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.