Prepare a Letter of Intent or Conditional Offer to Purchase
You must decide whether to structure the deal as an asset sale or a share sale, each with its tax implications and legal considerations.
Additionally, you should think about incorporating seller financing options, a comprehensive training and transition agreement, and other critical terms that will protect your interests and facilitate a smooth transfer of ownership.
Business Valuation Using the Income Approach
The most common method used to determine a fair sale price for a business is calculating a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple of SDE (seller discretionary earnings), which is simply EBITDA plus a manager’s wage (normalized to market).
Both are measures of a company’s ability to generate operating earnings for the owner.
The multiples vary slightly by industry and are typically in the range of three to four times EBITDA for a small- to medium-sized business or two to three times SDE for transactions under $650,000.
Asset Sale vs Share Sale
When considering the purchase of a restaurant, the distinction between an asset sale and a share sale is pivotal in shaping the transaction's structure and implications.
Understanding these differences can help you make an informed decision.
| Consideration |
Asset Sale |
Share Sale |
| Assets |
Specific assets purchased |
All assets and liabilities |
| Tax Benefits |
Step-up in basis for depreciation |
Less control over tax cost |
| Liabilities |
Buyer avoids historical liabilities |
Buyer inherits all liabilities |
| Transition |
More complex due to contract renegotiation |
Smoother transition with existing contracts |
| Due Diligence |
Focus on specific assets |
Comprehensive review of entire company |
In an asset sale, you may benefit from depreciation benefits on newly acquired assets, while a share sale offers a smoother transition by maintaining existing contracts.
However, a share sale also means inheriting any liabilities, making thorough due diligence crucial to assess risks.
Business Brokers provide invaluable expertise in business valuation, which can enhance your understanding of the liquor store's value for informed judgments.
Seller Financing
Some Seller financing can be advantageous, allowing you to reduce the initial equity required to pay for the business and supplement traditional bank financing.
This approach can make acquiring a restaurant more accessible if you do not have the immediate full capital investment.
When negotiating seller financing, ensure that the repayment terms, interest rates, and collateral are clearly defined in your broker's letter of intent or conditional offer to purchase.
Engage a business transaction lawyer to draft or review these documents, ensuring they appropriately address all legal aspects of the vendor loan.
Training & Transition Agreement
Crafting a comprehensive Training & Transition Agreement is critical when buying a restaurant, as it ensures a smooth transition and equips you with the necessary operational knowledge to run the business successfully.
You will need to specify the training duration, typically ranging from a few weeks to several months, and outline the seller's responsibilities during this period.
Clearly define both parties' responsibilities to avoid misunderstandings, and consult a business broker or a lawyer to ensure the agreement adheres to local laws and protects both your interests and the seller's.
