How to Create a Successful Restaurant or Cafe Partnership
Planning to go into a restaurant partnership? The hospitality industry has a high failure rate, making it critical for business partners to plan carefully for every possibility. A solid partnership agreement can help prevent common problems; even working through what’s included on this page may give you pause to consider if this is the level of financial and personal responsibility you really want. Many people are caught up in the romance and glamour of the industry and ignore the risks and hard work. Both you and your potential partners should go through these eight sections step by step and consult a lawyer at a very early stage.
Note that this article is for general advice only and is not a replacement for legal advice. Always consult a qualified lawyer for a partnership agreement that is right for your situation and complies with the law.
What Can Go Wrong With a Restaurant Partnership?
Typical problems include…
Differing Visions and Goals: conflicting ideas about the restaurant’s direction, including menu choices, service style, and expansion plans, lead to disagreements and operational problems.
Financial Disagreements: including unequal contributions, conflict over reinvestment versus profit distribution, and lack of transparent financial reporting.
Unequal Workload Distribution: if one partner feels they are contributing more time and effort than others, it can lead to resentment and reduced cooperation.
Decision-Making Deadlocks: where partners have equal stakes, there could be deadlocks on critical issues like hiring key staff or making significant purchases.
Lack of Clear Operational Roles: without clearly defined roles, partners may either step on each other’s toes or neglect certain aspects of the business. Is it a job or a partnership?
Personal Conflicts: disagreements or clashes in management style can spill over into the business, affecting staff morale, customer experience, and the overall working environment.
There are often problems if there is no agreement, and expectations must be clarified. Money always becomes an issue because how to handle it isn’t set out in advance – the problem becomes worse when money is tight, and decisions have to be made on what gets spent on first. Kylie Denning, Foodie Coaches Accounting
What to Consider When Planning a Business Partnership…
1. Formation and Structure of the Partnership:
Length of the partnership: Agree on the commencement and termination dates of the partnership.
Real Estate Holdings: How real estate will be held, whether directly by partners, in trust, or under a lease.
Capital Contributions and Ownership: Clarify each partner’s proportion of capital contribution and the ownership interest, including whether it carries interest.
Valuation of Different Types of Contribution: An example could be where an investor has funds and enthusiasm to open a restaurant, and a chef has very little capital but immense experience and a good reputation – how are these contributions valued?
Operational Roles and Responsibilities: Define each partner’s specific role, responsibilities, and operational expectations within the partnership.
Management of Intellectual Property (IP): Detail the ownership rights over patents, designs, copyrights, and know-how developed by partners.
2. Financial Management:
Profit and Loss Sharing: Set out the distribution of profits and losses, including provisions for unequal work contributions.
Partner’s Wage if Working in the Business: This could be a chef or manager-partner who needs to earn a living and will also be entitled to a profit share.
Requirement for Additional Capital: Establish if and when partners need to contribute additional capital.
Cheque Signing Arrangements: Who has the authority to sign cheques and under what conditions?
Access to Bank Accounts: Who can access passwords, and what can they do with the account?
Partner Loans: If partners are to provide loans, lay out the terms, interest rates, and repayment schedules.
Capital Expenditure Approval: Specify thresholds for expenditures that require partner agreement.
Performance KPIs and Goals: Agree on business performance indicators and targets with monitoring mechanisms. How often will they be discussed?
Business Valuation: Develop a comprehensive method for valuation, especially for buyouts, including the treatment of goodwill and assets. This could be some multiple of the profit or another agreed method. This is critically important and can be a source of disagreement and conflict – many people want to leave a partnership because of financial disappointments but expect an unrealistic valuation as the basis for the other partner buying them out.
The main purpose of the partnership agreement is, is not necessarily for the day-to-day running of the business (although it can be), but in case things go differently than planned and how disputes are to be resolved. What do we do if X happens? Eg one partner doesn’t want to be in the business anymore. How will that person be bought out? How is the business valued, who will value it and what if the value is disputed?
Or what if one partner wants to sell and the other doesn’t? And if there’s an offer received from a third party, and one partner wants to accept it, usually there’ll be a ‘drag along clause’ where the other partner has to accept as long as it’s within the valuation metric. There could also be a first right of refusal so that if the other partner wants to pay more or the same as the offer, they can buy out the other half. That’s common in a good agreement. Tim Niesler, Foodie Coaches Accounting
3. Legal and Compliance:
Accountants and Lawyers: The partnership should engage separate accountants and lawyers from those of the individual partners.
