Selling a Restaurant or Bar: Liquor Licenses, Leases, and What Buyers Pay For

Two ways a restaurant gets valued

On earnings. A restaurant with consistent, documented seller's discretionary earnings is valued like any other business, at a multiple of those earnings. The multiples are lower than in most industries, historically around 1.5 to 2.5 times SDE, because margins are thin, competition is high, and failure rates are well known. A restaurant producing $250,000 in documented SDE might be worth $400,000 to $600,000 on earnings.

On assets. A restaurant with weak or undocumented earnings, or one that is losing money, is valued on what a buyer would pay for the location, the build-out, the furniture, fixtures, and equipment, and the licenses, as a place to open their own concept. This is sometimes called an asset sale or a "second generation" restaurant sale. The value is the cost the buyer avoids by not building from scratch, which can be substantial in a market where a new build-out costs hundreds of thousands of dollars and takes a year of permitting. A closed or struggling restaurant in a good location with a full kitchen and a liquor license can sell for $150,000 to $500,000 or more on that basis, depending on the market.

The seller's job is to figure out which basis produces the higher number and present the business that way. A restaurant with $80,000 in SDE and a Type 47 license in a strong location is worth more as assets than as an earnings business, and pretending otherwise wastes time.

The liquor license

In California, alcohol licenses are issued by the Department of Alcoholic Beverage Control and are transferable, with ABC approval, to a new owner at the same premises. The common types for restaurants and bars are Type 41, beer and wine for a bona fide eating place, Type 47, full liquor for a bona fide eating place, and Type 48, full liquor for a bar without a food requirement. Type 47 and 48 licenses are limited in number by county population, so in Los Angeles County and other dense markets new ones are rarely available and go through an annual drawing, and in practice the reliable way to get one is to buy an existing one. That scarcity gives the license standalone value, often in the tens of thousands to well over a hundred thousand dollars depending on the county and the type.

The transfer process runs through ABC and takes time, typically 60 to 90 days and sometimes longer. The buyer files an application, the premises is posted with a public notice for thirty days, the buyer is investigated, and any protests are heard. Under California law the purchase price for a license transfer must be placed in escrow, and the escrow cannot be closed until ABC approves the transfer. That means the license escrow and the business escrow are coordinated, and the closing date is set by ABC's approval, not by the parties.

Sellers should confirm before listing that the license is in good standing, that there are no pending disciplinary actions, that the licensee of record is correct, and that all fees are current. A license with a pending violation slows the transfer or stops it.

The lease

A restaurant buyer's lender, and any sensible buyer, needs a long lease. Ten years including options is the standard. Rent as a percentage of sales matters: a restaurant paying more than about 8 to 10 percent of revenue in occupancy costs is squeezed, and buyers know it.

Landlords of restaurant space are accustomed to assignments and also accustomed to using them as an opportunity. Approach the landlord early, before a buyer is involved, to extend the term and clarify assignment rights. A below-market lease in a good location is one of the most valuable assets a restaurant has, and the landlord knows it.

Use clause and exclusive rights matter too. A lease that permits only the current concept limits who can buy the space.

Furniture, fixtures, and equipment

The FF&E list is part of every restaurant sale. Everything in the kitchen, the bar, the dining room, and the back, with ownership status. Leased equipment, especially ice machines, dishwashers, and POS systems, is common and has to be identified, because the buyer either assumes the lease or the seller pays it off. Equipment subject to a loan has a lien that gets paid at closing.

Health department permits, the certificate of occupancy, grease trap and hood certifications, and fire inspection records all come up in diligence. Buyers walk the kitchen with someone who knows what to look for, and deferred maintenance on hoods, refrigeration, and plumbing gets priced in.

Cash

Restaurants and bars have a reputation for unreported cash, and buyers assume it. The answer is the same as in any business: profit that is on the tax returns is worth two times or more at closing, and profit that is not is worth nothing. POS reports, merchant statements, and bank deposits that tie to the returns are what a buyer and a lender accept. An owner who plans to sell in two years and has been under-reporting should start reporting now.

Who buys restaurants

Experienced operators buying a second or third location, first-time owners often financed by SBA loans, and chefs or managers backed by an investor. Operators looking for a second-generation space are a separate pool and are the buyers for an asset-based sale. Franchise resales have their own process, including franchisor approval of the buyer and transfer fees, which need to be built into the timeline.

Timeline

With a liquor license, expect three to five months from LOI to closing, driven by ABC. Without one, a restaurant sale can close in six to eight weeks like any other business. The bulk sale escrow, tax clearances, health permit transfer, and lease assignment run in parallel.

A worked example

A neighborhood restaurant with $1.4 million in revenue shows $60,000 in net profit on its tax return. The owner works full time and takes a $50,000 salary. Depreciation is $30,000. Interest on equipment loans is $8,000. The owner's car and phone run through the business at $9,000. Documented SDE is $157,000. There is also, the owner says, about $150,000 a year in cash that does not appear anywhere.

On documented earnings, at 2 times SDE, the business is worth about $315,000. The unreported cash is worth nothing to a buyer and cannot be financed.

The restaurant has a Type 47 license in a county where those licenses sell for around $80,000 on their own, a lease with eight years left including options at below-market rent, and a kitchen and dining room built out four years ago at a cost of about $600,000. As a second-generation space with a full liquor license and a good lease, the location would draw offers from operators at $350,000 to $450,000 even with no earnings at all.

The asset basis produces the higher number and the wider buyer pool. The memorandum presents the location, the license, the lease, and the build-out first, with the documented earnings as support, and the business sells to an operator opening a second concept.

Had the owner reported the cash for three years before selling, documented SDE would have been closer to $300,000 and the earnings basis would have produced $550,000 to $650,000. The tax on three years of $150,000 would have been substantial and still far less than the difference in price.

Franchise resales

A franchised restaurant adds a step. The franchise agreement requires the franchisor's approval of the buyer, who usually must complete the franchisor's training, and a transfer fee, often a percentage of the sale price or a fixed amount. The franchisor may also require the buyer to sign a new franchise agreement on current terms, which can carry higher royalties than the seller's agreement. Some franchisors have a right of first refusal on any sale. The seller should read the transfer section of the franchise agreement before listing and build the franchisor's timeline, typically 30 to 60 days, into the closing schedule.

Getting ready

Decide which valuation basis applies and present that one. Confirm the license is clean. Extend the lease. Build the FF&E list with ownership status. Get the POS and bank deposits tied to the tax returns. Fix the deferred maintenance a buyer will see on the walk-through. A restaurant that has done those six things sells.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.