ABC LIQUOR LICENSES: TYPE-41, TYPE-75 LICENSES AND A BIT ABOUT THE ABC APPLICATION PROCESS.
As a reminder, I’m a restaurant broker in the State of California, so what I’m sharing today is most specifically aligned with the laws and regulations of the state. But no matter where you operate, the license that allows for the service of alcohol needs to be a consideration and on the radar of both restaurant buyers and sellers. Because alcohol sales and service are legislated at both the federal and the state levels, there are similarities between states, but there are also differences. For this post, my discussion will be on how liquor licenses are related to the sale, purchase, and operation of restaurant bars and cafes in the state of CA and most specially in the San Francisco NorthBay region.
***I also want to reiterate an announcement I’ve made in the past about the ABC license annual fee waiver. In February 2020, Governor Newsom signed a Covid relief package that included license renewal fee waivers for many ABC licensees through February 2023. The most important stipulation is to request the waiver while the license is in good standing. Follow this link for more information. ***
The most ubiquitous restaurant alcohol license is the Type-41 On-Sale Beer & Wine-Eating Place. This license allows for licensees to sell beer and wine for consumption on or off the premises. Some distilled spirits can be used onsite for cooking purposes only; brandy, rum, or liqueurs absolutely cannot be sold. Operators must maintain the licensed premises as a bona fide eating place and provide suitable kitchen facilities. Operators must also make actual and substantial sales of meals for consumption on the premises. Minors are allowed on the premises.
As a restaurant broker, I most commonly work the most with 3 ABC license types: the 41 and the transferred Type-41 (besides full liquor licenses—Type-47 and 48s—which I covered in a previous post). In addition to these, there are Type-41 licenses, which allow licensees to serve beer and wine and other forms of alcohol that aren’t distilled (for the most part) or have a lower alcohol content like Soju (which is distilled but has a low alcohol content) and, well obviously, champagne.
Type-41 licenses are fairly easy to secure. With a restaurant purchase, buyers generally transfer the seller’s existing license. But (as I discussed in Episode X when I live streamed from the Downtown Bakery & Creamery in Healdsburg), the benefit of transferring an existing license is somewhat minimal compared to the effect it has on the sale of the restaurant. As a reminder, if the license is transferred, the escrow timeline is tied to the ABC license transfer timeline. This can be between 60 and 90 days depending on the district office servicing the transfer. 60 to 90 days!!
But if a buyer secures an original beer and wine license, which costs about the same and has an almost identical application process as the transfer, then the escrow process can be shortened. Although the original license application process can begin during escrow, there is a risk to the buyer that there may be an interruption in alcohol service if the escrow closes before the original license becomes active.
I want to discuss two aspects of the licensing process that can cause barriers to licensure that I haven’t discussed before. These are the arrest record of the applicant and their spouse, and proof of funds.
The License Application
Let me start with who is included on the license application. If the applicant is a sole proprietor and married, the applicant and spouse must complete a detailed, “Individual Personal Affidavit”. The same holds true for a partnership. If the applicant is an entity (LLC, S-Corp, C-Corp or B-Corp), every owner (member or shareholder) with 10% or more of ownership must submit the detailed “Individual Personal Affidavit”. Additionally, and this is a detail that is always surprising to my clients, their spouses must also complete the “Individual Personal Affidavit.” This is true even though the applicant is an entity. And this form asks very detailed questions that include work history and criminal history as well as their financial contribution and source of that contribution.
With regards to the criminal history, what I’ve found for all of my clients thus far is that the biggest stumbling block to securing a license is that they don’t disclose their ENTIRE record (expunged or not). Instead, they disclose what is on the record. I have had clients with robust arrest records and if the entire history was disclosed, they secured the license. There are situations that can prevent applicants from securing a license. These include types of crimes, how recently the crimes were committed and whether the terms of the sentence were satisfied. For many of my clients, I recommend they contract with a service to produce a report of their criminal history to ensure they accurately report it on the application. With all the licenses I’ve helped secure or transfer, I’ve never experienced an applicant that had a “disqualifying” criminal record—and I’ve seen quite a bit. And remember that detailed criminal records are required for the applicant AND their spouse.
