email or phone me. My information is at the bottom of this blog post/article.


Here are some great answers, suggestions, and items to consider:

The biggest problem you will encounter in your active 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.

------------------------------------

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.

------------------------------------

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.

------------------------------------

Peter Siegel, MBAAbout: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ CA businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, small business owners/sellers, business brokers, agents, investors, and advisors). Reach him direct at 866-270-6278.


Categories: BizBen Blog Contributor, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business



  Helpful Resources To Assist In Selling And Buying California Businesses

Matt Sadati, Business Broker, SF Bay Area, Northern CA

I have Engineering and Law, JD degree, with over 30 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 33 businesses each having one to 30 branches.

Harry Sidhu, CBB, Broker - SF Bay Area, Central Valley, SAC Region

Assisting both sellers and buyers of businesses - dealing mainly with Liquor Stores, Grocery Markets, Gas Stations, Smoke Shops, Restaurant Related, Retail Related, Service Related. Serving SF Bay Area, North Bay, Sacramento area. Call Harry Sidhu, CBB for assistance at 510-366-6130.

Jack Oh, Business Broker - LA, Orange Counties

Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989.

Ryan Clark, Business Broker, Southern California

The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups. Phone Ryan at 310-652-8353.

Rick Carlson, Business Broker - Southern California

You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939.

Jeff Back, Broker: Restaurant Specialist - SF Bay Area

J. Back & Associates Restaurant Real Estate was founded in 1988 as the first bay area real estate company to specialize exclusively in restaurant real estate. I am the past President of Charley Browns restaurants and have been involved in the restaurant business for over 35 years. 925-736-8200.

Lee Petsas, Business Broker - Orange, San Diego Counties, Inland Empire

UBI Business Brokers has been successfully selling businesses in Southern California since 1965. Our Agents have over 100 years of experience in selling small to medium size businesses throughout Southern California. We service Orange County, Inland Empire, San Diego. Phone Lee at 714-363-0440.

Michael Davidson, Business Broker - Southern California

Los Angeles Business Broker providing M&A quality services for Small Business Owners. We leverage our technology and expertise to Simplify & Expedite the Business Sales Process. Matching the right buyer with the right business is how we define success.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews

Buying A Bar - 4 Tips Worth Reading About Before You Buy Your Bar Or Lounge

Four factors to consider when buying a bar. Peter Siegel, MBA (BizBen ProBuy, ProSell Programs) with BizBen discusses: The advantages and disadvantages of a bar that serves food as well as liquor. Staffing, inventory control and owner involvement as they relate to a good business are summarized.

Don't Buy A Restaurant Without Checking The Competition - Key Buying Tips

Looking to buy a restaurant business? Check out these tips first to avoid getting blindsided when you buy any type of small or mid-sized California restaurant. Peter Siegel, MBA (BizBen's ProBuy & ProSell Programs & Restaurant Purchase Financing Expert) at 866-270-6278 covers this topic for buyers.

Buying A Restaurant Can Be Challenging: 3 Key Tips For Restaurant Buyers

People always need to eat; there should be plenty of business. Some buyers think there is prestige to owning a popular eating establishment. But it isn't an easy purchase. Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program at 866-270-6278) reviews this topic.

Financing Advice: Showing Add Backs To Get Business Acquisition Financing

When seeking business acquisition financing, it helps to review a seller's addbacks as a source of funding to service the debt service. But explain them correctly. Peter Siegel, MBA business acquisition financing expert and advisor at 866-270-6278 covers this topic on financing a business purchase.

Thinking Of Selling My Business: What Factors Create Value And Drive Price?

There are a lot of misconceptions about what enhances the value of a business. The following factors in this Discussion Post on BizBen are aspects of a business that really drives its value and pricing. Business owners thinking of selling should check these out these factors before selling.

Buyer Beware: Does A Company's Culture Effect The Sale Of A Small Business?

When purchasing a small to mid-szied CA business, there are a many items to evaluate. One area that is often overlooked is the business's office culture. Peter Siegel, MBA with BizBen discusses with business buyers the importance of understanding how the business "feels" on a day-to-day basis.

The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns / documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell, Financing Expert) explains.

Before Buying A California Business, 10 Questions You Should Ask Yourself

Before buying a business, all serious business buyers should ask themselves some key questions about possible buying a small California business, franchise, or opportunity - from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 866-270-6278.

See All News, Tips And Events


Business Purchase Financing SBA Loans
Escrow Services From Helen Yoo New Century Escrow
Southern California Legal Services For Buyers And Sellers
Michael Brewer, ABC License Consultant


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million



BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2017, All Rights Reserved

                       
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Buying A Bar - 4 Tips Worth Reading About Before You Buy Your Bar Or Lou...
Don't Buy A Restaurant Without Checking The Competition - Key Buying Tip...