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What do you mean your restaurant doesn’t have a shareholders' agreement?

What do you mean your restaurant doesn’t have a shareholders' agreement?

Running a restaurant is hard work. Granted, I have zero experience operating a restaurant, but a lot of my clients do, and as a lawyer to companies operating in the foodservice industry I know how much blood, sweat and tears restaurant owners pour into their businesses day in and day out, not to mention the ungodly hours they keep and the personal lives they sacrifice in the process.

I suppose, then, that it would make sense to take every step possible as a business owner to protect your investment. Yet I continue to be amazed by the number of restaurants, new and established, single-unit and multi-unit, successful and struggling, that have not yet taken a critical step and entered into a shareholders' agreement among its owners. I cannot say that I am entirely surprised, given the aforementioned time limitations which restaurant owners confront every day – but I do remain amazed.

Shareholders' Agreement

Being a franchise lawyer can be fun work – it is invigorating and energizing to be on the receiving end of a phone call when a restaurant owner has decided to take the next step and expand. But as a lawyer, I also get called often when something has gone wrong, and business partners having disagreements is nothing new, nor is it unique to the restaurant industry.

I can understand the reluctance to take the time to enter into a shareholders' agreement. Many restaurant owners get into business together as friends, family, acquaintances or business partners in existing ventures. There is a certain element of trust inherent in the relationship, and negotiating an agreement that ultimately requires each party to be self-interested may seem counter to that spirit. Also, it costs money at a time when there is typically not a lot to go around.

But think of a shareholders' agreement as a pre-nup. At the start of a business relationship, as with a marriage, there is bound to be a honeymoon period – a time during which the partners are eager, excited, happy and willing to overlook small differences of opinion. But pre-nuptial agreements are not signed to cover the good days. They exist so that if something goes wrong, there is no confusion about what steps need to take place. A shareholders' agreement is no different. Partners are going to argue – some often, some infrequently, some about substantive issues, some about superficial ones. But if everybody does start to argue, it is far more difficult to try and set the ground rules for resolving that dispute than it is at a time before the dispute has even arisen.

A properly-drafted shareholders agreement can address such critical issues as:

  • who is responsible for what investment
  • who is responsible for specific operational requirements
  • who is entitled to access to what records and financial reporting
  • when the company needs more money, where does it come from – the owners, third party investors or a bank
  • what happens when someone wants to sell their shares and get out
  • what happens when the shareholders want to kick another owner out
  • how do shares get valuated if the parties cannot agree
  • how many votes does it take for a decision to be approved
  • what if a shareholder dies, becomes disabled, gets divorced, goes bankrupt or is charged with a crime

The answers to some of these questions may seem intuitive, but do not presume that common sense and reason will prevail at a time when everybody is arguing. Corporate law does create a few default rules to address bare minimum answers to some of the above issues in the absence of a written agreement, but those default settings are rarely sufficient to resolve a dispute.

As a restaurant owner, you have invested so much into your business, and money is only a fraction of that investment. You owe it to yourself to ensure you are taking every precaution to protect that investment and minimize the likelihood that an internal dispute tears the business apart.

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