Texas Restaurant Law

The Top 7 Things To Consider Before Buying A Restaurant

By Matthew Sanderson on May 1st, 2013 Posted in Acquisitions, Alcohol, Contracts, Corporate Entity, Employment, Intellectual Property, Liability, Litigation, Real Estate

There are so many things to consider when buying a restaurant that we decided to break that list down to just seven issues. If you only look at these issues, you should avoid most of the big hazards when you buy your next restaurant. Now, this assumes that you have some idea of the restaurant itself, what it serves, and its reputation.

With that in mind, the top seven things to consider include the following:

Financials – Make sure that the owners have and can show at least a profit and loss statement and preferably certified financial statements. Show this information to your accountant, and make sure that it makes sense to you. Also, request that the Seller certify that these financial statements are true and correct.
Prior Liens & Liabilities – Run a UCC lien search against the restaurant, the entity (like an LLC) and the owners. This should establish the liens that may need to be paid off when you complete the transaction. If you close the deal without paying off these liens, the prior lien holders may seek their payment from your new restaurant.
Inventory - Make sure that the inventory on the day you take over is sufficient to cover your operations. Also, make sure that the Seller is incentivized to keep the inventory at a level that is healthy for the ongoing operations of the restaurant.
Intellectual Property – The purchase agreement should deal with intellectual property. Who owns it after closing? Are you buying it? Who owns the name of the restaurant? Who decides when the next restaurant with the same name can open or where it opens?
Employees – It is important to interview at least the key employees before you close the transaction. Also, request that the seller remain responsible for accrued but untaken vacation time and sick leave.
Real Estate – Most restaurants operate on leased premises. As such, the landlord must sign off before you complete the sale. Has the seller talked to the landlord? Also, ensure that the “bricks and stick” will support your ongoing operations. As such, decide whether additional repairs or modifications are needed, and address those in the contract or with the landlord.
Alcohol – Finally, have you identified the transition of the alcohol activities in your purchase agreement? Remember that the seller cannot transfer or sell you his or her alcohol permit. As such, you must ultimately obtain your own, new permit, but you can enter into a management agreement with the seller while you wait for your own permit. Be careful, though, because there are very strict requirements in the management agreement, and the Texas Alcohol and Beverage Commission must receive a copy of the agreement and approve it before you complete the transaction.

About the author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.

Top Ten Tax Mistakes for Restaurant Owners

By Matthew Sanderson on April 23rd, 2013 Posted in Corporate Entity, Employees & Waitstaff, Franchises, Liability, Litigation, Real Estate, Recent Law Trends

We all know how important restaurant taxes are to restaurant owners. Last week, our own tax counsel, David Gair, outlined his Top Ten Tax Mistakes for Restaurant Owner on TexasTaxTalk.com, so TexasRestaurantLaw.com decided to share it as well. Here is the list in its entirety:

