Buying a restaurant in New York City is mostly the purchase of two things that the seller may not control: a lease and a liquor license. The kitchen equipment is often leased or financed. The staff can leave. The recipes are not protected. What the buyer is really acquiring is the right to occupy a specific space, on specific terms, with the ability to serve alcohol. If either of those fails to transfer, the deal is worthless regardless of what the purchase agreement says.
The Law Offices of Albert Goodwin represents buyers and sellers of restaurants, bars, cafes, and food service businesses in New York City.
Asset Purchase Versus Entity Purchase
Most restaurant deals are structured as asset purchases, in which the buyer acquires the equipment, leasehold interest, name, goodwill, and permits, and forms a new entity to operate. The buyer avoids the seller's known and unknown liabilities, and gets a stepped-up basis in the assets.
Entity purchases, in which the buyer acquires the membership interests or stock, appear where the entity holds something that cannot practically be transferred. The most common reason is the liquor license: transferring an entity's ownership can be a faster route to continued alcohol service than a new license application, though the State Liquor Authority must still be notified and the change approved, and unapproved transfers of interest are a violation. The tradeoff is that the buyer inherits everything, including wage claims from employees who left two years ago, unpaid sales tax, and pending litigation. An entity purchase requires far deeper diligence and much stronger indemnity protection.
See asset purchase agreements and stock purchase agreements.
The Lease Is the Deal
Before anything else, we obtain the lease and every amendment, and answer these questions:
- How much term remains, including options? A buyer paying for goodwill on three years of remaining term is buying a short annuity.
- What does the assignment clause require? Most restaurant leases require landlord consent. Whether consent may not be unreasonably withheld matters enormously, and many leases give the landlord absolute discretion. Some contain recapture rights allowing the landlord to terminate rather than consent, and take the space back at market rent.
- What will the landlord demand as the price of consent? A rent increase, additional security, a new guaranty, an assignment fee, or a lease modification eliminating an option. This negotiation should happen before the buyer is contractually committed.
- Is the tenant in default? Unpaid additional rent, real estate tax escalations, insurance non-compliance, or unapproved alterations can surface only when the landlord is asked to consent.
- What is the permitted use, and does it cover the buyer's concept?
- Who signed the guaranty and does it survive? A seller frequently remains liable after assignment unless expressly released. Obtaining that release is a seller-side priority that is often overlooked until years later.
We generally condition the closing on landlord consent in a written assignment and assumption agreement, and where possible obtain an estoppel certificate from the landlord confirming rent, term, security, and the absence of defaults. See restaurant leases and commercial leases.
The Liquor License
A New York liquor license does not transfer with the assets. The buyer generally must apply to the State Liquor Authority for a new license, which involves notice to the community board, the 500-foot rule for on-premises licenses in areas with three or more existing licenses, the 200-foot rule regarding schools and places of worship, personal disclosure by principals, and proof of the source of funds. Processing takes months.
The practical bridge is a temporary retail permit, which allows an applicant that has acquired an existing licensed premises to operate while the application is pending, subject to eligibility requirements and Authority approval. Deals are frequently structured around it, and a buyer should understand that a temporary permit can be revoked and is not a guarantee of ultimate licensure.
Management agreements used to let a buyer operate under the seller's license before approval are a recognized risk area. An arrangement in which an unlicensed party effectively controls the licensed business can be treated as an unlawful availment of the license, jeopardizing the license itself. These structures require careful drafting and honest assessment. See liquor licensing.
The Tax Bulk Sale Notice
New York imposes successor liability for the seller's unpaid sales taxes on a purchaser of business assets. Under Tax Law ยง 1141(c), a purchaser must notify the Department of Taxation and Finance of the pending bulk sale at least ten days before taking possession or paying, using the prescribed form. The Department then has a defined period to advise whether the seller owes taxes, and the purchaser holds the purchase price, up to the amount of any claim, until released.
A buyer that skips this step can be held liable for the seller's sales tax arrears up to the purchase price or the value of the assets, whichever is greater. This is the single most common expensive mistake in small restaurant transactions, and it is entirely avoidable. Note that New York's Uniform Commercial Code bulk sales article has been repealed, so the tax notice, not the UCC, is the operative requirement.
Related diligence: unpaid withholding taxes, unemployment insurance contributions, and commercial rent tax for larger Manhattan tenants.
Diligence That Matters in a Restaurant Deal
- Equipment ownership. Walk-in boxes, ice machines, dishwashers, POS systems, and beverage equipment are frequently leased, financed, or owned by a distributor. A UCC search reveals liens; a physical inventory reveals what is actually there. Equipment that appears on the asset list but belongs to a lessor is a closing problem.
- Employees. Whether the buyer hires the staff affects wage claim exposure, and continuing the same operation with the same workforce is a factor in successor liability analysis for employment claims.
- Health Department history. Inspection results, outstanding violations, unpaid fines, and any pending closure proceeding.
- Certificate of occupancy, Department of Buildings violations, and open permits. Unresolved open permits from a prior renovation can block future work.
- Gas service. After service interruptions, restoring gas in New York City can require inspections and utility work that takes months. A restaurant sold without confirmed gas service is a very different asset.
- Sidewalk cafe or roadway dining authorization, which is tied to the operator and does not automatically follow the business.
- Vendor contracts, especially exclusive beverage agreements with unamortized equipment or upfront payments that must be repaid on transfer.
- Delivery platform accounts, outstanding chargebacks, and any negative balance.
- Intellectual property. Whether the name is actually owned, whether a trademark exists, and whether social media accounts and the domain are being conveyed. Many sales close without ever transferring the Instagram account, which is often the most valuable marketing asset.
- Gift cards and outstanding credits, which customers will present to the buyer.
See due diligence.
Deal Terms We Negotiate
Beyond price, restaurant transactions turn on the escrow deposit and the conditions under which it is returned, allocation of the purchase price among assets for tax purposes, a holdback against undisclosed liabilities and the tax clearance, seller financing and the security for it, the seller's non-compete and its geographic and temporal reasonableness, the seller's continued involvement during transition, proration of rent, utilities, and prepaid expenses, inventory valuation at closing, and the representations and warranties that survive and for how long. Where a chef-owner is selling, whether that person's name and likeness may continue to be used is a term worth resolving explicitly.
See business purchase agreements, buying and selling a business, and letters of intent.
Restaurant Transaction Counsel in New York City
If you are buying a restaurant, we will tell you before you sign whether the lease can actually be assigned, whether the license can be obtained, and what liabilities are attached to what you are acquiring. If you are selling, we will structure the deal to release your guaranty, protect you from post-closing claims, and get you paid. Either way, the work that determines the outcome happens before the deposit goes hard.
Call the Law Offices of Albert Goodwin at 212-233-1233 for a consultation.
You can contact us by phone at 212-233-1233 or by email at [email protected].
