Structuring a Restaurant Group for Success
Building your own brand requires more than a vision—it's also about planning your concept's organization.
Have you ever had the dream or the ambition to create your own brand? Are you yearning to create your own restaurant group? Are you searching for regional, national, or global recognition of your restaurant or brand? If the answer is "yes" to any of these questions, the foundation of a successful restaurant group rests not only in your hands and the hands of your executive chef and management team, but also with a proper legal structure of your organization.
I am oftentimes consulted with general issues ranging from the formation and structuring of a restaurant group to the protection of a brand or a restaurant concept to matters concerning franchising opportunities, management issues, and investor relations. A proper legal structure, established early in the development of a restaurant group’s creation, is critical to the successful navigation of these issues and concerns. So, you ask, how do you structure a restaurant group for success?
First and foremost, once your investors are identified, an entity should be created to act as the parent company for your first restaurant and any future restaurants. Each restaurant should be owned wholly, or in part, by this entity. For purposes of this article, I will assume that each restaurant will be a wholly owned subsidiary of the “parent entity;” however, the formation of a separate entity for each restaurant provides the flexibility to have different investors in each restaurant establishment, should you so elect. I tell my clients to envision a wheel with several spokes. Each spoke represents a different restaurant (some with the same investors, others with new investors).
Second, a separate entity should be established to own the restaurant brand and concept. If the group owns trademarks or other intellectual property, this entity would be the registered owner of those marks. Typically, this entity is utilized not only to hold the brand and concept, but oftentimes also to explore branding and merchandising concepts. Generally speaking, this entity is owned by the restauranteur, executive chef, and key employee (if any) only, and not by third party investors; however, each deal is structured differently and in the instance where the restauranteur is backed by one or more investors, it is not atypical for those investors to have an interest in this company. For each new restaurant that is opened, a license agreement is entered into between the restaurant and this company for use of the group’s brand and concept for a fee.
Third, separate entities are typically also established for the restaurant management company and, at times, an administrative services company. Each such company would then enter into separate agreements with each restaurant for the provision of services (management, administrative, back-office, or similar services) to that restaurant, with services provided for a fee. Ownership of this entity is typically consistent with ownership of the aforementioned branding and concept holding company.
Finally, if you have aspirations to franchise or license your brand and concept, consideration should be given to the formation of a separate entity for that purpose. Because of the uniqueness of franchising, and the fact that the franchise arrangement is predicated upon the usage of the brand, concept, and intellectual property of the restaurant group, this company is at times structured as a wholly owned subsidiary of the brand and concept holding company. This entity would enter into franchise agreements with each franchisee, under which the franchisee would pay a royalty or franchise fee to the franchisor entity.
As discussed in this article, each entity within a restaurant group is created for a specific and discrete purpose. The use of multiple entities accomplishes several goals, ranging from providing for flexibility with an investor group to allow for different investors in each restaurant establishment, shielding of assets (including the core brand and concept from creditor claims), and the expansion of revenue streams from beyond the restaurant kitchen into merchandising, licensing, and franchising. With the formation of each separate legal entity, it is essential to draft separate agreements, each of which must be properly drafted to be enforceable and effective for its intended purpose.
The path to a successful restaurant group requires the navigation of several steps. The first step is identifying an executive chef that is talented, driven, and like-minded to you. Second, the direction of the group can be determined and the legal entities that comprise the group can be formed. Lastly, the brand and concept are created and grown by you, your executive chef, and your management team. If you follow these important steps in creating your restaurant group, you will be on the path to success.
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