THE HEALTH DEPARTMENT CHANGE OF OWNERSHIP SITE REVIEW: IT’S A THING.
Today I’m discussing the health department change of ownership site review: it’s a thing.
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. How each County inspects and enforces codes at the change of restaurant ownership differs greatly.
The health department change of ownership site review is one of the most primary contingencies for the buyer and, as I mentioned above, each county performs them differently. In San Francisco, the health inspector comes onsite days before the close of escrow and the inspection resulting requirement are typically minimal and health permit approval is granted to the buyer that day. As we move into to the North Bay counties, those inspections are done as soon as the buyer can get the health inspector onsite after the seller has accepted the offer. Those inspections usually render a report with requirements that can be rather lengthy and sometimes costly to satisfy. The buyer will not be issued a permit without satisfying the requirements.
Here is the most important takeaway: The change of ownership inspection is NOT the same or similar to the inspections that happen in semi-annually the health department field inspectors.
Those inspections are the ones that result in the placard being displayed in the window with the restaurants inspection grade. These are two very different inspections, and in most counties they are inspected by employees in different departments of environmental health. This is especially true in the San Francisco North Bay. Rather than enforce environmental health code changes to current restaurant operators, which often require solutions that are expensive and sometimes disruptive, code upgrades are mandated at the change of ownership. Meaning, if a restaurant that has only been in operation for 3-4 years is being sold, they secured their initial health permit 3-4 years ago. The change of ownership site review isn’t too brutal, but for restaurants who have been in operation for 10, 15, 20 or even 30 years, the site review generally results in a lengthy list of upgrades and the buyer will not be issued a permit until the upgrades are completed.
Before I take you through the site review process, I want to clarify one thing. As a restaurant broker, I work with bulk transfers. Bulk transfers are where the buyers are taking ownership under a new entity, the transfer goes through the escrow process and the restaurant is delivered to the buyer free of all liens and encumbrances. Some buyers may opt for a stock buyout of the seller’s corporation or membership buyout of the seller’s LLC to keep all licenses and permits in place. This option avoids the health department change of ownership site review. However, this is not always the best strategy. An ABC license requires a full transfer if the ownership changes more than 50%. The transfer of the ABC license can sometimes alert other agencies to step in and require a new inspection.
As soon as the buyer and seller establish a contract for a bulk transfer of a restaurant, bar or café, there are two major buyer contingencies:
- securing agreeable lease terms with landlord approval
- conducting/passing the health department change of ownership inspection
The buyer may opt for what we could call ‘voluntary inspections’ during the due diligence period. These voluntary inspections include, but are not limited to, inspections of equipment or HVAC inspections. However, buyer cannot operate as a new owner without a lease or a health permit.
Quick note: the buyer pays for the due diligence inspections and in Sonoma County. The health department will not accept a change of ownership application until the facility passes an exhaust hood air balance test. Buyers should budget a minimum of a $1,000 to complete the air balance test and health department site review.
Both the buyer and the seller should be present for the site review. This allows both parties to understand what is required. They will also both be present to answer questions the inspector might have. The inspection can take anywhere from one to two hours.
Below is a list of things that typically comes up on the reports:
- Residential equipment or appliances (Non-commercial (or non NSF) equipment) being used
- Wood (vs stainless steel) shelving
- Cleanable surfaces on walls
- Sinks, Sinks, Sinks
- Water heater size (related to sinks, sinks, sinks)
- Guest access to the bathroom
- Refrigeration Outside
- Approvable flooring and coving
- Grease trap
Quick Tips Pertaining to the List Above
When the health department comes onsite, the first thing they require will be that any non-commercial equipment be removed. Generally, those things might include operators using a Cuisinart food processor rather than a Robot Coupe or a kitchen-aid mixer that is not NSF approved or microwaves that are for residential use.
Shelving: Many restaurants have wood shelving, either untreated or treated, and most of it is no longer health department compliant. Certain types of maple butcher block are allowed, but the operator must prove that it meets the health department’s criteria.
Sinks: Triple sink needs to be large enough to submerge the largest crockpot. It must have drain boards on both sides.
Food Storage: Any area used for food storage needs to have stainless metal or coated shelving. Shelf bracketing is also inspected, however the health department requirements for those are too detailed to discuss on this post.
Walls: Every wall that is in areas where food is cooked, prepped and/or stored requires specific coverings. Near heat or flame, the wall covering is required to be flame resistant. Tile or stainless steel is required in those cases. In other areas, walls must be covered with a cleanable surface which usually means Fiber-reinforced plastic. In some locations, the health department will allow certain types of oil-based paint.
So, who’s responsible for the changes? There is no straight answer on this. Some of the items may be due to the operator’s deferred maintenance. A review of past health reports may be beneficial in this case. Most of the time, the requirements have to do with codes that have changed since the seller started operating. If the buyer is paying the full asking price, the buyer may ask the seller to take care of the items. In some cases, the seller may counter with an “as-is” addendum, which signifies that the buyer will take care of any additional costs to take ownership.
You’ll notice that some of the items will require the business to close down in order to fix them. What happens to the staff or rent during this closure? All of this is a negotiation between the buyer and seller and sometimes the landlord.
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.