Employee Classification – Misclassifying workers as independent contractors and not employees can be terrible problem. Restaurant workers (chefs, waiters, dishwashers, etc.) are employees. Employers don’t get to arbitrarily pick classifications. The underlying question is whether the worker is under your “direction” and “control.” Good news is that if you have misclassified there are a variety of solutions. For instance the IRS has a voluntary classification settlement program that can mitigate damages if you act quickly enough.
Choice of Entity – This is an important decision that needs careful thought. Proper choice of entity can save you tax if the company is profitable and shield you from tax liability if it is not. For instance, certain types of limited liability entities can shield you from discharge of debt income (a common problem for restaurants) – others cannot.
Failure to Pay Employment Taxes – Many companies in distress find that in order to keep the company going they have to delay payment to certain creditors. A favorite is not paying employment taxes. This is usually a HUGE MISTAKE. The IRS not only hits the company with huge penalties – but the responsible persons can be liable for the Trust Fund Recovery Penalty in their individual capacity. The trust fund recovery penalty is also not dischargable in bankruptcy.
Failure to Maintain Good Standing with Secretary of State - It is very common for business owners to fail to observe responsibilities with the Texas Secretary of State and/or the Texas Comptroller. This can lead to loss of limited liabilty. For instance, Texas law provides that if a company fails to file a report or pay a tax or penalty – each director or officer of a company will face personal liability for any debt of the company.
Paying Sales Tax - Failure to pay the appropriate sales tax will lead to personal liability for these taxes. Additionally, the Texas Comptroller does not take kindly to this failure and can and will shut the restaurant down.
Tip Reporting - There are IRS tip reporting requirements for both employees and employers. You need to have a system in place that properly accounts for this.
Structuring Deposits - Generally, when a deposit of cash is made into a bank of greater than $10,000 a Currency Transaction Report (CTR) must be filed. For restaurant owners dealing in cash is a normal operation. And large deposits are not uncommon. Many people think that the CTR will raise red flags. The bigger red flag is when you attempt to avoid the requirement by depositing less than $10,000 on a regular basis. This is a felony! To avoid this problem altogether you can actually apply for an exemption with the government.
Failure to Employ Qualified Professionals – Running a restaurant is not a do-it-yourself type operation. There are legal/accounting issues that come up that simply require help. Gaining good advice and assistance will generally help you make money.
Not Keeping Good Records - Not many people like to go to the trouble of keeping detailed records. The Internal Revenue Code permits various business deductions – but only if you follow the rules. The major rule is maintaining documents that show you paid the expense and also demonstrating that the expense was business related. If you are too busy – find a qualified bookkeeper. The bookkeeper will save you money.
Property Taxes – Generally, restaurants will lease a location to operate the business (as opposed to buying the property). It is important to have a well written lease that clearly delineates who will be responsible for paying property taxes.

What Is Restaurant Intellectual Property?

By Matthew Sanderson on April 17th, 2013 Posted in Acquisitions, Competition, Contracts, Employees & Waitstaff, Intellectual Property, Liability, Litigation, Negotiation, Vendors

At TexasRestaurantLaw.com, we have covered “Who Owns Your Restaurant Name?” and “Is Your Restaurant Recipe Safe?” However, we have not previously discussed the many parts of restaurant intellectual property. This post shows some of the most critical pieces that encompass restaurant intellectual property.

Your Name & Brand

We all hear that branding is everything. Likewise, you probably put a lot of thought into your brand and name. So how important is it? You might ask the folks at Chips Old Fashioned Hamburgers in Dallas. Because of branding (and a darn good burger), this Texas restaurant was just named as one of America’s top 10 best burger restaurants in the U.S. Here’s the link for the article.

Before making the Top 10 List, Chips wisely used the “TM” next to their logo, which shows that they claim a trademark in their brand. These types of trademarks offer a great amount of protection for a brand, and that is the prime way that restaurants protect this information. Additional protection can occur when the trademark is registered with the United States Patent and Trademark Office. Likewise, when buying a restaurant, it is important to ensure that the restaurant owners actually own the name and that it is specifically listed as part of the items being purchased.

Your Recipes

Recipes are another key “ingredient” in the totality of a restaurant’s intellectual property. Unlike a brand name, protection for recipes is not available either via a trademark or a patent. Thus, these items remain part of a restaurant’s trade secrets, and it is important to keep them exactly that – a secret.

Your Inventions

Inventions are another aspect of a restaurant’s intellectual property. Many restaurant owners invent things, and they often do not realize it. Have you designed a new bottle opener to make beer service faster? Have you had a particular POS system developed by a programmer that is unique to your restaurant? Have you designed a new straw or a new lighting system?

All of these are examples of possible inventions that you should consider protecting via a patent.

Your Trade Secrets

Finally, the catch all of intellectual property for restaurants is the trade secret category. Trade secrets are “everything else”. Restaurant trade secrets can include know-how, customer lists, processes, recipes, and many other items.

