Buying a Bar (well at least the building)

18 Replies

I am what i would consider to to the investment world of real estate. I own a few small properties (condos) that I rent. Now I have been in talks with a good friend of mine who is attempting to buy a bar in a college town. He used to manage the bar and knows the business after being involved for 15 years.
SO the bar is unique and potentially a great business opportunity. he is in the process of raising capital to buy the operation and has asked me if i wanted to buy the building. The building is quite expensive at around 800,000 and basically would take all of my capital to purchase. I know as a general rule its not good to do business with a friend but it is a great opportunity. I am having two issues...
What is an appropriate return that i should be asking for as with my residential property i have always tried to find approx. 6-8%.
My other issue is his long term goal is to purchase the property from me as he would need it to be attached to the business which i understand and agree with but I have always been a long term investor with thoughts that i buy to hold for my retirement in thirty years... So how do i price a buyout in lets say ten years? As this ties up my capital is this a smart move to get involved.
Again this some what new to me so i apologize if i seem ignorant or have not given proper detail...any thoughts advice or criticism will gladly be accepted.

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?

@Gil Lieblich Aside from the fact you admittedly know nothing about the bar business, along with the fact that the person running the bar would be someone you know, is a recipe for disaster. You say he "used" to manage the bar, which means he doesn't know for sure what exactly has been or is going on right now. Covering the rent on an $800k building, PLUS all the other expenses that go with the barwoul d mean it would need to be incredibly successful.

I don't think investing all you have into something so fraught with red flags is a good idea... of course that's just my opinion :)

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!

What is important is what is the BAR doing today?? Not it's successful history in the past.

I can get bars for free right now or buy equipment for 10 cents on the dollar. The value of the business is the current cash flow and how stable it is.

A manager and an owner of a restaurant are 2 very different things! I have been both and was in the restaurant industry for over 11 years before getting into commercial real estate. I have very deep knowledge of the subject.

If the underlying building has a quick sale value where you can get your money back then it's not as bad.

If I had 800,000 cash I wouldn't be buying this. Do not do this deal.

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...

You could offer it back to your manager with either an installment sale or a lease with option to purchase or a lease purchase arrangement (he MUST buy in this case as opposed to the case where he can choose to buy with an option). Those are all forms of seller finance. You would get a monthly cash flow from the payments in any of those scenarios.

How is the business being purchased, since it appears to be selling separately from the building? Is there a liquor license required, and will that be part of the sale if one is required?

You are worried about one kind of ROI - rate of return or Return ON Investment - the other posters are worried about another ROI - Return OF Investment!

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.

Gil, I am getting the feeling you are too concerned with your friend here. He wants his cake and to eat it too. His concern needs to be running a business, not having you cut him a special deal that means he will buy it IF it is good later down the road and if it is not a good deal later on he won't.

Restaurants and bars many times have a lifespan where they rise, peak and then decline. College kids are as fickle as the general public and when the next cool thing comes along they will be gone.

Heard about a recent phenomenon where kids are so frugal now that they do all their hooking up online then meet at the bar just to go home with each other and don't even bother buying a drink. That could be the newest cool thing.

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

That would definitely be a business killer... and a weird social change for kids... takes all the work out of it. As far as the business goes its just drinks no food... current profits are at around thirty percent and from 200-300 a year. So it is a very profitable business and there are some specific reasons the owner is looking to sell and move. A big part of why i am on here is because i need opinions from a purely business perspective. As you said he is a good friend and i want to help but it has to be the smart and right decision for me... so i need help determining a fair return and how to set it up if he has the option to purchase how do i do that so its still favorable terms for me? Do i guarantee a percentage increase in value... do i exchange it for profit sharing in the business or perhaps just ask for a higher yearly rent to make up for it?
The business does come with a purchased liquor license. The building location is on the main street in the center of town in a major university. So the building has value...

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...

