Opening a Restaurant: Plan for Success – and Failure, Too

Failure is a topic most restaurateurs would prefer to avoid when setting up a new venture, when their heads are full with visions of success. However, the restaurant business is tough, and problems can arise due to circumstances both within and outside of your control.

A great time to protect yourself from potentially devastating problems is now, while you are setting up your business and you can plan calmly.

In this post, I will discuss several of the initial legal steps you can take to prepare for a potential failure.  In my next post, I will turn to the ramifications of failure and what actions you can take at that time.

First, consult an attorney to prepare your initial legal documents.  There are many issues of which you may be unaware, or that you may not know how to resolve. You need to choose an appropriate legal structure and learn about human resource issues. Especially if you have a partner, you will want to deal with buyout issues, succession issues and how to handle deadlocks if multiple owners are unable to reach decisions on major issues.  As they say, an ounce of prevention is worth a pound of cure.

You may want to consider moving your assets into a trust in order to take them out of the reach of potential future creditors.  Moving assets out of the reach of any existing creditors could be deemed fraud, so you will want to act on this right away, before you incur any debt.  For this and other reasons, you should definitely see a trust attorney because the details can be very tricky and the law varies from state to state.

Second, avoid personally guaranteeing the debts of your new business.  You want to be sure to sign all of your documents in a representative, not personal capacity so you don’t inadvertently incur personal liability.  In other words, you should sign all of your business documents “New Restaurant, LLC by John Doe, President” and not simply “John Doe.”

If your bank, food vendor, or other supplier insists that you personally guarantee the debt, the next best step is to avoid your spouse from becoming personally liable along with you.  In Missouri especially, property owned by both spouses generally cannot be reached by the creditors of either one individually, so this is a very good protective measure to take early on.

A third precaution is to ensure that your retirement plans are fully funded.  In general, retirement plans cannot be reached by creditors, and you may need to live on those funds at some point.  Also, while you do not want to withdraw funds from these accounts just to meet short term cash-flow problems, you may want funds available to rescue your restaurant from business-threatening financial problems, such as by making changes in your operations, settling with creditors, or to hire a consultant or other professional.

So, do your homework before opening your restaurant (or any other business) – you may be happy that you did.

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditors’ rights, and commercial law. He represents creditors, business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee for the Eastern District of Missouri for more than 35 years.