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So you want to buy a liquor permit business

By Brian J. Hirsch

You've successfully negotiated the purchase of an Ohio bar or restaurant and are prepared to close. But there are still a few details left. How can you ensure a smooth and quick transfer of the liquor permit? What do you need to do so that you can operate the business immediately upon closing? Below are some helpful pointers to allow for an efficient transfer of ownership.

Any transfer of ownership of an Ohio liquor permit must be approved by the Ohio Department of Commerce, Division of Liquor. This requires filing certain applications to provide the Division of Liquor with information concerning the sale, the new permit business, and its owners. Among other information, the applicant must disclose to the Division of Liquor the nature of sale (e.g., what assets were sold), information on the financing of the deal, identities of certain owners of the business, and personal information on certain owners and managers of the business. It is important to have all documentation complete and ready to file by closing to minimize delays in the application process. Note that the seller's signature will be required on the application, so be sure to include the transfer application with the other documents to be executed at closing. Expect the application process to take about one to two months if the application packet is complete, but it is not uncommon for the Division of Liquor to request additional information or documentation in the review process, adding to the processing time.

When structuring the ownership and management of the liquor permit business, be sure to consider whether there may be any background check concerns. Background checks are required for any managers, officers, and owners of at least 5% of the business. The Division of Liquor will look at felonies and misdemeanors, and particularly those that involve alcohol-related offenses. It will also examine issues involving prior ownership of liquor permit businesses, such as non-payment of sales taxes. Any of these issues could be a basis for denying the application to transfer the permit. As an example, Uncle Ron, who owned a biker bar back in the '90s and was morally opposed to paying sales taxes, might not be the best business partner. If Uncle Ron is a manager, officer, or owns at least 5% of the business, the Division of Liquor will run a background check and may very well reject the transfer application.

A buyer will typically want to operate the liquor permit business immediately following closing, even though the permit is still in the seller's name (and will continue to be for a couple months). In order for the buyer to immediately operate the business, the parties should draft a management agreement, which bridges the time gap between the closing of the sale and approval of the permit transfer. The management agreement should provide that the buyer is responsible for all operations of the business and is entitled to all profits, but also is responsible for payment of taxes. The seller will want to ensure that the buyer indemnifies him for all issues that might arise from the buyer's operation of the business, such as legal claims and non-payment of taxes. The seller also may request that the buyer have an adequate insurance policy in place and name the seller as an additional insured.
If the buyer is also purchasing the real estate of the liquor permit business, he should consider placing the real estate in a separate limited liability company from the permit business. This helps to limit liability in the event of a claim against the liquor permit business. The company that owns the real estate would need to lease the premises back to the company that operates the permit business. If there is a mortgage on the real estate, consider whether it is appropriate for the lease payments to approximate the mortgage payments.

Here are a few other helpful pointers:

  • During the permit transfer process (and, thus, the period that the buyer is operating the business under the authority of the management agreement), the buyer will need to pay sales taxes under the seller's vendor's license number - or pay the taxes to seller, for the seller to report and pay. Once the permit transfer is approved, the buyer can obtain a new vendor's license number and begin paying under the new number. Non-payment of sales taxes can significantly delay the application to transfer or even be cause for denial.
  • For businesses located in southwest Ohio counties (including Hamilton, Butler, Warren, and Clermont, among others), most permits will expire annually on June 1. The permits should timely be renewed during the transfer period, or else the transfer application may be delayed or rejected. If the buyer forgets to timely renew and receives a notice of cancellation, all is not lost. There is a short grace period after the renewal deadline, but a 10% penalty is imposed. No liquor sales are permitted until the permit is reinstated.
  • Have managers, officers, and owners of at least 5% of the business have their fingerprints taken at an electronic fingerprint location as soon as possible, so as to avoid delays with the application process.

Understanding and planning for these issues will help ensure a smooth transfer of a liquor permit business. However, it is strongly recommended that you obtain competent counsel to advise you in such a transaction.

Buechner Haffer Meyers & Koenig Co., LPA is a full-service law firm with attorneys that can assist with liquor permit transfers, business formation and planning, real estate transactions, and many other issues.

NB:

1- This article specifically addresses the sale of assets of a permit business, which business will remain at the same location. Much of the information in this article, though, can be applied to different types of permit business sales, like those that involve the transfer of ownership and location of the permits. It is also important to note that Ohio law requires that the sale be a bona fide sale of a business, so sales are often structured as asset deals, involving the sale of a meaningful portion of the business assets in addition to the permit.

2- The application requires disclosure of any managers, officers, general partners, and owners of at least 5% of the business. If the operating entity is owned by another entity (rather than individuals), expect that the Division of Liquor will drill down into the entity ownership structure until it gets to "warm bodies." Ownership and management of each entity should be disclosed on separate disclosure forms.

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