However, for these items to really be part of a restaurant’s intellectual property, they must remain secret. The best ways to accomplish this are to (A) have your employees and vendors sign non-disclosure and/or non-compete agreements and (B) when possible, separate pieces of these trade secrets across different parties so that not one party can assemble them all. Again, see our prior story, “Is Your Restaurant Recipe Safe?” for more on this topic.

How To Deal With Restaurant Partner Disputes

By Matthew Sanderson on March 20th, 2013 Posted in Commentary, Contracts, Corporate Entity, Franchises, Franchising, Liability, Litigation, Negotiation

There are many motivations for restaurant creation and investment. However, these different desires can lead to conflict, so how are restaurant operators, owners, and investors supposed to resolve these conflicts? This post answers that question, and it gives a game plan to operators, owners, and investors to deal with these inevitable conflicts.

Step One: Avoid The Conflict By Identifying Motivators and Doing Your Homework

The best way to deal with a conflict is to ensure that it never happens in the first place. We have written several posts about when to bring on a partner (click here for link) and avoiding partnership mistakes (click here for link). Use these tools and advice to ensure that it is the right time to bring on a partner, that it is the right partner, and that the structure of the partnership is correct.

Aside from these strategies, you can also ensure that everyone understands each other by initially identifying the motivation of all of the other partners. If one partner is motivated by greed while the other partner is motivated by the challenge, they need to know and agree on that up front. They also need to identify and agree on the restaurant’s goals and the timing of those goals at the beginning of the partnership. If not, partners could face a high likelihood of conflict.

Step Two: Open The Lines Of Communication

Assuming that you have not been able to avoid the conflict in Step One, the next step is to ensure that everyone is communicating. You also need to communicate in a constructive way. Yelling is a great way to express yourself, but it is not generally going to bring the parties to an agreement on a dispute.

This might be a “duh” moment for many people, but it is a huge issue. Many people become so wrapped up in the problem that they fail to talk about it or they talk about it poorly. Neither option will produce good results in a dispute.

If you can talk constructively about the issue, it can save you a lot of time and money.

Step Three: Stand Up For Yourself And Your Rights (But Don’t Lose Your Cool)

Assuming that you could not avoid the conflict and communication has now broken down, it is time to bring in a third-party to resolve the dispute. This does not have to be an attorney. Any person that both parties trust may be able to act as a good mediator to bring the parties back to being able to communicate and resolve the dispute. Of course, failing that, you may need to bring in an attorney to at least present your position in a legally supportable format, which may be the only way to resolve the dispute.

Ultimately, whether you can resolve the dispute on your own or if you have to hire or involve a third-party, it is vital that you keep your cool. Instinctive reactions can often lead to disastrous and costly mistakes, so consider the dispute, the other side, and the value of the dispute before you take action. This can often lead to success in the face of what may seem a monumental dispute.

Sugar And Horses: How To Deal With Restaurant Supply Issues?

By Matthew Sanderson on March 13th, 2013 Posted in Commentary, Liability, Litigation, Negotiation, News, Recent Law Trends, Vendors

Two recent news stories present the issue of how restaurants should deal with supply issues. The first story is the infamous horse meat scandal that has plagued Burger King in the United Kingdom since January. Click here for that story. The second story appeared in today’s Wall Street Journal. It deals with the fact that the U.S. Department of Agriculture may purchase up to 400,000 tons of sugar to bail out sugar processors who may default on current loans of approximately $862 million. Click here for the full story.

These stories show that restaurants and others in the food industry are quite reliant on suppliers. As such, restaurants may be greatly affected by the actions of suppliers. The stories above show that Burger King’s reputation may have been damaged from the actions of its meat suppliers. The sugar story shows that, despite falling prices, these bailouts could keep sugar prices up. This affects restaurants, candy makers and really all of us, given the world-wide “addiction” to sugar.

