Question:
I just completed the purchase of a small restaurant in the Los Angeles area. About three months after I took it over construction began directly across the street from us for a major national restaurant chain that caters to the same clientele as us. They’re scheduled to open in nine months. I’m worried they will drive us out of business. I have reason to believe that the seller knew about this but didn’t disclose it to me. What remedy do I have against the seller? Also, should I sell the business now?
Answer:
While I can understand your concerns about future competition, I’m not certain how you would go about trying to prove the seller knew. Even if he did, is there anything in your contract that would have obligated him to reveal this (besides being the honorable thing to do)?
I think you need to attack this situation from two perspectives:
Regarding the seller, the first thing you can do is find out when the competitor filed for its building permits or other required filings. You may find out it was after your sale and that’s the end of it; but chances are it was prior to three months ago. Next, you should consult with the attorney who drafted your purchase agreement and see what representations and warranties are included in the contract. Specific attention should be paid to any language indicating whether the seller was obligated to disclose any material facts that could have an adverse effect on the business. This does not necessarily mean that had he known about the pending construction he was obligated to reveal it. This is something best left to the interpretation of a competent attorney. Personally, I hate the idea of litigation, unless every other avenue is explored, so before you go after the seller with “guns-a-blazing” do your research.
Selling the business is not an option. How do you think a prospective buyer would feel about the viability of the business if you put it on the market so soon?
The bigger issue here is the fact that you now own the business, and your focus is far better spent on successfully operating it. There’s always going to be competition and the fact remains that in less than a year, they’ll be there. How are you going to position your business so that they’re a non-factor? What are you going to do to keep your clients loyal to you? Sure you may see a drop off when the chain first opens, but a good restaurant can thrive amidst heavy competition. Turn your attention to making your restaurant the place to be. Don’t operate defensively. Use the new chain as a vehicle to bring new people to your location as well.