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Acquiring or selling a business can be a daunting task, even more so when the business holds one or more liquor licenses. To ensure a successful outcome, it is important for you to understand the threshold issues for transactions generally, as well as those unique to these types of transactions so you can hopefully avoid common pitfalls.

Asset vs. equity purchase

First, the type of purchase – asset vs. equity (stock or membership interest) -- is not only the key to the structure of the transaction but also has a major impact on the licensing process. Generally, with an asset purchase, the buyer is effectively purchasing the right to the license as one of the assets of the business. In New York, a liquor license cannot be sold or transferred, so technically the license itself is not a salable asset. However, in certain instances, particularly with liquor stores, the fact that the license exists at that location is itself an asset since it greatly increases the likelihood of the buyer being able to obtain their own license. It is important to understand how the existence of the license factors into the purchase, and into the allocation of the purchase price. This varies depending on the type of business and specific circumstances but typically involves a higher value for a liquor store than it might for a bar, restaurant or grocery store.

If a buyer is purchasing the assets of a licensed business, they would need to submit a new application to the New York State Liquor Authority (the SLA) for a license in their entity’s name. If the buyer is purchasing the equity of the business, then the parties would need to collaborate to submit an Application of Approval of Corporate Change to the SLA which results in the SLA effectively changing the ownership/principals on file with the license, but the license remains in the same corporate entity.

A primary reason buyers might prefer to do an asset purchase is because it does not involve the buyer assuming liability of the seller’s entity. This is particularly important in the context of a licensed business, where the seller’s liability with their license extends back to violations committed during the current license period and the one preceding it. Depending on the type of license, this could be a six-year window. The other benefit of an asset purchase is if the buyer is filing a new application, they are entitled to apply for a “temporary operating permit” from the SLA. Currently, SLA processing times can be take six to12 months; however, a temporary permit can typically be received in about six weeks. At the moment, there are no temporary permits for corporate changes, meaning an equity transaction involving a liquor license could take nearly a year to complete.

Common pitfalls to avoid

One of the most common and serious pitfalls for buyers in these transactions is failing to include language in the purchase agreement making the approval of the permit or license a condition for closing the transaction. If, for example, this language was not in the purchase agreement, and the SLA denied the buyer’s application, the buyer would remain obligated to complete the purchase without the ability to operate as a licensed business.

One of the common pitfalls for sellers is not including time limits in the purchase agreement that require, for example, the buyer to submit their SLA application within a certain period and to comply with requests by the SLA in a timely manner. Unless language to this effect is included in the agreement, the buyer could delay submission of their application, which, given the already prolonged SLA processing times, could substantially delay closing.

There are also clauses unique to these types of transactions that can prove detrimental to both parties if not included in the underlying agreement. These include provisions regarding surrender of the existing liquor license, application for a liquidator permit (which allows the buyer to purchase the seller’s alcoholic beverage inventory), determination of the price and value of inventory, and proper conduct and creation of an acceptable inventory list.

Transactions involving licensed businesses present unique circumstances with which many experienced attorneys are not familiar. Whether you are the buyer or the seller, it is important that you have the right attorney, or team of attorneys, working to make sure the transaction documents are properly drafted and include all the relevant, specific provisions to ensure a smooth and successful transaction.

If you have questions regarding the operation of your existing New York licensed business or are contemplating buying or selling your business or applying for a new license, please reach out to Alexandra Becker at Whiteman Osterman & Hanna.

Whiteman Osterman & Hanna, the Capital Region’s largest law firm with over 100 attorneys, has developed a reputation for innovative solutions and professional leadership. For almost 50 years, the firm has served the legal needs of business, government, not-for-profits and individuals in the Capital Region and across New York state.

As seen in the Albany Business Review - view here.