So how can restaurants (especially here in Texas) insulate themselves from these (and other) kinds of liabilities? Consider the following possible solutions:

Carefully negotiate food and all supplier contracts;
Ensure that such contracts discuss solutions for supplier liability or bad dealings;
Use back-up and alternate suppliers to give you the best bargaining position;
Coordinate supplier contracts with others of the same or similar restaurants to maximize leverage for negotiating these items; and
Carefully review any supplier regarding their quality control and ongoing practices and negotiate ongoing audits and review of these processes, if possible.

Further, how should restaurants deal with these issues after the fact? Consider the following possible solutions:

Have a game plan in mind before an incident; and
Deal with any incidents up front instead of trying to cover them up (like it was alleged that Burger King did in the story above).

At the end of the day, there is only so much that anyone can do about liability from third-parties that you rely on for your business. However, preparing for issues and properly executing a plan for dealing with them when they arise will put you in the best position for when such unexpected and negative issues arise.

How To Avoid Taxes From Your Restaurant LLC

By Matthew Sanderson on March 5th, 2013 Posted in Corporate Entity, Legislation, News, Recent Law Trends

For years, I have recommended that all restaurants should be operated as limited liability companies – that is no more! Recent tax changes have now made LLCs much less attractive. Instead, we now suggest that our restaurant clients should consider forming “S-corporations,” except in rare instances. See below for the details and for a way you can avoid these taxes if you act quickly.

Why Have Things Changed?

Effective January 1, 2013, certain types of income have become subject to an additional 3.8% or 0.9% in employment taxes. Many LLCs can avoid these taxes by making an election to be taxed as an S corporation.

Effective this year, all income earned from LLCs not taxed as S corporations that are engaged in an active business is subject to self-employment taxes imposed at a rate of 12.4% (up to the social security maximum — $113,700 for 2013) and a 2.9% rate for Medicare (without any maximum). Also beginning this year, there is an additional 0.9% tax for Medicare (bringing the total to 3.8%) for individuals earning in excess of $200,000 ($250,000 for couples filing married filing jointly). There is also a new 3.8% Medicare tax (with no maximum) on income not derived in an active business including interest, dividends, annuities, royalties and rents, and income from a passive activity of a trade or business.

Help! I Want To Avoid These Taxes!

Don’t panic! There is help for those who now operate as an LLC. It is called a conversion. You can convert your LLC into an S-corporation, and the fees are relatively little. However, there is a very small amount of time left to make the conversion this year. Those conversions must be complete by March 15. That means that time is running out, so contact us today if you want to avoid these taxes.

Ouch! The Payroll Tax Takes Its Toll!

By Matthew Sanderson on February 27th, 2013 Posted in Commentary, Legislation, News, Recent Law Trends

As many of you know, the payroll tax cuts recently expired, which reduced 2% of consumers’ take-home pay. That recently caused many retailers, including restaurants, to scale back prior expectations for revenue this year. Recall that in January in this article (click here to see it), we discussed the great outlook for restaurants for 2013 based on a report from the National Restaurant Association. Apparently, that outlook is still quite rosy, but less optimistic than before.

Key Restaurants & Food Companies Being Affected

For instance, according to an article in the Wall Street Journal last week (See the edition dated February 22, 2013, written by Shelly Banjo, Annie Gasparro and Julie Jargon), Burger King, Kraft, Tyson, and Chipotle all scaled back their revenue forecasts for 2013 or have made adjustments to their 2013 overall strategies based on these taxes. Further, these companies claim that their reduced expectations or strategy changes were based primarily from the hit that taxpayers would receive to their incomes from the increased taxes.

What Other Restaurants Are Doing About The Increased Taxes

Burger King responded by reducing the price of a Whopper, Jr. from $2 to $1.29. Last year, McDonald’s started to focus its advertising on its Value Menu, and the article above shows improved profits from that effort.

Given the shift in these tax rates, restaurants may consider adjusting their pricing down or certainly not raising prices. That seems to be the strategy employed by the restaurants listed above. Further, if these taxes do prove to be the scourge that they are being made out, it could be an opportunity for restaurant owners with cash to buy out other restaurants that struggle from the hardship.

