BiggerPockets

Takes all of your capital, like putting all your eggs in one basket? Bad idea, imo. Who brought you this "deal" someone who want to run it? Hmmmm

If you aren't familiar with the bar business how do you know it's a good deal?

That's good advice from a lady who doesn't go to bars! he he

It is a disaster waiting to happen for anyone to own any commercial building and not have a good idea of the types of businesses that would fill the space. You don't just own a building in commercial as you have a real vested interest in the success of your tenant. If you don't understand the business you may drive by to collect rent and see a "Out of Business" sign on the door, too late, suck it up!

Thank you for all your responses. I guess i need to be more clear woth so.e of the details. Its not that i know mothing about the business. It is located in a college town and has been pretty consistant at least for the last fifteen years that i have been going. My friend left only a year ago so is pretty familiar with their current business. We both have looked at the business and the details his costs ans profits. We also had others with experience look at the business and the numbers they match up as well as another friend owns another bar in town and the numbers are similar. I dont know all the details true but i am familiar and really its not a very complex operation being that its one the largest bars in town.
I wont be laying out all 800 but rather i will pit down thirty plus percent. Also there is an apartment above the bar that gets around fifteen hundred.
So i am back to my original issues of what is a good rate of return and how do we make a deal to allow him to buy it back in lets say ten years or similar idea...

Analyze where the margins are coming from. Most is usually the appetizers, desserts, and the booze, machines, etc.

The main meals are low margins to pull people in. Make sure fixed food and liquor contracts are in place.

The costs of items are going up faster than prices can be raised. This is the number one thing I look at because if costs go up margins become thinner and volume has to go much higher to compensate.

This is why I do not like businesses with high volume of sales to make slim to decent margins. One or two things start to turn and a positive is now a negative cash flow.

Make sure the restaurant will not need all new equipment and re-imaging soon as it is a big cost.

I think we have about 45 to 50,000 college students in this town, 6 colleges and a state university. 3 large bars maybe what you're looking at, but probably larger. All have turned owners in 5 years, one twice. Most college kids are broke but there are spenders, but I would not rely on sturents to keep the doors open on a large operation.

Don't know where the resturant issues come in on this deal, didn't see anything from the op on that.

Sounds like you're hot on the idea and want confirmation to go with it. Not from me, I get the impression that you don't know enough about the industry even if you think you might, asking the questions asked as evidence. You can't put your money up and rely on your friend where he/she only has an up side. You need to know the business.

You can not ratio and pro-forma your way through assessing any bar business. Success goes far beyond the past performance that might be pumped in the books. You need to audit the place, verify inventories sold through the place.

Liquor licenses are held by the business owner, not the building owner but might be both, but pretty sure the names of owners are run through background checks and an application process, you don't automatically buy a license.

Seller financing is very common for bars as such business are harder to finance, along with privately name type resturants, non-franchised stores. I have put many together. Options usually won't fly, never taken, most buyers milk the profits and move on unless strict accounting and cash control is in place and overseen by the seller. That's usually a business manager under seller control for installment deals, many buyers baulk at such arrangements.

You can kill any bar in less than 6 months. Bars are social animals as well as a business. High employee turnover has a direct effect on the bottom line in a short time. Large places to a lesser degree, but who is there matters. Bands are another aspect, a large place better go for the best in the area IMO and pay the pipper, large cover charges really need to be considered. The large place here that turned twice was killed by band cover charges on fri/sat, college kids won't pay 20-30 at the door here, they may in your area, but point being, you can price your way out of business quickly.

Distributors set the prices, not you, they don't have competition. Only one distributor in an area for Bud, one for Johnny Walker, etc. Volume buyers, like larger places, get better pricing, distributors can also raise a price after loss leader sales, you may not be able to simply raise your price, so the distributor really can control the margin. Point being, you need to know how your distributors operate, they can squueze you. Liquor laws limit where you can buy your product. Here, bar owners could buy cheaper at a liquor store, but can't, probably the same all over.

Smaller bar owners can gang up on large ones, they have less overhead, they do know each other. They can offer specials even at a loss for longer periods, remember inventory costs are controlled by distributors. They do decent bands, no cover and get popular employees and you'll have a hard time with college crowds. If there is a business more cut throat than RE, one has to be the bar business!