While on the topic of spouses, what if the applicant is in the process of a divorce? The ABC requires very specific documentation (divorce papers or proof of legal separation). It is important applicants state their status VERY accurately, as the ABC fingerprints all applicants (and their spouses). As a result, the agency knows exactly what is going on. It is IMPERARTIVE that the applicant’s history matches the information on file with the ABC. Again, the complications I’ve experienced with applications have the most to do with applicants not disclosing information thoroughly and properly.
Ok, let’s talk money… The ABC conducts a complete financial investigation of the applicants (and their spouses) to ensure the applicant is the true owner (member/shareholder) and there are no unqualified persons who have a financial interest in the business or license. There are many, many questions on the the ABC application asking about finances including: detailed information on the business bank account, authorized signers, bookkeeper’s name and contact information, total costs to secure the license (including the allocation of costs to purchase the business if the license is tied to a business purchase) and total contribution of owners (and their spouses). If the applicant is securing a loan (SBA or private) or the funding is being gifted, detailed information must also be submitted.
The most important takeaway for both the criminal history and the source of funding is that applicants state the complete, truthful, and accurate situation for both. And the same goes for marital status.
The other takeaway? Applicants should work with a knowledgeable and qualified consultant when securing licenses. This holds true regardless of whether they’re applying for a beer and wine or full liquor licenses. It applies whether the license is being transferred or the applicant is securing an original license.
A Type-75 licenses is a Brewpub/Restaurant license that authorizes the sale of beer, wine, and distilled spirits for consumption in a bona fide eating place that can also include limited amount of brewing of beer. So, wait, what was that? Holders of a Type-75 license call sell full liquor? It’s true. And because of that factor, these licenses used to be hot, hot, hot. They offered business operators a “work around” for the expensive Type 47/48 licenses.
And it wasn’t until recently that these licenses could be purchased as original licenses. I know in the County of Sonoma they’re now only available on the open market. The deal with these licenses is that in order to secure one, licensees have to brew and sell a minimum amount of at least 100 barrels of beer per year and can produce no more than 5,000 barrels of beer per year. The brewing license requires a permit from the federal Alcohol and Tobacco Tax and Trade bureau (TTB), brewing equipment, room for brewing equipment, health permit license (think: quarry tile floor, cleanable surface on the walls, Handsink, floor sink and proper lighting) as well as building permits.
For the most part I’ve seen clients secure these licenses with little to absolutely no interest in brewing beer onsite, it was merely to allow for the service of full liquor. And it can be difficult to render a good product out of these small systems. I do have one amazing success story with this license, and I’d like to give a shout out to my clients Stacy Wagner and Mike Gatto who own Hop Creek Pub in Browns Valley in Napa County. Both Mike and Stacy have had long illustrious restaurant and hospitality careers which include working for restaurants with onsite beer brewing. So, when they purchased the restaurant and transferred the Type 75 license associated with the premises, they were committed to and passionate about producing quality, award-winning beer, and they have been enormously successful.
One thing to note about these licenses: the ABC is closing the loophole. This will change the legislation around the use and operation of Type-75s, and the changes will be retroactive. For instance, the ABC recently increased the amount of beer that needs to be brewed annually. Additionally, the ABC investigators are visiting premises with Type-75 licenses much more frequently and with more regulatory oversite then they do with holders of other licenses.
A final word on Type-75 licenses, they are difficult to transfer and nearly impossible to sell if the sale requires a premises transfer. In other words, the license is difficult to sell if the buyer doesn’t plan to brew beer on the premise where the license is currently located. This is due to the infrastructure required to operate with a Type-75 license.
Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco North Bay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, and she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.