Assignment of Interest and Prohibition on Changes: Restrictions on partners assigning or changing their partnership interests eg without the agreement of the other partner. Because of the ‘up close and personal’ nature of many hospitality partnerships, a new partner not compatible with the remaining partners will surely result in conflict and disagreement.
Liability for Debts of the Partnership: Clarify that partners are ‘jointly and severally liable’ for debts if a corporate structure is not used.
Decision-Making and Resolution of Deadlocks: Outline decision-making processes and solutions for potential deadlocks.
Exit Strategy and Succession Planning: Procedures for a partner’s exit and the process to ensure business continuity.
Post-Exit Conduct and Restrictions: Restrictions on a partner’s activities after leaving the partnership. See also s.6 on Protection of Business Interests.
Buy-Sell Agreement Provisions: Terms regarding the buyout of a partner’s share, including the right of first refusal.
Amendment Procedures: The process for making changes to the partnership agreement.
4. Risk Management:
Insurance for the Death of a Partner: Establish insurance policies to finance the buyout of a deceased partner’s equity. This ensures that the surviving partner does not end up in business with the family or beneficiaries of the deceased partner, with whom they may have very little in common.
Regular Meetings and Reporting: Schedule for partnership meetings and financial reporting.
Conflict Resolution Mechanisms: Agree upon methods to resolve internal disputes without resorting to lawyers.
Grievance Procedures: Establish methods for addressing grievances within the partnership.
Employment of Family Members – see more details below.
6. Protection of Business Interests:
Non-Compete Clauses and Confidentiality Agreements: To prevent competition and protect confidential information after a partner exits. This could include:
Geographical Restriction: the radius within which the departing partner cannot engage in a similar business (say 2-5 km).
Time Limit: how long the non-compete clause is valid, often ranging from 1 to 3 years post-departure.
Scope of Business Activities: the partner is restricted from engaging in certain business activities to prevent direct competition.
Client and Supplier Relations: prohibition against soliciting the restaurant’s clients, poaching staff, or interfering with supplier relationships.
Confidential Information: the former partner must not use or disclose any trade secrets, recipes, or proprietary systems to which they had access.
Non-Disclosure Agreements (NDAs): require NDAs to safeguard proprietary information.
Code of Conduct: enforce a code of conduct to maintain professional standards within the partnership – see below.
7. Dispute Resolution:
Dispute Resolution Mechanisms: Create agreed-upon procedures to handle disputes.
Dispute Resolution Costs: Decide how legal costs for disputes will be managed.
Another problem with not having a partnership agreement is when there’s a dispute between the shareholders, or someone isn’t getting the reports that they need, there’s nothing to say about what reports they should be getting or access to information, or how the dispute that they have is resolved.
Suppose you wanted to buy out the other party or even put the company into liquidation and do a restructure. In that case, you’ve got no leg to stand on, and partners can be making life harder for solicitors, accountants, and other owners. It’s simple: you absolutely must have a Partnership Agreement so if something does go wrong, there’s an easy way out. Tim Niesler, Foodie Coaches Accounting
8. Changes and Continuity:
How the Partnership Agreement Can Be Changed: clearly outline the amending process.
Right of First Refusal in Valuation Disagreements: Establish procedures for valuation disputes, including the right of first refusal.
Each category and its detailed points provide a comprehensive framework for drafting a partnership agreement to help secure the partnership’s operation and future.
What a Lawyer Needs to Create Your Restaurant Partnership Agreement
The points above give you an idea of the many issues to be considered – don’t think of it as a negative process but as building a strong foundation for future growth without conflict or misunderstandings. Here’s what to gather to brief them thoroughly:
Partner Details: Names and contact information of all partners.
Business Plan: A copy of your business plan, including the vision, mission, and operational strategy of the restaurant.
Financial Projections: Detailed financial projections and current financial statements if the business is already operating.
Initial Contributions: Initial capital contributions by each partner.
Roles and Responsibilities: Each partner’s proposed or current role and responsibilities in the business.
Document Existing Agreements: Any verbal agreements, understandings, and previous arrangements.
Key Areas of Concern: What do you want the agreement to address based on your experience and the challenges you foresee?
Prepare Questions: About the legal process, specific clauses, or implications of certain terms in the agreement.
Consider Future Scenarios: Eg the addition of new partners, exit of existing partners, or changes in financial contributions, and how you would like these to be addressed.
Legal and Financial Documentation:
Schedule and Budget: Your timeline for finalising the partnership agreement and your budget for legal services.
What to Include in a Code of Conduct for Partners…
Professionalism: partners should conduct themselves professionally at all times, respecting employees, customers, suppliers, and the community.
