Due Diligence in Every Deal

Due Diligence Is Where Deals Are Saved or Killed

You found a restaurant you want to buy. The seller accepted your offer. The excitement is real — and it's exactly why this next phase matters more than any other part of the acquisition.

Due diligence is the buyer's opportunity to verify everything the seller has represented about the business before committing irrevocably. Revenue, expenses, lease terms, equipment condition, licensing status, legal exposure — all of it gets examined under the microscope. If the numbers hold up and the operation checks out, you close with confidence. If they don't, you renegotiate or walk away with your deposit intact.

Skipping due diligence or rushing through it is the most expensive mistake a restaurant buyer can make. We've seen buyers inherit undisclosed tax liens, discover that reported revenue was inflated by 30%, and find out mid-closing that the lease couldn't be assigned. Every one of those situations was preventable with proper due diligence.

This is where having experienced representation matters. We coordinate the entire process — managing document flow, flagging issues before they become deal-breakers, and connecting you with the attorneys and CPAs who specialize in restaurant transactions.

Financial Due Diligence

Financial verification is the foundation of every acquisition. The seller's asking price is based on reported earnings — your job during due diligence is to confirm those earnings are real, sustainable, and accurately represented.

Tax Returns and P&L Verification

Start with three years of federal and state tax returns. Compare them line by line against the profit and loss statements the seller provided during negotiations. Look for inconsistencies between reported revenue on tax filings and the numbers in the P&L. Discrepancies aren't always intentional — some sellers have sloppy bookkeeping — but they need to be resolved before you can rely on any earnings figure.

Bank Statement Reconciliation

Request 24 months of bank statements and match total deposits against reported gross revenue. This is the single most revealing exercise in financial due diligence. If the seller reports $1.2 million in annual revenue but bank deposits total $950,000, you have a problem. If deposits exceed reported revenue, the seller may be underreporting income for tax purposes — which means the business might be worth more than the books suggest, but also that you're dealing with someone who hasn't been transparent with the IRS.

Undisclosed Liabilities

Check for outstanding accounts payable, delinquent sales tax, unpaid payroll taxes, and vendor balances that weren't disclosed. A thorough review of inventory and outstanding obligations ensures you're not inheriting the seller's debts. Your attorney should run UCC lien searches and check for any judgments or encumbrances against the business.

Payroll and Sales Tax Compliance

Verify that payroll taxes have been filed and paid current. Review sales tax filings against reported revenue to confirm compliance. In California, the Employment Development Department and the California Department of Tax and Fee Administration can both place liens on businesses for unpaid obligations — and those liens can follow the business through a sale if not properly addressed in escrow.

Lease Due Diligence

The lease is the second most important document in a restaurant acquisition, right behind the financials. A bad lease — or a lease that can't be transferred — will kill a deal faster than almost anything else. This is where lease negotiation expertise becomes critical.

Assignment Rights

Read the lease assignment clause carefully. Does the landlord have the right to approve the new tenant? Can they impose additional conditions on the assignment? Some leases require the assignee to meet specific financial thresholds or provide personal guarantees. Others give the landlord the right to recapture the space upon assignment. Know what you're dealing with before you invest weeks in due diligence.

Remaining Term and Options

Calculate the total remaining lease term including option periods. SBA lenders typically require a minimum of 10 years remaining on the lease (including exercisable options) to approve a loan. Even if you're paying cash, a short lease limits your ability to recoup your investment and reduces the business's future resale value.

Rent Escalations and CAM Charges

Map out every rent increase through the remaining term. Annual escalations of 3% compound significantly over a 10-year lease. Review Common Area Maintenance (CAM) charges, property taxes, and insurance pass-throughs — these "triple net" expenses can add 20-40% on top of base rent. Calculate your total occupancy cost as a percentage of revenue. If it exceeds 10%, the economics get tight quickly.

Personal Guarantee Requirements

Many landlords require new tenants to personally guarantee the lease, even when the business is structured as an LLC or corporation. Understand the scope of the guarantee — is it for the full remaining term or limited to a specific number of years? Can it be reduced as you build operating history? This is often negotiable, but only if you raise it during the assignment process.

Operational Due Diligence

Financial due diligence tells you what the business earns. Operational due diligence tells you what it will cost to keep it running — and whether the physical operation can support the revenue the seller is claiming.

