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.
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.
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.
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.
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…