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Not Having Contracts for Your ...

Not Having Contracts for Your Restaurant is Recipe for Disaster

  • October 26, 2018

You and your (brother, sister, best friend, etc.) decided to open a restaurant together. You have started to narrow down locations, secured some financing, you may even have a couple of friends who will invest…things are moving full steam ahead. What happens next? STOP…If this is your first restaurant, there are lots of things you will consider before opening your doors. And, if you have partners, regardless of who they are, the process can be even more involved.

Throughout your new venture, you will become quite familiar with contracts.  When it comes to your partners, you’ll want to make sure that your contract with them is as thoughtful and complete as possible.  In this way, your contract will do its best to become a solution to or path through a problem.  A poorly drafted or boilerplate form of contract may only make your problem worse.

It is imperative to create a contract or agreement no matter who the other person is, no exceptions.  While you may not believe that a family member would betray you, a family member’s betrayal is the most frequently litigated issue in “business divorces”.

“You will want to spend the time and money to draft an agreement that has a tailored plan, not only for duties, responsibilities and decision-making, but for critical events, such as partners withdrawing, dying or retiring, and valuation on sale, buy-ins, buy-outs, and dissolution.  Depending upon the type of business entity you select, and what your agreement says or doesn’t say, partners can find themselves in a nightmare scenario where there is no way to terminate or exit the venture or to combat the abuse of the majority owner.”   -Darren H. Fairlie, Esq. (SDG Law commercial and civil litigation attorney)

Your FIRST COURSE (of action).
First, decide who the owners are, what percentage each will own of the business and establish the roles of each of the partners. Your agreement should detail the roles and responsibilities of each partner as it pertains to business areas such as marketing and advertising, finance, staffing and human resources, etc. Further, it should cover the amount of equity or sweat equity put in by each partner and how that is factored into ownership interest.

You will want to consider what happens if the business is sold or dissolves. Who will be responsible for tax matters. Who will run the day-today? What is the sign-off procedure for larger decisions? Who will oversee staffing and HR issues? Who can make purchasing and selling decisions? PLUS, you should have something in your agreement about what happens when you do not collectively agree on a decision.

Don’t get SCALDED down the road. Preparation is the key to success.
What if more capital is needed down the road? Maybe the business will take off and you will expand or in other instances, re-locate. Other things to consider would be intellectual property. Perhaps one person is a chef and one person is more business minded.  What they both bring to the table has value to the business: recipes, vendor connection, client lists, business name, etc.  It is important to think of all these scenarios and how they may play out while everyone is getting along and well before they happen. Reacting to them after they have happened can be detrimental to your business.

As you can see, there are many things to consider when opening a restaurant with or without partners. Like most business, with partners it becomes more complicated. You must do your best protect yourself and prepare for anything, up front.

“The ‘ounce of prevention’ is the time spent planning and drafting how the business venture will work.  The ‘pound of cure’ is the time spend litigating a dispute in the courts.  Some disputes can be avoided, some cannot.  But in any event, a thoughtful, well-drafted agreement can streamline that dispute and give you leverage and options you wouldn’t likely have without one,” explains Darren.

 

SDG Law is a general practice law firm with 15 attorneys and a large support staff. Our business law team has experience helping restaurants, breweries, hotels and other hospitality clients successfully set up their business which includes contracts, establishing and maintaining a NYS liquor license, financing, leases, expansions and business divorces.

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