Equipment Condition and Age

Walk the kitchen. Open every cooler, fire every burner, run every piece of equipment. Request the equipment list with approximate ages and maintenance records. A 15-year-old walk-in compressor that's "working fine" might need a $8,000 replacement within six months. A hood system that hasn't been serviced properly could fail its next fire inspection. Factor deferred maintenance into your purchase price negotiation.

Health Department History

Pull the restaurant's health inspection history from the local environmental health department. Look for patterns — repeated violations in the same categories suggest systemic issues, not one-off mistakes. Critical violations related to refrigeration temperatures, pest control, or structural problems signal potential capital expenditures after closing.

Building Condition and Code Compliance

Inspect the physical space: HVAC systems, plumbing, electrical capacity, grease traps, ventilation, and ADA accessibility. Some issues are the landlord's responsibility under the lease; others fall on the tenant. Know which is which. If the building needs significant upgrades to meet current code — especially for a concept change — those costs come out of your pocket.

POS System, Vendor Contracts, and Employee Agreements

Review the point-of-sale system and any technology service contracts. Check if vendor agreements transfer with the business or need to be renegotiated. Understand which employees have written agreements, non-competes, or compensation arrangements that survive the ownership change. In California, non-compete agreements for employees are generally unenforceable, but other contractual obligations may carry forward.

Licensing and Permits

Every restaurant operates under a web of permits and licenses. Missing or expired permits can delay your closing, trigger fines, or prevent you from operating entirely.

Business License and Health Permits

Verify that the current business license and health permits are active and in good standing. Confirm what's required to transfer them into your name or entity. Some jurisdictions require new plan checks and inspections for ownership changes, especially if you're planning any modifications to the menu or operations.

Liquor License Status

If the business holds a liquor license, verify its type (Type 41 beer and wine vs. Type 47 full liquor), confirm there are no disciplinary actions or conditions, and understand the ABC transfer timeline. California liquor license transfers typically take 45-90 days and involve public notice requirements, background checks, and ABC approval. This timeline often runs parallel to or longer than your escrow — plan accordingly.

Fire, Conditional Use, and Specialty Permits

Confirm current fire department permits, hood suppression system certifications, and occupancy ratings. If the business operates under a Conditional Use Permit (CUP), read every condition — CUPs can restrict operating hours, delivery operations, alcohol service, live entertainment, and outdoor seating. Violating CUP conditions can result in revocation, which means you lose the right to operate the business at that location regardless of what you paid for it.

Check for music and entertainment licenses (ASCAP, BMI, SESAC), signage permits, sidewalk dining permits, and any other location-specific authorizations. These are easy to overlook and expensive to discover after closing.

Legal Due Diligence

Your business transaction attorney should lead this portion of the process. Legal due diligence protects you from inheriting problems that don't show up on a balance sheet.

Litigation and Liens

Search for pending lawsuits, judgments, and liens against the business, the business entity, and the individual seller. Check federal and state court records, tax lien databases, and UCC filings. A seller with active litigation or unresolved liens needs to clear those obligations before or at closing through escrow holdbacks or direct payoffs.

Franchise Agreement Review

If the business is a franchise, your attorney needs to review the entire franchise agreement — not just the transfer provisions. Understand the remaining term, renewal conditions, territory rights, required capital improvements, ongoing royalty and marketing fund obligations, and the franchisor's approval process for new operators. Franchise transfers add complexity and timeline to the transaction.

Insurance and ADA Compliance

Review the current insurance coverage and claims history. A pattern of workers' compensation claims or liability incidents tells you something about the operation's safety culture and exposure. Evaluate ADA compliance for both the physical space and digital presence — ADA lawsuits targeting restaurants have increased significantly in California, and non-compliance is a liability you don't want to inherit.

The Due Diligence Timeline

A standard restaurant acquisition allows 30 to 45 days for due diligence, starting from execution of the purchase agreement. Here's what a well-managed timeline looks like:

Week 1: Document Collection

Submit your complete document request list on day one. This includes tax returns, P&L statements, bank statements, the lease, employee records, vendor contracts, licenses, and permits. The seller's responsiveness in week one tells you a lot about how the rest of the process will go. Delays here should be addressed immediately — they rarely get better on their own.

Week 2: Financial and Lease Analysis

Your CPA reviews the financials and reconciles tax returns against P&L statements and bank deposits. Your attorney reviews the lease, identifies assignment issues, and begins landlord communication. You should have a clear picture of whether the financial representations hold up by the end of week two.

Week 3: Operational and Legal Review

Conduct physical inspections — equipment, building condition, health department records. Your attorney completes lien searches, litigation checks, and UCC filings review. If the business has a liquor license, the ABC transfer application should be in process. Franchise approval requests should be submitted.