Regardless of what anyone says, bars are seasonal, bad weather keeps people in, more so than resturants. Accounting methods can smooth some of this out, pro formas are best guess especially for student clientel.

Expect vandelism, bathrooms and mischief from drunks. Large places with college students here have such issues weekly, part of doing business. Smaller bars can be watched much easier.

Your bonds and insurance will depend too on experience in the business, it's required. So what your last owner was paying may not be your premium.

As Joel mentioned, equipment is cheap second hand, old coolers will likely cost you, check for reapirs done and contracts. Utility bills are insane for super large bars, at least here, check bills carefully.

I'd also say that a bartender at a large bar probably can't do the bar side and business side, much too involved unless they have a death wish. You need a general manager, bookkepper, accountant, as well as bar tenders. A large bar is not a one man owner operation.

Point is, looking at what a past owner has done may not be applicable to the next owner. That's why you really need experience, not just a bean counting financial approach basing your decisions on expected returns, I guarantee you'll be wrong 6 months out if you are not very conservative. IMO

I saw Bill post after i had posted my last response so i will touch on a few more things... First thanks for taking the time to explain so much... I dont know everything behind the scenes of the business but I am very familiar with the bar business. The facts are this is not what many would consider a large bar but in the main area it is the second largest with a capacity of 300 approx. The beauty of the business it is a high volume business and has shown itself to be succesful for 30 years. IN own there is 5 major players the only bar that has changed hands was 13 years ago and that was a shady place running drugs and now a very succesful place ad I am close with the owner i know his numbers.
Their are a few distributors you are correct but because of the volume of the bar their is more competition to be the go to beer so it is possible for them to push us around but not likely. I understand the summer months are pretty bad but still the bar grosses 750-1million with a30 percent profit so the business is solid. Now to be clear I am not buying the business and my only concern is if the business failed then i would need a new tenant.
That being said yes i have looked over all the details i know the inventory i know the numbers and feel good about the business I just dont know the right way to structure a deal especially commercial deal as I have only had residential properties.
Yes kids are fickle and maybe kids will stop consuming mass amounts of alcohol but that is a risk i am ok with... This is not the normal bar where trends and competition are so much an issue as the school get s bigger the location is right at the center of housing so i am comfortable with the business even if it slows down there is still money to be made... I just need help with structuring a commercial property deal so i get "rent" that is fair and is a buy out s an option what should i get out giving him that option...

Again Bill thank you for your time and depth of knowledge which i admit some is over my head... But i will look further into your advice and yes i will speak to a lawyer shortly to get a better grip on how to structure the deal. as your friend mentioned yes jersey politics plays a role as one major reason the owner is finally selling is he has pissed off many important people in the community as he attempted to open a new place and went up against those in power instead of working with them... so we feel he knows there can be some pressure on teh existing bar. that being said the community would probably be happy to see him go and accomodate the new owner.
The liquor license is limited and the business will get the license as it costs around 180000 form my research and speaking to other owners. But that would be under my friends name.
I would only have my name on the building or at least that is the current plan.

To me, the reason its a bad deal is that you're limiting your upside because you're setting your sales price now instead of in 10 years. What if the area booms and the building is worth 1.5 mil in 10 years?

Your friend is asking you to take the risk on the building probably because he can't afford to right now, yet he wants to lock in a sales price now.

Also, it seems you're trying to come up with a reasonable return. A better question would be how much are the other spaces in the area charging?

This doesn't feel like an investment at all. It seems like you're just giving him a loan and you're getting none of the upside attached with the risk.

btw: Is the building discounted at all right now? If you really wanted to invest in a building, would this be the one you'd pick if your friend wasn't the one buying the bar it was leasing to?

If you want to be part of the bar, why not just go in as a partner with him on the bar and the building. You bring your cash for the building he brings his for the bar. But you get the upside of the building and the bar long term.

That would be an investment. What you're doing is lending your friend the money to buy the building and taking all the risk with none of the upside.

If you're still locked in to helping him out like this, I would still recommend checking what the rents are for the other commercial spaces around town and charging the same. Then coming up with a reasonable sales price based on what you want to make - not what is fair to him.

Check out the show Bar Rescue on Spike. It's very interesting and shows all of the nightmares involving bar ownership.