So You Want to Buy a Bar…

If you’re looking to buy a business, there is a lot to know before you actually make an offer.  This is especially true if you’re looking to buy a business that owns a liquor license, such as a bar or restaurant.

Once you’ve found the bar that you want to buy, the first step is to sign a purchase agreement.  The purchase agreement should cover everything that you and the seller have agreed upon – purchase price, payment method (e.g. cash, promissory note, etc.), timing of various steps, all terms and conditions, default provisions, naming rights, etc.  (See our article on Merger Clauses for the importance of including everything in one document).  The purchase agreement should also provide a date for closing, which will not occur until after the liquor license is transferred.

Note that Michigan law requires that all liquor inventories be purchased in cash.  Therefore, if your purchase includes any type of financing (such as a promissory note or loan), the purchase of liquor inventory must be specifically excluded from the purchase agreement and must be done in cash at closing.

The purchase agreement should also include provisions about the liquor license, including the purchase price and a provision covering what will happen if the liquor license cannot be transferred.  This is because the license itself cannot be transferred just through a purchase agreement.  Rather, the purchaser has to apply to the Michigan Liquor Control Commission (“LCC”) to transfer the license.  The purchaser then must undergo a rigorous application process in order to be approved to buy the license.  This process can take months, so purchasers must be patient!

While the liquor license transfer is pending, you should conduct due diligence on the operations of the bar.  If you plan to keep the bar open continuously before and after the closing, you should plan accordingly for a seamless transition.  Once the liquor license transfer has been approved, you can hold a closing and complete the sale.

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm.

Michigan Laws on Gift Cards and Gift Certificates are Changing

A recent Michigan law and impending Federal legislation are reshaping the way businesses can handle the sale and use of gift cards and gift certificates. In November 2008, the State of Michigan passed new laws which mandate that gift cards and gift certificates issued by retailers may not have an expiration date less than 5 years from the date of purchase. Also, no non-use fees or service fees may be deducted from the value of the gift card.

These laws do not apply to a prepaid card issue by a financial institution that may be used at many different types of retailers (such as a prepaid Visa card).

Furthermore, companies cannot refuse partial payment of a good or service with a gift card. In other words, even if the total sale is more than the balance on the card, a business must accept the gift card as partial payment for the good or service. Companies also cannot refuse gift cards during sales or closeouts.
Lastly, the terms and conditions of a gift card cannot be altered after the gift card has been purchased. Terms must be disclosed on the gift card or certificate, on the envelope it comes in, or an 800 number must be provided to obtain the terms and conditions.

To add to all the State changes, President Obama recently signed into law the Credit Card Accountability Responsibility and Disclosure Act. Title IV of the Act—relating to gift certificates, gift cards, and prepaid cards—becomes effective August 22, 2010. These regulations will not have as great an impact in Michigan as they may in other places around the country because Michigan has already enacted rules governing the use of gift cards and gift certificates. The new Federal law provides:

•    Gift cards may not expire less than 5 years after the date of purchase (already in effect in Michigan).
•    Dormancy fees, inactivity fees, and service fees are prohibited unless (1) there has been no activity with respect to a certificate or card for the preceding 12 months, (2) disclosure requirements are met, (3) not more than one fee per month is charged, and (4) any additional requirements imposed by Federal Reserve Board regulations are met. (Companies in Michigan may still have to follow Michigan laws if stricter).

These State and Federal laws must be strictly followed to avoid becoming liable for damages and penalties.