I'd suggest you use an LLC, to own the business. Own the building seperately. Give the LLC the option to buy the property. Give him the opportunity to buy into the LLC. Sell the LLC at twice the annual gross. The last 50% of the LLC must be paid in cash, the firts 50% financed as you would an option, when fully paid he gets 50%, then give him a couple years to buy the last 50%. When he owns the business, he then has the option to buy the building. That can be 4 or 5 years off, you then have an option price for the building, 30% paid in 3 years, with that the business should carry the end financing and he will own the business with a 30% down on the building. That's 8 years to finance you out. Set rents at market rate per foot. Sale price 5% appreciation per year. You get the depreciation on the building until purchased. The business LLC pays triple net lease, rent+taxes+insurance. Small maintenance and damages from the LLC, major outside maintenance on the building owner.

See an attorney to draft the outline and operating agreement. This roughly should allow someone with nothing to work their way in, 8 to 10 years, the deal needs an expiration date, say at ten years, the business LLC could be held as collateral for performance by 10 years. See your attorney.

A suggestion to strart with. But basically sell the business then the property requiring payments, then a lump sum, then payments on the building, then to a sale.

Also, you said the license is sold with it, I doubt that is totally it....liquor licenses are usually permitted, so many available in a certain area, you can buy the license rights, you still have to obtain the license in your name.

Since my last post I spoke to a guy familiar with the business in NJ, he suggests you play the politics game as well, city to state, seems you may need friends from time to time.....hmmmm.

See an attorney!!!

Good luck

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.

Who has the money at risk, I suggest you have the license in your name if you qualify or both if possible. If he drops dead do you want to close while getting a new license through. Easier to get off a license than on one with a new transfer.

If you want no part of the business, that's fine, but if something happens, you need to step in to cover your payments. Good luck...

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.

You make a very good poi t mike. I guess in a way it is essentially a loan with some sort return that i am trying to justify. He is looking for investors for the business and i preferred to stay on the side of the building because to me it is less risky as it is a hard asset. That being said if he were to give me a buyout clause with an ongoing profit share in the business could be so.ething wkrth while but as discussed it is essentially a loan that he gets all the upside potential.
The issue with trying to compare it is very difficult because there are only a few similar properties in town and they are all owner occupied. So its tough to get a real estimate.
If you were to structure a deal that would be to good to pass up what would you askfor

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

Comparable properties don't have to be bars, any commercial space similar in size is where to start. Rents for you are based on your deal, P+I+T+I+Maintenance estimated+Profits will be your rent. Actually, maintenance and vacancy, but here you vacancy needs to assess the risk of business failure more than rental turnover.

You can look at a return on the sale price at your required yield or capatalization rate, that is the total amount at risk.

The lender will want 125% or more as a debt coverage ratio, I'd suggest 130%.

You can also use gross or net sales from any business to base rental income, this would make a book in itself. A minimum rent is charged, like the 125% plus 10% of average sales quarterly. Better to kick in the sales portion at the end of the second quarter paying the first quarter amount. If you are selling the building this is a good source for an option price to be paid as amounts in addition to base rents.

I agree with Mike that it doesn't sound like an investment not taking the business, guess your friend saved your life at some point...LOL

Don't set you sale price today if selling 10 years out, you are certainly due the appreciation. Have it appraised, you could average two appraisals at the time of sale. The future value will be greater simply from it being occupied with past rents than if it were empty with market or higher rents.

I thought you were flipping the nickle for the building and business. Saying the he is looking for investors is not good, he is undercapitalized and if his partnerships run flat, you've got problems.

Where people go wrong 99.9% of the time is doing business based on friendships, or family. Attorneys I know may not cover all the bases in a deal. Why? Because any potential issues that are not addressed can be taken care of as they pop up with a trip back to the attorney! Divorce, marriage, death, bankruptcy or hazard losses may not occur at all over the term, but they can and do. It's business first, then friends and I guarantee your friendship will have testing moments so address it now.

Good luck!

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