Purchasing a liquor license can be an exciting step for any budding bar owner or restaurateur. It’s often a sign that your business dreams are becoming a reality. However, beneath the surface of this seemingly straightforward transaction lies a hidden peril that could turn your dream into a financial nightmare.

This cautionary tale reveals the little-known issue of undisclosed credit card debts attached to liquor licenses and how they can come back to haunt unsuspecting buyers.

The Hidden Debt Trap

Imagine this: you’ve found the perfect location, renovated the space, and are ready to serve your first customer. You’ve even managed to secure a coveted liquor license from a previous owner. Everything seems perfect, but there’s a catch. Unbeknownst to you, the previous owner financed the purchase of the liquor license using a credit card cash advance. This detail was never disclosed during the sale, and now, the credit card company is knocking on your door, demanding repayment.

How Does This Happen?

When a previous owner uses a credit card cash advance to pay for their liquor license, the debt isn’t always immediately apparent. These transactions can be easily overlooked during the sale process, especially if proper due diligence isn’t conducted. Unlike traditional loans or liens, which are typically recorded and visible in public records, credit card debts are private and can remain hidden unless explicitly disclosed by the seller.

The Legal Quagmire

The legal ramifications of this scenario can be complex. In many jurisdictions, liquor licenses are considered assets that can be seized by creditors. If the credit card debt used to finance the license goes unpaid, the credit card company may have the right to reclaim the license, leaving the new owner high and dry. Worse yet, if you unknowingly acquire a license with such hidden debt, you might find yourself liable for the balance. Failure to address this can result in losing the license and potentially facing legal action from the credit card company.

A Cautionary Tale: The Story of “Joe’s Tavern”

Consider the case of “Joe’s Tavern”, a small bar that was thriving under new management until an unexpected letter arrived. The previous owner had used a substantial credit card cash advance to buy the liquor license, never disclosing this debt to Joe. Suddenly, Joe found himself responsible for a debt he didn’t incur. The credit card company threatened to revoke the liquor license unless the outstanding balance was paid immediately. Without savings, finding the funds to cover this new debt can cripple a new business drastically affecting cash flow and jeopardizing operations.

Protect Yourself: Due Diligence Is Key

To avoid falling into this trap, prospective buyers of liquor licenses must exercise thorough due diligence.

  1. Comprehensive Financial Audit:
    • Partner with LLP to conduct a thorough financial audit of the license’s history. This includes reviewing all financial transactions related to the license, identifying any credit card cash advances, and ensuring there are no hidden debts.
  2. Full Disclosure Agreement:
    • Work with the team at LLP to draft and secure a full disclosure agreement from the seller. This legally binds the seller to reveal any and all financial obligations tied to the liquor license, including credit card debts and other liabilities.
  3. Title Search and Financial Due Diligence:
    • Utilize the expertise of liquor license professionals to perform a comprehensive title search and financial due diligence. This process helps uncover any liens, loans, or undisclosed debts associated with the liquor license, providing a clear picture of its financial status
  4. Indemnity Clauses and Protective Provisions:
    • Ensure that the purchase agreement, crafted with the help of Liquor License Professionals, includes indemnity clauses and other protective provisions. These legal safeguards hold the seller accountable for any undisclosed debts that may surface after the sale, protecting the buyer from unexpected financial burdens.

Conclusion: Forewarned is Forearmed

Buying a liquor license is a significant investment that can propel your business to new heights. However, the hidden danger of undisclosed credit card debt is a risk that every buyer must be aware of. By taking proactive steps to investigate and secure your purchase, you can avoid the fate of Joe’s Tavern and ensure that your business remains on solid financial footing. Remember, in the world of business, forewarned is forearmed—don’t let hidden debts turn your dream into a nightmare.