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The Perils of Silents (Silent Partners)

The Perils of Silents (Silent Partners)

More often than not, if I have a client purchasing a restaurant, they have a silent partner in the wings with deep enough pockets to satisfy the voracious appetite that restaurant businesses, at least in the initial stages of development, tend to have.

In situations like this, the first thing I do is tell the silent partner to seek their own independent financial and legal advice, and carefully consider the pitfalls.

  • Don’t judge a book by its cover

    Don’t rely on your proposed partner’s reputation. Even if you know him or her well, make your own proper enquiries, or better still, have someone independent do it for you. And, remember, truism that it might be, friends and business don’t mix.

  • A picture isn’t worth a thousand words

    By the same token, don’t substitute your partner’s enthusiasm for level-headed and sound advice concerning the proposed business and its prospects of success. Possibly, you won’t have been involved in a restaurant before, so seek advice from someone who knows.

  • Consider the equities

    Don’t let the first flush of excitement for a new venture cloud your judgement about what you should be getting out of the deal in return for your financial input. In my experience, silent partners put up most of the cash or security in return for their partner’s labour. That labour always gets paid for, but not so the poor financier.

  • Don’t borrow too much

    Always have at least half what you need in cash before going into a venture. I’ve seen very few restaurants support interest and principal repayments when the whole purchase price has to be borrowed.

  • Cross-guarantees

    While on the subject of borrowing, don’t forget that your partner should be as equally responsible for repayments as you. Make sure they are tied up with properly prepared cross-guarantees and indemnities on which your partner has received advice from a solicitor other than your own.

  • What about the chef?

    The best manager in the world isn’t going to attract customers when the food’s not up to scratch. Up-market restaurants, particularly, need a good chef, but employing and keeping one can be a monumental headache. I’ve found the happiest results occur when the chef owns a piece of the action or is on a performance incentive to acquire some of it.

  • Business structures

    Give a lot of thought to the how you want to structure your relationship with your operating partner. There is a wide range of options, from partnerships through to trading trusts, and to choose the one to suit you best you’ll need good professional advice. The particular structure you choose might also depend on the differing inputs of the parties. Decide early on the duties and responsibilities of each party and enshrine them in some form of agreement.

  • Think twice about personal guarantees

    Business culture is changing in regard to PGs, so don’t just assume you have to give them to start up and to stay in business. Of course, everyone still asks for them, but get into the habit of saying “no”. It may not work with the bank, but it might with other credit providers, landlords and suppliers.

  • Quarantine your non-business assets

    Giving personal guarantees will expose any personal assets to the recipient of those guarantees. Depending on your business structure, you might also be exposing your assets to other creditors of the restaurant. Before you start in business, seek proper advice on ways and means of shielding, or lessening the exposure of, your personal assets from creditors.

  • Directors’ liability

    You’re likely to end up a director of a company involved in the new enterprise. Nowadays directors have substantial, and often onerous, obligations to shareholders, co-directors, employees and creditors. Some of those obligations are cast in terms of personal liability; for example, directors can be personally liable for tax not remitted by a company. And you can’t avoid the problem by merely not being a director, because the Income Tax Act, for example, regards a director (appointed or not) as “any person involved in the management” of a company, and if you don’t want to be involved in the management of the business in which you’ve invested your hard-earned dollars, you want your head read!

  • Silent partner doesn’t mean ignorant

    Long gone are the days when one could plead lack of knowledge as a “sleeping” director as a defence. Ignorance is not a defence when, for example, something should have put the director on notice that all was not right with the company and an enquiry should be made. Director or not, you must be proactive in the affairs of your business. You owe it to yourself, let alone all those others who might one day want to sue you for your indolence.

  • Insurance

    I have purposely not touched on the usual “nuts and bolts” issues in buying or setting up a business, but insurance should be dear to every silent partner’s heart! It is your dollars at risk, so make sure they’re protected – with proper insurance on the business and its tangible assets, including public liability. Also, don’t forget life and income replacement cover for all the players, including the chef, and, last, but not least, directors’ indemnity insurance.

I trust I have given all you potential silent partners enough food for thought (so to speak). In a word, I wouldn’t be too silent about it, for you know what happened in Silence of the Lambs…


Occupational Health and Safety? Not To Be Sneezed At!

Occupational Health and Safety? Not To Be Sneezed At!

Occupational Health and Safety: I’m at the end-game in two cases involving injuries in the workplace. In both, the injuries were to fingers being put where they shouldn’t go and the penalties to the employer are potentially very large. So how can you, as an employer protect yourself against the possibilities of large penalites?

