With the independent food industry rapidly developing in Detroit, we thought we would revisit one method of ownership that is often the gateway into the restaurant industry. There are various approaches to restaurant ownership, i.e. passive investment, owner/operator, but as business attorneys we are often approached by clients who find their point of entry to the Restaurant industry through franchise ownership.
Naturally, there are pros and cons to every closely held business, and whether the client is considering a franchise from afar, or ready to sign a an FDD, there are some legal considerations to be mindful of as one embarks on the process:
1. Review the Franchise Disclosure Document (FDD) and other franchise documents with legal counsel. The FDD contains all the nuts and bolts of the franchise owner’s requirements. It will detail the franchise fees, territory, licenses, ongoing royalties, contributions to a marketing fund, etc. This document is often considered “non-negotiable.” Whether or not that rings true, the franchisee should understand each and every term contained therein and be prepared to negotiate terms and details of the agreement with help of counsel.
2. Choose a business entity under which to operate and have proper documents drafted by counsel. There are several options in business start up, i.e. C Corp, S Corp, LLC, Partnership and tax election that should be decided and completed upon at the outset. If there is more than one owner of the business, shareholder agreement with buy-sell provisions is recommended.
3. Location, location, location. Often one of the key factors for success, a lease for retail space and/or purchase of real estate should be reviewed thoroughly and negotiated with assistance of counsel. The real estate documents may also require personal guarantees that should be reviewed and negotiated thoroughly.
4. Equipment purchase or lease may require additional contracts that the operations should review. Often the equipment is leased directly from the franchisor, in other cases equipment is leased or purchased from third parties. This may include financing and security agreements that should be understood prior to being agreed upon.
5. Once the business is up and running, employment issues will often be at the forefront and one of the biggest challenges of operations. Be sure to have all necessary employment documents in order, including applications, employment agreements for management, non-compete agreements where applicable, and employee handbooks. Employee retention is key to a successful operation.
6. Trade names and Branding. Trademark application for new names, or trade name licensing in the case of an established name will be important especially once the operation becomes successful.
With the exception of the first bullet above, the same principals and issues arise in non-franchise restaurant ownership and operation. The attorneys of Dalton & Tomich have first hand knowledge and experience in advising restaurant industry clients developing a business plan, obtaining liquor license, complying with safety regulations, mergers, acquisitions, providing referrals in advertising, marketing, and funding. And of course, we are always willing to taste test the new menu.