Ethical Practices: commitment to ethical business practices, including honesty in financial reporting, marketing, and all transactions.
Conflict of Interest: partners must avoid situations where their personal interests conflict with the partnership’s and disclose any potential conflicts.
Compliance with Laws: adhere to all relevant laws and regulations governing the restaurant industry, including health and safety standards, employment laws, and food service regulations.
Respectful Workplace: maintain of a respectful workplace free from harassment, discrimination, and abuse.
Confidentiality: uphold confidentiality regarding sensitive business information, both during the tenure of the partnership and after its conclusion.
Quality Standards: maintain the restaurant’s standards of quality and service and ensure that all decisions align with the brand’s reputation.
Employment of Family Members…
This can be a sensitive issue and should be addressed within the restaurant or cafe partnership agreement to avoid conflicts of interest or perceptions of nepotism. Clearly state the partnership’s policy on employing family members, whether it is allowed, and under what conditions.
Merit-Based Employment: Emphasize that all employment decisions, including those involving family members, should be made based on merit, qualifications, and business needs.
Approval Process: Outline a process for approval of family member employment that may include assessment by disinterested partners or an independent committee to avoid conflicts of interest.
Reporting Structure: Specify that family members should be kept from a direct reporting line to their relatives within the business to maintain professional boundaries and accountability.
Transparency: Commit to transparency in employing family members, ensuring that all partners are aware and agree with the decision.
Limits on Employment: Consider limiting the number or percentage of family members employed within the business at any time.
Establishing a detailed cafe or restaurant partnership agreement is essential to ensure the success and longevity of your new restaurant or cafe. This article has outlined key areas to consider, but remember, it serves as a guide, not legal advice. Taking the time to create a detailed and legally sound agreement can save you from potential disputes and challenges in the future. Here’s to your success!
Planning to go into a restaurant partnership? The hospitality industry has a high failure rate, making it critical for business partners to plan carefully for every possibility. A solid partnership agreement can help prevent common problems; even working through what’s included on this page may give you pause to consider if this is the level of financial and personal responsibility you really want. Many people are caught up in the romance and glamour of the industry and ignore the risks and hard work. Both you and your potential partners should go through these eight sections step by step and consult a lawyer at a very early stage.
Note that this article is for general advice only and is not a replacement for legal advice. Always consult a qualified lawyer for a partnership agreement that is right for your situation and complies with the law.
What Can Go Wrong With a Restaurant Partnership?
Typical problems include…
What to Consider When Planning a Business Partnership…
1. Formation and Structure of the Partnership:
2. Financial Management:
3. Legal and Compliance:
4. Risk Management:
5. Relationship Among Partners:
6. Protection of Business Interests:
Non-Compete Clauses and Confidentiality Agreements: To prevent competition and protect confidential information after a partner exits. This could include:
Geographical Restriction: the radius within which the departing partner cannot engage in a similar business (say 2-5 km).
Time Limit: how long the non-compete clause is valid, often ranging from 1 to 3 years post-departure.
Scope of Business Activities: the partner is restricted from engaging in certain business activities to prevent direct competition.
Client and Supplier Relations: prohibition against soliciting the restaurant’s clients, poaching staff, or interfering with supplier relationships.
Confidential Information: the former partner must not use or disclose any trade secrets, recipes, or proprietary systems to which they had access.
Non-Disclosure Agreements (NDAs): require NDAs to safeguard proprietary information.
Code of Conduct: enforce a code of conduct to maintain professional standards within the partnership – see below.
7. Dispute Resolution:
8. Changes and Continuity:
What a Lawyer Needs to Create Your Restaurant Partnership Agreement
The points above give you an idea of the many issues to be considered – don’t think of it as a negative process but as building a strong foundation for future growth without conflict or misunderstandings. Here’s what to gather to brief them thoroughly:
What to Include in a Code of Conduct for Partners…
Employment of Family Members…
This can be a sensitive issue and should be addressed within the restaurant or cafe partnership agreement to avoid conflicts of interest or perceptions of nepotism. Clearly state the partnership’s policy on employing family members, whether it is allowed, and under what conditions.
Establishing a detailed cafe or restaurant partnership agreement is essential to ensure the success and longevity of your new restaurant or cafe. This article has outlined key areas to consider, but remember, it serves as a guide, not legal advice. Taking the time to create a detailed and legally sound agreement can save you from potential disputes and challenges in the future. Here’s to your success!
Check the other useful blog posts on the Foodie Coaches website…
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