Header graphic for print

Texas Restaurant Law

How To Compensate Key Restaurant Employees

Posted in Employees & Waitstaff, Employment, Liability, Litigation

Many, if not all, restaurants have extremely valuable employees, and it is often important to find a way to compensate these employees in such a way as to make sure they stick around long-term. But what is the best way to compensate those invaluable employees? This post shows how profit sharing can be a solution to the problems of giving away stock and taking on partners.

Problems with Offering Stock or Equity

We have previously posted advice on avoiding partnership mistakes.  As suggested in that post, bringing on a partner by issuing stock or equity can cause several potential issues.

One key issue is the potential problem is the loss of full decision making ability and control over your restaurant.  Of course, as we previously mentioned, you can certainly draft a partnership agreement (which we highly recommend), but bringing on an equity partner can still cause unnecessary decision-making headaches.

Additionally, bringing on equity partners means dealing with issues of what happens when a partner dies, becomes disabled, or maybe just wants out.  These issues are discussed in our previous post analyzing when to bring on a partner.

Having multiple equity owners can also be problematic in a scenario where you decide to sell your restaurant.  In this case, most restaurant purchasers want to deal with as few equity owners as they can.  Thus, having numerous equity owners may ward off otherwise willing purchasers.

A Solution – Profit Sharing

One solution to these problems is profit sharing.  Profit sharing in most cases means giving an employee a percentage of your current profits.  A profit sharing agreement can also include a right to receive proceeds from a sale of the restaurant or other types of distributions.

With a profit sharing agreement, you are able to align your interest with your employee’s interests, giving them a piece of the upside of the restaurant, without having to deal with all the issues discussed above.  You can give the employee some “skin in the game” without losing any decision making control or complicating your ownership in case of a potential sale.

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.

Texas Restaurants Expand Like Crazy In 2014 (Already)!

Posted in Acquisitions, News, Recent Law Trends

It’s only January 15th, and already six major restaurant expansions or acquisitions have occurred in DFW! It’s an exciting time in the restaurant industry. Here are the details:

First, Day Star Restaurant Group acquired Texas Land & Cattle and the Lone Star Steakhouse chains. Click here for more on that story. Texas Land & Cattle has long been a Texas staple, and this move ushers in great potential.

Next, Denton is getting its first Cafe Brazil. Known for great coffee and breakfast, this is quite a boon for Denton and the University of North Texas late night studiers! Click here for those details.

Also, Fort Worth just opened AF+B and Velvet Taco. Click here and here for those stories respectively.

Finally, the Fork In The Road is expanding to Arlington, and 3 Stacks in Frisco is undergoing a $500,000 renovation according to these stories: Fork Expansion and 3 Stacks.

The expansion of these restaurants mimics what we at TexasRestaurantLaw.com are also experiencing both in the restaurant sector and in other sectors. The end of 2013 saw tremendous growth, which unlike in other years, was not driven by tax or end of year issues.

Given these facts, it appears that 2014 will be another year to celebrate in the Texas restaurant industry!

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.

Five Tips On Transitioning A Restaurant

Posted in Acquisitions, Alcohol, Contracts, Liability, Negotiation, Real Estate

You may have just acquired a restaurant or perhaps you are days away. What are the main things to consider in the transition? This week, we decided to answer this question, to focus on restaurant transitions, what makes them go well and what makes them go badly.

Assuming that the sale of the restaurant was properly documented, here are Five Tips On Transitioning A Restaurant:

  1. Permits. Hopefully prior to the sale, but at least shortly after, it is important to ensure that all permits are properly in the name of the new owner. These permits include at a minimum the Certificate of Occupancy, the Food Establishment Permit, and a Mixed Beverage Permit (or other applicable permit dealing with alcohol, if you serve it). Failure to properly permit your restaurant could be a major civil or even criminal infraction.
  2. Contracts. The next key issue deals with the restaurant’s contracts. It is important to either assign the restaurant’s contracts from the old owner to the new owner or to obtain new contracts with key vendors. These vendors could include the food vendor, the soft drink vendor, the alcohol vendor and many more.
  3. The Lease. Similar to the point above, one often overlooked contract to make sure becomes assigned is the lease. Many times, owners forget that the landlord must approve new tenants, and it often takes quite a bit of time to ensure that the landlord is comfortable with the new owners. Therefore, it would be best to have the lease assigned before the sale, if at all possible.
  4. The Menu. Many restaurant owners immediately want to change or improve the menu upon acquiring a new restaurant. However, as Michael Shine found out when he purchased Frank’s Chop House on Westheimer in the Houston area, that’s not always wise. Click here for an article by Greg Morago at the Houston Chronicle for more on this story.
  5. Inventory. A key consideration when transitioning a restaurant is how to account for the inventory when a new owners takes over. If not handled correctly, the transition could give the old owner an incentive to either stock up too greatly on food or to deplete inventory levels to virtually nothing. Therefore, it is important to consider how food and other inventory will be transferred.

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.

 

Restaurant Prices are Set to Rise this Year

Posted in Uncategorized

There is no denying that restaurant prices are set to rise this year. Multiple sources show that restaurants and customers will both pay more at all levels of of the industry. This includes fast-food, fast-casual, and fine dining.

For example, Andrew Robinson at BizJournals.com, reports that chain restaurants are increasing their prices. See this link for more on chains. He says that most chains expect to increase prices between 1.6 and 2 percent.

Likewise, Mark Branda from Nation’s Restaurant News states that companies like McDonald’s and Buffalo Wild Wings have made similar disclosures. See this link for that article. These articles were based on a survey from SpenDifference that primarily interviewed chain restaurants, but the story does not end there. All restaurants are likely to experience similar pricing needs, at least if they serve beef. Erin Dostal, also at Nation’s Restaurant News, reports that beef prices will rise for restaurants. Here is a link to that article.

Taking these facts together, it seems that prices will rise. Unfortunately for restaurants, though, costs are rising as well, which does not guaranty higher profits. Still, our own firm has seen quite the uptick in restaurant acquisitions in the first two quarters of 2013, so this still seems to point toward a more robust economy and ultimately good news for restaurants.

The Top 7 Things To Consider Before Buying A Restaurant

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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?
  5. 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.
  6. 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.
  7. 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

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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?

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.

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.

How To Deal With Restaurant Partner Disputes

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.

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.

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

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.

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.

How To Avoid Taxes From Your Restaurant LLC

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.

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.