The purpose of Occupational Health & Safety legislation in all states is more or less uniform. It is there to ensure that the employer creates and maintains a safe working environment for the employee.

Occupational Health and Safety Case Study One: Food Mixer

In one of my cases, the employee in question was using a food mixer without the plunger. The appliance in question was very old, and had been used in the same kitchen for over thirty years. It didn’t have the requisite metal neck common in the more modern appliance and, thus, an employee might get their finger caught in the workings, if the prescribed plunger wasn’t used.

That is just what happened. The employee, a very experienced apprentice, by his own admission, just wasn’t taking enough care and lost a bit of his finger.

Occupational Health and Safety Case Study Two: Complex Machinery

My second case involves a worker in a food manufacturing industry. He was asked to use a particularly complicated piece of machinery and, somehow, his hand got caught in the mechanism, which relieved him of his largest right digit!

In the latter case, evidence indicates that the employee in question did not take adequate precautions before operating the machine, but there is also evidence provided by WorkCover Authority that the employee had received no training or supervision in the operation of the machine.

The client faced the spectre of a maximum fine of $55,000 and, in the event, decided to plead guilty.

In the first matter, I made strenuous representations to WorkCover that my client was not in dereliction of his duty in the training and supervision of the particular employee. We have documentary evidence that the employee had proper training in the use of the food mixer and, at most times, he had used it in the presence of one of the kitchen supervisors on duty. Indeed, by his own admission, on the particular day in question, the employee chose not to use the plunger and thereby left himself open to injury.

Notwithstanding this, this employer is also liable to a maximum fine of $55,000, not because there wasn’t adequate supervision, but because the machine could have been properly guarded even though it wasn’t.

A submission that the machine had been used for over thirty years without any troubling event, on the advice my client has been given, won’t be taken into account and, knowing the attitude of industrial magistrates to accidents in the workplace (at least in the jurisdiction in which I practice), this client has also been advised to plead guilty.

Plead guilty and lessen the sentence?

In both cases, a mere plea of guilty is not going to be sufficient to mitigate any fine imposed. In other words, just pleading guilty won’t necessarily persuade a magistrate to give you a lesser fine because you have “fessed up”.

What courts Australian-wide now want to see is the ethos of workcover legislation being implemented by employers, particularly in risk-prone industries. That ethos is the prevention of injury, which can only come about by:

  • Making machinery safe,
  • Educating staff in its use, and
  • Supervising that use with appropriately-trained managers.

It is evitable that some machinery used in the food industry is going to be potentially dangerous. The lesson is that all businesses, big or small, must put in place preventative measures based upon the above tenents. Indeed, I think protocols should be implemented which deal with such things as:

  • Training of supervisors to instruct users of potentially unsafe machinery.
  • Continuing supervision and instruction of the use of that machinery by nominated parties.
  • Appropriately-worded notices adjacent to any particular machinery which is potentially dangerous, and
  • Close liaison with WorkCover authorities in your particular state or territory to ensure that you are keeping “up to speed” in this ever-changing area of law.

I am sure many of my readers have already been involved in WorkCover matters. If you’re subject to court proceedings, the first thing you should do is seek appropriate legal advice. My experience (and this is not legal advice) is that it is very hard (though not impossible) to defend an action where an employee has actually been injured. You must, therefore, look at ways and means of lessening the penalty which might be imposed.

What courts consider when deciding penalites

In NSW, the case law requires magistrates to deal with guilty pleas on the following basis:

  • The penalty imposed must be dependent upon the seriousness of the breach and the degree to which the offender fails to ensure a safe system of work.
  • The difficulties to be surmounted by the offender in taking adequate precautions to avoid the injury of employees, including such matters as time, trouble and expense, measured against the magnitude and duration of the risk in relation to the incident.
  • Whether proper supervision of the method work was undertaken. This is a statutory responsibility and cannot be delegated to a party other than the employer.
  • Whether the offender can demonstrate to the court that it has embraced the primary objects of workplace legislation mentioned above.
  • Whether the offender has a well-documented policy and program of safety in use at the time of the accident, and
  • Whether the offender has since the time of the accident taken urgent and direct steps to ensure that general safety policy is adhered to by both supervisors and employees.

All employers have a statutory responsibility in the area of Occupational Health and Safety and it is one that cannot be ignored. Ignorance of the law has never been an excuse; in cases of work-related injuries, it can often be damning!