Buying a hospitality business can be a risky venture if you don’t have all the facts or miss a crucial piece of information.

To minimise the risk, it’s important to do your due diligence. Here are five issues you need to resolve buying a hospitality business.

  1. Has the franchisor provided all the relevant legal documents?

If you’re buying a franchised business, the franchisor must provide the following documents:

  • Information statement and key facts sheet
  • A copy of the Franchising Code of Conduct
  • A disclosure document, which must be provided 14 days before signing of the franchise agreement

After signing the franchise agreement, there is a seven-day cooling off period. If you change your mind in those seven days, you can cancel the contract. The franchisor should return the money you paid within 14 days. However, if training or other expenses were incurred by the franchisor in that time, they may deduct those costs.

  1. Are there any lawsuits or judgments pending?

If the business is facing litigation, you could be inheriting a lengthy legal battle. If it’s something minor, like a labour dispute, you may be able to settle it quickly.

If it’s a more serious matter, such as an unethical business practice or an assault that occurred at the establishment, the lawsuit could result in a hefty settlement and leave the business’s reputation in tatters.

Similarly, if the business has judgment debt against it, you, as the new owner, will become liable for the unpaid debt plus any interest or penalties.

  1. Is the relationship with suppliers positive?

 A hospitality business relies heavily on it’s suppliers. Find out if the business is in good standing with its suppliers and if they are reliable.

Are any contracts up for renewal? This is a good time to assess the quality of products and, if they’re unsatisfactory, you can switch to a different supplier.

  1. Are food and liquor licenses and registrations up to date?

Australia follows stringent regulations around food and safety. If you’re buying a food business, find out what laws apply in your state. In Victoria, under the Food Act 1984, a food business must be registered with the local council.

If you plan to sell liquor, check if the business has a valid liquor licence. Are there any restrictions? Has the business violated any regulations that resulted in the Liquor Licensing Commission suspending the license?

  1. What does the lease agreement look like?

If the business premises are leased, ask to see the lease agreement. Is the rent in line with the market and what is the annual increase? Are there any terms in the lease that you do not agree with? Are there any restrictions or planned zoning changes that may limit business expansion?

Request a meeting with the landlord to discuss any issues with the lease agreement. It’s also advisable to do a thorough inspection of the premises. If there are any hazards or damages, ask the landlord to conduct repairs to make the building safe. You don’t want to risk employees or customers getting injured on your premises.

Blaine Hattie is a Hospitality Lawyer at Sutton Laurence King Lawyers.

To help you navigate the legal challenges of buying a hospitality business, contact Sutton Laurence King. Email us at info@slklawyers.com.au or call 03 9070 9810.