How To Open a Restaurant
You have been thinking about opening a restaurant for a long time. Now you have started researching the steps you will take to go from concept to your first soft open. Since more than forty percent of restaurants fail in the first three years, the more research you do ahead of time, the better off you will be.
You will also be well advised to contact the National Restaurant Association and local restaurant associations for more personalized advice on your restaurant venture from restaurant mentors.
This article will primarily discuss the legal side of the restaurant business and what you will have to do to satisfy the law's various requirements as they apply to the restaurant industry. No matter what type of restaurant you may be opening, this article assumes you have a business plan, a menu, the ability to deliver products, financing, and some marketing ideas. It will walk you through the legal steps to get the business open for customers on your restaurant ownership journey.
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The Choice To Franchise
Under franchise agreements, it is possible to own a wide variety of franchise restaurants – Taco Bell, McDonald's, Applebee's, and many other chain restaurants. In that case, much of the legal work will have already been done for you, and the rest will mostly be cared for by the restaurant chain. You will be a franchisee, the restaurant chain will be the franchisor, and you will sign a franchise agreement (and pay a bunch of cash in the process).
You will likely be responsible for complying with local zoning ordinances, labor laws, state employment laws, state taxation, employment taxation, food safety, building safety, and other local and state regulations.
Taking Over an Existing Business
At any given time, there are any number of already-existent restaurant businesses for sale. If you are looking to buy a restaurant that is already in business, there are several areas that you will need to look at before you take that leap. It should go without saying, but a lawyer needs to be involved in this purchase as soon as you have decided to move forward.
Get familiar with the restaurant, if you are not already. Eat there a few times. Tell the owner you may be interested in buying or renting it from them.
First, look at the books, and get a certified audit of those books. Check employee records. While restaurant employee turnover is generally higher than most industries, a constantly churning turnover rate could spell danger.
Look at every contract. This would include all supplier contracts, leases, union contracts, clothing suppliers, even down to the cleaning contract. Make sure they all make sense to you. Don't be afraid to get clarification on anything that isn't clear.
Look at every food, beverage, and health license and make sure each is up-to-date.
Come to an understanding of the value of the business, including stock, equipment, and "goodwill"—the customer relations that keep people coming back.
All of these things will be in the contract for the sale of the business.
If it looks good, hire a lawyer to negotiate the rest of the steps for purchase and prepare to run the business. You will then have to follow many of the next steps as if you were starting from scratch.
Starting a New Restaurant
Create and protect your restaurant's name. If you want to start a restaurant from scratch, pick a unique name and start in with all of the voluminous paperwork you will need to process to get your business up and running.
Once you have decided on a name for your restaurant, you should protect it, even if you will not open your new business for some time. First, make sure that the restaurant name is available as an internet domain name. This is the first step in web development.
Then visit your state's Secretary of State's website to see if the name is available, and then register it.
Your first significant decision on the legal side of opening a restaurant will be to decide what kind of business to form. This decision should be high on your priority list when writing your business plan. It should be made in consultation with your lawyer.
Most small businesses, including restaurants, will start as a Limited Liability Corporation (LLC). If the restaurant is a small hot dog shop with no employees beyond the family, you could consider a sole proprietorship. Franchises are usually corporations, but if you are a franchisee, you will not choose a structure (unless you create a holding company for the franchise). If you are going into the restaurant business with a partner or partners, you can consider forming a partnership.
Find a Space
You want a place where the traffic will justify the real estate location, but several other considerations exist. Licensing, health regulations, rent, unionization, and many other factors can change from location to location and need to be thoroughly researched before you decide on a storefront address.
Remember that a lease is an enforceable contract, so be very careful with those contract clauses. Make sure you understand them completely and know you can live up to that contract.
Licensing and Inspecting Your Business
There will be numerous licensing requirements for your business, depending on where your restaurant will be located. Each state will have different requirements that you can read on FindLaw. You will need:
- A state and possibly a local business license
- A liquor license if you are selling alcohol and potentially another license for carry-out alcohol if you do that. You may need a separate license to deliver food, depending on the jurisdiction
- A food service license
- If you play music – recorded, streamed, or live – you will need a music license. You may also need a separate live music license from the city
- Ongoing fire inspections so you can obtain a certificate of occupancy
- You might also need a sales tax license (depending on the jurisdiction), a sign permit, a valet parking permit from the city, a dumpster permit (or have your dumpsters otherwise regulated), and a pool table license
You will have food facility/ food safety inspections from the local health department.
Employment, Payroll, and Taxation
You cannot let anything slide with your restaurant's taxation and employment paperwork. Being incomplete with those forms can shut you down faster than anything except messing around with a liquor license.
Assuming that you will be hiring staff, you must first obtain a Federal Employer Identification Number (EIN), although sole proprietors can use their Social Security numbers instead of an EIN.
Restaurants that employ tipped wait staff have special taxation rules and regulations for both the restaurant and the employees. It is well worth paying an accountant to handle this area. There will be a tipped employee minimum wage.
Every potential employee should fill out an application—even people who you know personally. Everyone should have proper identification, with a copy of that identification kept on file.
And everyone you do not know should be able to pass a background check—particularly those who will handle your money.
Many seasoned restaurant employees will have food safety certification. Local health departments may require employees to be certified with food handler permits through the state.
Employee taxation is a complex topic best done by your accountant. Of course, not all new businesses can afford to pay an accountant, but it is essential to ensure that all entities' taxation forms are appropriately filed.
Few small restaurants outside of large cities will have employee labor unions. But more prominent cities like New York may have a strong union presence in restaurants, probably with the United Food and Commercial Workers union (UFCW).
Negotiating with a union is difficult at best, even for people with experience. Hire a professional negotiator. If you are a franchisee, the franchisor will already have a negotiation team in place. It is best not to try to handle this yourself.
Restaurant businesses require insurance coverage, including the following:
- Business liability insurance
- Worker's compensation insurance
- Automobile insurance if you have delivery drivers
- You may want to consider commercial umbrella insurance
- Your lease may also require you to have specific insurance limits for a loss or damage to the real estate
Contact a local insurance agent to obtain these products, and don't let them ever lapse.
A Note on Local Food, Business, Fire, Health and Safety Regulations
You need numerous permits from local and state governments to open and run a restaurant business. This can be confusing, frustrating, and create all types of negativity before and during the life of your business.
It does not have to be that way. Going into this business, you know you'll have to deal with regulations. The best way to do this, as early on as possible, is to make personal contact with local regulators. This means the fire inspector, the health inspector, and anybody else who may have a relationship with the business from the government. Tell the regulators that you want to fully cooperate with them and that you want to contact them with any questions. This personal relationship will be the best way to cut through all of the red tape you are sure to encounter, and it is the most efficient way to know what they expect from you.
At the same time, hiring a lawyer will be the most efficient way of applying for, receiving, and conforming to all the local regulations.
Start by Getting the Right Legal Help
Opening a restaurant is not easy. The restaurant industry is highly competitive. It takes talent, a great plan, the right financing, the right people, the right location, and a little bit of luck. But you will give yourself a much better chance of opening a successful restaurant if you understand all the laws and regulations involved, have expert financial and legal help, and pay attention to everything down to the littlest detail.
If you are ready to move forward with the next great restaurant, you can use a trusted business formation service to take the legal steps necessary to form your business or find experienced legal help on FindLaw. Good luck!
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