Have you seen any signs of these taxes affecting your restaurant? We would like to hear about it!

The Changing Nature Of Restaurant Real Estate

By Matthew Sanderson on February 20th, 2013 Posted in Acquisitions, Commentary, Franchises, Franchising, News, Real Estate

For those familiar with the International Convention of Shopping Centers (a/k/a “ICSC”), you probably received your copy of Shopping Centers Today (“SCT”), which is the monthly magazine that they publish on national real estate. For those who don’t know, ICSC connects nearly all retail operators, landlords, and brokers who are involved in real estate, and they do so via national and regional conventions. I received my copy of Shopping Centers Today, and I was amazed for several reasons related to restaurants.

First, about half of the publication was devoted to restaurants. Next, Texas played an equally vital role on the national and international arena. Finally and most significantly, the usual players and usual strategies were not present. With that in mind, here are some key differences from just this one publication that show the changing nature of restaurant real estate.

Sophistication

Restaurants these days need more than just good food. It is becoming harder and harder for a restaurant concept to start, make money, and thrive without sophistication. To really succeed, restaurants need business plans, legal guidance, tax and accounting advice, and those are just starters. As one example, the Smashburger article in SCT shows that they raised $15 million of private equity funding prior to opening the first three restaurants. Clearly, Smashburger did not need all of that capital for three restaurants. However, they were thinking ahead and expanding as they opened. This shows the level of sophistication and forethought by one highly successful franchise.

International Focus

Another key example of the restaurant industry’s new focus is its international direction. Outside of the U.S., restaurants like McDonald’s are expanding like crazy. Inside the country, international food continues to be where growth lies.

Malls Revisited

We have all heard of and seen the contraction and consolidation of traditional malls. Still, those malls are being converted into open-air venues, and strip malls are again on the rise. Have you considered how your restaurant may benefit or be hurt by this direction?

The above examples are just a few of the changes in the quickly evolving restaurant industry. Let us know how you see things changing!

When To Terminate A Restaurant Transaction

By Matthew Sanderson on February 13th, 2013 Posted in Acquisitions, Commentary, Competition, Contracts, Franchises, Franchising, Liability, Litigation, Negotiation

Restaurant transactions are similar to the old Kenny Rogers song, The Gambler – “You’ve got to know when to walk away, and know when to run!” Perspective is so important in general, and in restaurant transactions, you must know when to move forward on deals and when to kill them. But how do you determine that point?

Well, in typical lawyer fashion, my answer is that it depends. There is no set point in time when all deals should terminate. It is situation specific. Still, there are a number of factors that go into this decision. This post shows a few of my favorites.

In the style of Jeff Foxworthy, this will be:

It Might Be Time To Kill The Deal If:

You No Longer Trust Your Business Partner. Whether it is your source of capital or a true, roll-up-their sleeves partner, a lack of trust kills deals.
The Numbers Don’t Add Up. If you are looking into a new deal, the numbers should make sense. If the purchase price is too high or even too low, there may be an issue. If you cannot track where the money goes, there may be a problem.
You Find New, Detrimental Information. No deal is ever done until it is closed. Similarly, you must constantly reevaluate new information each and every day of a deal. Similarly, you cannot fall in love with a deal until it’s done because you must be on the lookout for new information that might cause you to rethink it.
A New Law Makes The Deal A Dud. Whether that new law is a new zoning issue or health code issue or even a smoking issue, always consider what laws may play into your business model of the transaction. If things change or might be changing, consider killing the deal.
A Competitor Moves In. Are you watching the competitors in the area of the restaurant? Do you know who they are? Have you negotiated an exclusivity provision in the deal to keep competitors out? If the answers to these questions are in the negative, that might be a cause for concern.
You’re Not Getting Information. Anytime that you transact business in restaurants (or in any industry), you need as much information as possible. It is one thing if the information is not available. However, if someone is actually preventing you from getting information or if they make excuses about why they are not providing it, that is a major red flag.

