The restaurant business can be extremely rewarding; yet success is overwhelmingly elusive. It is an understatement to say that most restaurants fail, as some estimates put first year failure rates at upwards of 90%. Of course, each market and type of restaurant has its own variables and thus differing success rates. Nothing can guarantee the success of a restaurant, but if the following ten steps are followed, the likelihood of long-term profitability will be greatly increased.
(1) Strong Business Plan
Although not technically a legal document, a written business plan provides the foundation for any successful restaurant. As is true with most businesses, restaurants need to have a thorough, comprehensive, and clear business plan that is strictly adhered to. No matter how many partners, owners, members, or investors are involved, the business plan should clearly set forth the vision of the restaurant, the responsibilities of the various people involved in the enterprise, and minutely detail projected financial needs and obligations.
(2) Proper Entity selection
Once a solid business plan is created, an attorney should be consulted to determine the most efficient and practical entity to be formed to operate the restaurant. Selection of the proper entity depends on various factors, including the number of people and investors involved, and tax considerations. Entity selection should not be taken lightly. Given the nature of the restaurant business, incorrect or unadvised entity selection could lead to dire consequences including failure down the road.
(3) Legal Agreement between the Owners
A rock-solid legal agreement between the owners and investors should be created well before the restaurant opens its doors. The legal title of this document will depend on the actual entity selected (as the law requires different types of agreements for different entity forms). Irrespective of the title of the agreement, it is a crucial aspect of long-term success. The agreement should clearly set forth the roles of individuals involved, management structure, decision making, and investor powers. Mechanisms must be put in place to quickly and efficiently settle disputes. Consultation with legal counsel in the preparation of this agreement is imperative.
(4) Securities Compliance
Restaurants are not cheap to open, and raising funds from investors is a delicate process. Unless the owners are fortunate enough to have sufficient capital on hand, they will need to reach out to third parties. Soliciting investors places the principals directly at odds with securities laws, and an attorney should be consulted to ensure compliance. Whether or not an investor is accredited or not and may be exempt from compliance is a legal question that should not be decided without the advice of counsel.
(5) Licensing Compliance
Restaurant owners also need to ensure that they are in compliance with all applicable municipal and state licensing requirements. Every municipality has different licenses which must be filed and periodically renewed. For example, for most restaurants, one of the most important and expensive licenses is the liquor license. Oftentimes the license or licenses tied to the license will dictate the hours of operation of the restaurant. An attorney should be consulted to ensure license compliance at least on an annual basis.
(6) Regulations Compliance
Separate from licensing compliance is an understanding and compliance with any applicable regulations and ordinances. These differ from municipality to municipality, and new restaurant owners or operators of franchises need to ensure that each restaurant location is compliant with applicable regulations. Consulting an attorney is the best way to ensure that all local regulations are being complied with.
(7) Compliance with Employment Law (Wage & Hour)
Restaurants generally hire numerous employees including managers, waiters, bartenders, hosts, a chef, cooks, dishwashers, and janitorial staff. These employees are often part time and there is generally a high attrition rate. Many of these employees also work hourly and for tips. It is imperative that attention is given to legal compliance in the realm of wage and hour. All time and breaks must be documented, and overtime must be paid. Additionally, California law requires numerous postings visible to employees regarding their compensation rights. Failure to ensure compliance could have serious legal consequences.
(8) Compliance with Employment Law (Discrimination & Harassment)
Aside from compliance with wage & hour law, proper preventative steps should be taken to prevent discrimination and harassment. First and foremost, all employees should be given an employee handbook which clearly sets forth the restaurant’s “no tolerance policy.” The
handbook should also detail reporting procedures. Additionally, periodic employee training on harassment prevention and reporting should be mandatory. Finally, further precautions should be taken if the restaurant operates a bar, as the presence of alcohol can lead to a host of additional issues.
In the restaurant business, any number of disputes can arise quickly between managers, investors, and employees. It is therefore imperative that all parties have agreed in writing to dispute resolution procedures that can resolve disputes expeditiously. Alternative dispute resolution is thus preferable to taking a dispute to court, especially given the expansive budget cuts occurring in California courts today.
(10) Periodic Legal Consultation and Training
Restaurant management should retain and periodically consult with an attorney to ensure that the restaurant is in full legal compliance. Especially in the realm of employment law, periodic consultation and training is important. Revisions to employee handbooks and training procedures should occur on an annual basis. Additionally, as restaurants grow, expand, or franchise, they need to ensure they are aware of and in compliance with the law.
In summary, compliance and dispute prevention is always more cost-effective than non- compliance and dispute resolution. At some point, everyone has questioned why a popular restaurant closed its doors. No matter how popular or successful a restaurant may seem, damaging legal issues can quickly ruin a restaurant’s existence. Long-term profitability is therefore dependent on strong legal understanding and compliance.
By John Holcomb, Jr.
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