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Running a Restaurant/How to structure a partnership agreement

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Question
I have a restaurant that has been successfully operating for 2 1/2 years now and I am approached all the time by people who want to invest in my business. I''ve been approached by people who want to partner up in a second location and I've had people who are interested in franchising. While franchising sounds great I want to make sure I'm ready to take that step and start slow by maybe partnering up with someone in a second location and get that one operating as well as the original one is. I do have a very interested individual who wants to partner up. There is a part of town here that has been very vocal in wanting us to expand there and is potentially a huge market for us. We are anticipating big numbers from this area and this investor wants a piece of the pie. My question is what should the terms be if I let this investor into my company that I started and got it producing great numbers and great margins with a product in such high demand in an area with high demand? How much should I have him invest in the second location and what kind of percentage should they receive in return?

Answer
Hi Dean,

My apologies for being slow to reply.  Sometimes I miss these in my email, and this was one of those times.

I will do my best to answer your questions.  I do think that you are wise to try to get a second location (and possibly others) open before you attempt to franchise, and there are a lot of reasons for that.  You will want to know that your concept is solid and that it is not just an anomaly that you are doing so well with the first one.  Also, it takes a pretty big investment on the Franchisor's part to set up a system for franchising.  Your operations manual has to be really, really detailed and complete, you will have to have a Franchise Disclosure Document prepared and registered and much, much more.  

That being said, be very careful when allowing someone to partner with you in the second unit.  You will want to retain control of the concept and the daily operation.  We work with a lot of entrepreneurs in helping them to set up effective partnership agreements.  There are no hard and fast rules about who should have what percentage of ownership, etc.  It all depends upon your end goal with this as well as the investor's willingness to take on the majority of the financial risk.  What would seem to make the most sense is for you and the investor to create a Limited Liability Corporation (LLC).  If I were you, I would want to make sure that I retained the majority of ownership or that it is constructed in such a way that you are clearly the decision maker in terms of the concept and operations.  This can be accomplished in your partnership agreement and reflected in the Operating Agreement of the LLC.  If you are expecting the investor to provide 100% of the financing for the project, then you have to be willing to part with a sizable portion of the profits.  Alternatively, he could own the business (and all of the associated liability that goes with it) and you could function under a Management Contract based upon a percentage of sales and profits.  Another arrangement might be a Licensing Agreement where the investor pays you a licensing fee versus franchising, but to me, it is the least attractive type of arrangement because you will typically not have the control you will want to have.

Dean, it is extremely important for you to protect the equity in your brand that you have created.  If you do have a strong brand that is performing well, the last thing you need is to have a second location that does not follow the same procedures, serve the same quality food, maintain the same service standards, etc.  If you can do a 51/49 percent split with you having the majority ownership, that would be good.  It is just that an investor may or may not find that attractive if they are 100% funding the venture.

I would be more than happy to schedule a no fees, no obligation, no pressure phone call with you to bounce around different scenarios with you.  We have done this a lot and can provide you with the agreement documents if and when you move forward with this.  Please keep in mind that we are NOT attorneys and we would absolutely suggest that the documents be reviewed and edited by a qualified business attorney in your state that would be familiar with any and all local laws regarding such agreements.

Here's my contact info if you would like to contact me directly:

Foster and Associates
dfoster@fosterandassociates.net
(417) 849-1903 cell
(417) 877-0428 office

David  

Running a Restaurant

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David Foster

Expertise

We have been in the restaurant industry for over 40 years and consult with restaurants, casinos and hotels nationwide. We love helping restaurant operators succeed and can answer any questions related to restaurant start-ups, business plans, operations, labor costs, food costs, liquor costs, employee turnover, marketing etc.

Experience

I am a seasoned foodservice veteran with nearly 42 years experience in the industry. My extensive background includes overseeing multi-unit, multi-concept restaurant operations ranging from cafeterias to fine dining, and everything in between. I have a strong hands-on operations and marketing background that give me a unique insight into the “Real World” challenges of the restaurant industry. I have extensive concept development, menu and recipe development and kitchen layout and design expertise. I am effective in analyzing operational needs and identifying practical solutions in today’s very dynamic foodservice environment. In the industry, I am respected by my peers and have served on the Board of Directors of the Missouri Restaurant Association and have been a featured speaker on the subject of Home Meal Replacement at various national events. I also served on the Culinary Advisory Board of the Ozark Technical College as well as serving on the Board of Directors of Big Brothers, Big Sisters of the Ozarks.

Organizations
Member of the National Restaurant Association, Past Board Member of the Missouri Restaurant Association, Past Board Member of Big Brothers, Big Sisters of the Ozarks

Publications
The Consultant, Seasoned Views (a trade magazine for the restaurant industry)

Education/Credentials
Attended Drury College, Springfield, MO, Varsity Management, SRI

Awards and Honors
I have had restaurant projects featured in The Consultant (a magazine for foodservice consultants with worldwide circulation). I was honored for achieving the highest level of management competence by the Selection Research Institute.

Past/Present Clients
Sugar Creek Casino, Classic Rock Coffee Company, Mark Twain Brewing Company, Springfield Brewing Company, Bruegger's Bagels, M&M Grill, Paco Joe's, Holiday Inn, Hilton Garden Inn, Buffalo Run Casino, Golden Corral Corporation, Crosswinds Café, Chinese Chef, Mr. Dunderbak's Old World Market & Café, Bullfeather’s Wings and Grille, Mainstreet Market, Bear Rock Café, Cartoon's Oyster Bar & Grill, T's Redneck Roadhouse, Jim's Steakhouse, Neighbor's Mill Bakery & Café, Crazy Vine, San Francisco Oven, Maria's Mexican Restaurant, Andy's Frozen Custard, The Granite Club, Umi Japanese Steak, Seafood and Sushi, Springfield Grocer Company, US Foodservice, Premium Standard Farms, Smithfield, Dakota Organic, Kraft Foods, Allens, Inc.

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