What should you consider when buying a restaurant?

To run his own catering company, give people an evening in a good atmosphere and be his own boss. What else do you want? You also want a catering business that is successful and thriving, where a significant turnover can be generated and – with the right profits and not too high costs – also a good income for you as an entrepreneur. In many cases, it has been chosen to take over an existing and proven catering company. In that case, it is of great importance to make a thorough (pre-) examination of the hospitality company’s existing rights and obligations and of course also of the financial background and results. If this (preliminary) investigation leads to the conclusion that there are no financial or contractual ‘corpses in the closet’, then a decision can be made to buy the company. But what exactly do you buy, and how do you best protect yourself from possible risks? In this article, we will highlight three topics that require attention in each acquisition.

Business acquisition – in what form?

In principle, there are two options for taking over a catering business. You either buy the shares in the legal entity (usually a BV) from which the catering business is operated, or you buy the assets and (sometimes also) the company’s liabilities.

In the event of a share transfer, all assets, liabilities, rights and obligations in the company are transferred. The buyer will be the new shareholder in the company. Because everything in a company is part of a share transfer, it is important to do a thorough feasibility study. Often there are commitments or guarantees issued that are not always clear at first glance and can lead to unpleasant surprises.

However, the vast majority of catering companies are run as sole proprietorships or partnerships (partnership, VOF or CV). The transfer of such a company does not involve a transfer of shares, but an active / passive transaction. Inventory, shares and trade name are examples of assets in a company, in short; the belongings. A company’s debt, such as creditors and financing from a bank or other lender, are its obligations. In the case of an asset-liability transaction, all the assets of the company, at least the assets to which the seller wishes to transfer ownership and which the buyer wishes to acquire, are legally separated.

A major advantage of an asset-liability transaction is that the buyer, unlike a share transfer, is not obliged to take over all assets. You can choose to acquire only the interesting and valuable assets. For example, if the selling party uses a particular company name that you do not want to continue after taking over the business, do not include it in the sale. The ownership of this trade name then remains with the seller. The same can also be applied to obsolete stock or equipment that does not work. Or, perhaps more importantly, for debt and assets with any associated claims. It can be specified in the purchase agreement which goods will be taken over and which will not be taken over.

A disadvantage of an asset-passive transaction is that contracts with third parties, such as suppliers and customers, are not automatically included in the sale. For example, a delivery agreement can only be handed over to the buyer by the restaurant company in collaboration with this supplier. This is not the case with a share transfer; all rights and obligations are automatically transferred to it. Nevertheless, certain liabilities are sometimes also transferred with an active / passive transaction. These exceptions will be discussed below.

bearing substitution

Over the years, it has become less and less common that the building in which the catering business is located is also owned by the catering entrepreneur. In most cases, the property is rented by a third party. In the case of a rental situation, it is essential for the company’s continued operation that the landlord agrees to transfer the rights and obligations arising from the rental agreement from the seller to the buyer. This is called a bearing substitution. However, a landlord may refuse his (voluntary) cooperation with a request for rent substitution or set certain (unacceptable) conditions.

In this situation, however, the law allows the tenant to transfer his lease agreement to a buyer without the landlord’s involvement, in connection with the transfer of the company established in the leased property. In that case, the tenant / seller must have a “significant interest” in the transfer of the Restaurant Business, and the intended tenant / buyer must provide sufficient guarantees for full compliance with the agreement and for sound business operations. In practice, a sale of the company is seen as a weighty interest, and it gives the tenant / seller the opportunity to transfer his business – even without the landlord’s participation. In a later contribution, we will take a closer look at the conditions that apply to a rental substitution.

Takeover of employment contracts by business transfer

Where cooperation from the contracting counterparty is normally required when taking over an agreement, this is not required when taking over employment contracts. As a result of the sale and thus the ‘business transfer’, the rights and obligations arising from an employment contract between the seller of a restaurant business and the employee or employees working there are transferred under the law to the buyer. It is a business transfer when all business activities have been sold; think of the company’s premises, fixtures, customers, company name, goodwill, etc.). But it becomes more difficult if only certain parts of the company are taken over, or if there are no sales, but eg leasing of a company. A buyer of a catering company often prefers to be able to decide for himself with which employees he will continue the business, and it is usually beneficial for an employee to be able to stick to his terms of employment. There are therefore ongoing litigation on the question of whether there has been a business transfer.

In 2021, a proceeding arose at the Court of Appeal in Arnhem-Leeuwarden between a catering entrepreneur and an (intended) employee. The catering company, café-restaurant De Reünie, was located in a building rented by Heineken. The employee had worked here for more than 15 years. At one point, De Reünie got into financial difficulties, after which a settlement agreement was reached with a lender. The agreement included, among other things, the sale and transfer of the company to the lender or a third party designated by it. Eventually, the catering company was taken over by a party affiliated with the lender and continued as Grand-Café De Oberst. The employee believed that his employment contract was automatically transferred to the new company. The colonel disagreed. The Court of Appeal therefore had to rule on the question of whether there was a business transfer which resulted in the employee being employed by De Oberst.

The judgment took into account the question of whether the acquisition of the company took place on the basis of an agreement. The lack of an agreement could lead to the conclusion that there was no transfer of business. However, the court ruled that this was not essential and that a business transfer could still take place even without an agreement. According to the Court, a business transfer can also take place in two phases, eg by terminating a lease, after which the landlord allocates the lease to another party. This had also happened in this case. An agreement had been reached between Reunion and Heineken, which terminated the lease. De Colonel subsequently entered into a new lease with Heineken. Since De Reünie’s assets (such as the kitchen and garden furniture) have been transferred, the same bar and faucet installations were used and the nature of the catering business has remained largely the same, the Court of Appeal found that there had been a business transfer. That did not change the fact that De Colonel had independently entered into a lease with Heineken. The conclusion was that the employee was right.

Conclusion

Preliminary investigations are crucial when taking over a catering company. Make sure it is properly recorded what exactly you are taking over and under what conditions. To avoid unpleasant surprises, it is not a superfluous luxury to have an accountant or lawyer to help you. It is also good to realize that even in a situation where there is no takeover or purchase of a catering company, but only when you start renting a catering place, you can be confronted with staff who were employed by the previous tenant of this property. . In such situations, one must therefore also examine the previous utilization and find out if and how an agreement has been made with the staff. And if you are in doubt about risks, try to get a refund for this from the landlord.

LOFF Advocaten is a specialist in the catering industry and frequently assists catering parties, such as catering entrepreneurs, suppliers and tenants. For more information: www.loffadvocaten.nl

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