| “Are
Your Business Assets Protected” |
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by Dennis L. Monroe |
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from Food
Service News, November 2001 Issue |
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Two axioms hold true in the food service industry: 1. The food service industry is fun and that is why people make a career of restaurants and food service; and, 2. Food service is a dangerous business proposition. Bankers have been saying food service is a dangerous business proposition for a number of years; and given the present volatility in the restaurant finance industry and number of closures each year, it is clear the restaurant industry is volatile. Therefore, the person who wants to be a food service industry owner must be prudent regarding the arrangement of business affairs, protection of assets and insulation from personal liability.
Recently our firm has been doing a number of workouts in the restaurant industry. It is clear that if the business affairs of the restaurant owner had been clearly looked at in light of a possible meltdown, things would have been owned and positioned differently.
The following are some key elements a restaurant owner should think about prior to any financial troubles:
1. Corporate Set-Up. Make sure the business is either run as a corporation or limited liability company. There may be other entities, such as a limited partnership, that may create a protective wall. In almost every case, avoid the use of a general partnership or sole proprietorship.
2. Intellectual Property. If the restaurant owner has important intellectual property (i.e., trade names, recipes or other proprietary products), it may be wise to put these properties in a separate entity and license the intellectual property to the operating entity. This approach can protect these assets if something goes wrong with the operating company. The license itself normally provides for termination under various circumstances which again creates protection against creditor attacks.
3. Business Assets. Make sure the entities operating the food service concept contain only the assets necessary to operate those businesses. Items such as extra equipment and stray pieces of property should not be placed in the operating entity.
4. Real Estate. Make sure any real estate is owned under a separate entity and that there is an arm's length lease between the real estate ownership entity and operating entity.
5. Personal Guaranties. Avoid personal guaranties, where possible, for loans to the operating business. If guaranties are required, provide for burn-offs of these guaranties if the company performs well for a period of time. This seems like common sense but it is easier said than done because it is hard to get a loan without a guaranty.
6. Financial Obligations. Make sure all obligations of the company that may have a personal liability (such as payroll and sales tax) are paid current. Accounts payable, other than possibly franchise obligations, are normally not obligations for which the owner is personally liable. In troubled times make certain the tax obligations and items that could create personal liability are paid.
7. Lease Obligations. A business owner, as a lessee, should provide for the ability to sub-lease the lease obligations and also have the ability to close the restaurant or food service operation or have a buy-out of the lease. Also, the owner should maintain options to purchase, and make sure these options to purchase are held by an entity other than the operating entity. (Lease obligations will be addressed in subsequent articles.)
8. Employee Management. Business owners need to make sure their employees are kept "at will" and that they have the ability to terminate employees without severance and minimize the cost of downsizing.
9. Multiple Operating Entities. Consider the use of multiple operating entities. If the business owner has troubled locations or locations with an uncertain future, keep those locations in separate entities and avoid cross-collateralization and cross default provisions among the lenders and creditors.
In general, food service industry owners should consult advisors and then do an audit of the business asset protection structure.
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