From the above list, it should be apparent why there is never a single point of no return. Still, if a number of these factors start to arise or one big one comes up, it may be time to move on to the next, better deal.

What Makes Restaurant Litigation So Darn Expensive?

By Matthew Sanderson on February 7th, 2013 Posted in Liability, Litigation, Negotiation

We get this question quite a bit. There’s a dispute. Our restaurant client knows they are right. The restaurant wants a quick result and wants it done inexpensively. What in the world is takes so long or costs so much? Shown below are some answers to this question and some ways to reduce your litigation costs.

Some Analogies

Here is a helpful restaurant analogy for litigation. Imagine you are in your restaurant. The customer orders a pizza. You make the pizza, meet the customer’s order, and the customer pays the price on the menu. Simple, right?

Now imagine the same situation. However, also imagine that as you make the pizza, there is someone else in the kitchen hindering your progress. For each topping you add, they try to take a topping off. You set the oven; they turn it off. You roll the dough; they tear it apart. And on, and on, and on.

In this last situation, how in the world are you going to set a price for the pizza? After all, you do not know how long it is going to take you to avoid all of the hinderances from the other person. Heck, you may not even be able to make the pizza. Still, you’re going to do all you can, but it may take twice the ingredients you thought in the first place.

This is a close analogy to what happens in litigation. Each time your attorney makes progress for you, the opposing lawyer or even the court can cause impediments. This back and forth, this fight, is what causes the costs of litigation to spiral. As professionals go, this dispute process is really unlike almost any other discipline. For instance, your accountant often does not have an opposing party that works against them when they prepare your taxes. Similarly, doctors do not have another party that continues to intentionally make you ill when the doctor tries to heal you.

Issues That Contribute To Expense

Aside from just the constant impediments from the opposing party and the court, there are a number of other factors that lead to litigation expense.

Clear Facts. One factor is the nature of the case, meaning whether the facts are clear or murky. Clear facts can make litigation less expensive, but unclear facts that result in lots of competing opinions on those facts can be very expensive.
Expert Witnesses. Another factor is the need for experts. Often, an expert is needed to make an opinion on some issue in a case. For instance, in a restaurant construction dispute, an expert might be needed to determine if the restaurant was constructed properly. That expert can be costsly, but more than that, the other party will also obtain their own expert. Now both sides of the dispute must battle each other and the opinions of the other side’s expert. That leads to lots of lawyer time and client expense.
Time And Discovery. Time and the discovery process are yet an additional factor in litigation expense. The longer the case drags out, the more expensive it will be. The main factor in the length of a case is what we call “discovery”. Discovery is just the term lawyers use to obtain all of the facts or documents about a case. If either party wants to withhold key facts or documents, it takes a lot of lawyer time to force the other side to produce those facts. Often, these facts and documents win lawsuits, so the lawyers often battle over which facts and documents are really relevent. The longer the battle, the more expensive the case becomes.

Possible Ways To Reduce Litigation Expense

A fight is a fight, and no two fights are really exactly the same. The longer the fight, the more it takes to win. In litigation, that translates into money. Still, there are ways to reduce these expenses.

Hourly Rates. One way to reduce expense is to pay attention to hourly rates. The lower the hourly rate, the less over all the fight can cost.
Limit Issues. Limiting the issues is another cost saver. If you have, for instance, five things to dispute, but only three of those issues are really worth the fight, you can decide to only fight about those three issues that really matter.
Avoid “He Said, She Said.” Avoiding the “he said, she said” fights can also save costs. Any time that the dispute involves two conflicting opinions that cannot otherwise be proved, it will be more expensive thant those disputes where you can prove what happened in some other way. For instance, a dispute over whether you paid rent is likely to be less expensive than a dispute over whether someone said your employee insulted them.

Conclusion

All in all, litigation is expensive, as shown above. However, you can keep the costs down by knowing what drives litigation expenses and using the above methods to reduce them.

Have you been through a lawsuit? How bad was it? Please let us know!

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