Week 4: Issue Resolution and Decision

By week four, you know what you're buying. Any issues discovered in weeks one through three need to be addressed — through price adjustments, escrow holdbacks, seller repairs, or deal restructuring. This is the decision point: close, renegotiate, or walk away.

What Kills a Deal vs. What's Negotiable

Not every issue discovered in due diligence is a deal-killer. Equipment that needs replacement can be negotiated as a price reduction. Minor financial discrepancies can be resolved with documentation. Lease issues can often be addressed through landlord negotiation.

True deal-killers are material misrepresentation of revenue, undisclosed legal judgments or tax liens that can't be cleared, lease terms that prevent assignment, critical code violations that require prohibitive capital expenditure, and sellers who refuse to provide requested documentation. When a seller won't give you access to the information you need, that is the information.

Our Role in Due Diligence

We don't perform your legal or accounting work — that's what your attorney and CPA are for. What we do is coordinate the entire process so nothing falls through the cracks and the timeline stays on track.

Document Flow Management

We manage the document request process between buyer and seller, track what's been received and what's outstanding, and push for timely delivery. When a seller is slow to produce records, we know how to move the process forward without creating unnecessary friction.

Issue Identification and Escalation

Having seen hundreds of restaurant transactions, we know what normal looks like — and we know what red flags look like. We flag potential issues early, before they become surprises in week four. When something needs attention, we bring it to the right professional: your attorney for legal issues, your CPA for financial questions, a contractor for building concerns.

Professional Network

If you don't already have a business transaction attorney or a CPA experienced in restaurant acquisitions, we connect you with professionals who specialize in exactly this type of work. Not generalists — specialists who understand the nuances of food and beverage business transactions, California lease law, and ABC licensing.

Negotiation Support

When due diligence reveals issues — and it almost always does — we help you determine what's reasonable to ask for and how to structure the request. Price reductions, escrow holdbacks, seller-funded repairs, extended training periods, and modified deal terms are all tools we use to keep viable deals alive while protecting your interests.

Frequently Asked Questions

How long does due diligence take when buying a restaurant?

Most restaurant acquisitions have a due diligence period of 30 to 45 days from the date the purchase agreement is executed. Some deals close faster if documentation is well organized, while transactions involving SBA financing or liquor license transfers may require additional time. The key is starting document requests immediately — delays in week one compound through the entire process.

What documents should I request during due diligence?

At minimum, request three years of federal and state tax returns, monthly P&L statements for the trailing 24 months, bank statements for the same period, the current lease agreement with all amendments, sales tax filings, payroll records, equipment lists with age and condition notes, vendor contracts, insurance policies, health department inspection reports, and any pending or past litigation. We provide buyers with a comprehensive document checklist on day one of the due diligence period.

What kills a deal during due diligence?

The most common deal killers are material financial discrepancies — reported revenue that doesn't match bank deposits or tax returns. Other frequent issues include undisclosed liabilities like tax liens or pending lawsuits, lease terms that prevent assignment or carry unfavorable conditions, critical equipment failures that require major capital investment, and unresolvable health or code violations. Many issues are negotiable if caught early. The deals that die are usually the ones where the seller wasn't transparent upfront.

Do I need an attorney for restaurant due diligence?

Yes. A business transaction attorney is essential for reviewing the purchase agreement, analyzing the lease assignment, conducting lien and litigation searches, and protecting your interests in the deal structure. Choose an attorney who specializes in business acquisitions — not a general practitioner. The cost of a good attorney is a fraction of the cost of discovering a legal issue after closing.

Can I back out during due diligence?

In most restaurant purchase agreements, the buyer has the right to terminate during the due diligence period if they discover material issues that weren't previously disclosed. Your earnest money deposit is typically refundable during this period for cause. The specific terms depend on your purchase agreement, which is why having an attorney review it before you sign is critical. Once the due diligence period expires and contingencies are waived, walking away becomes significantly more expensive.

Start Your Acquisition on Solid Ground

Due diligence isn't a formality — it's the process that separates confident acquisitions from expensive mistakes. Whether you've already found a restaurant to buy or you're still exploring the market, having the right team in place before you make an offer puts you in the strongest possible position.

If you're evaluating a restaurant acquisition and want to understand what proper due diligence looks like for your specific deal, fill out the form or contact us directly. We'll walk you through the process, connect you with the right professionals, and make sure nothing gets missed between offer and closing.