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Restaurant Business: Legal Tips to Start and Scale Up

Restaurant Business: How to Start and Scale

Opening your own restaurant, coffee shop, confectionery is a long popular dream that is becoming a reality every year. And this is not surprising, because hospitality is written in the genetic code of Ukrainians.
And even strict quarantine restrictions due to the Covid-19 pandemic have not destroyed this cherished dream, except that they have slightly delayed its realization, and even then not for everyone.

Maxim Kurochko, Managing Partner of MK Legal Service, shared practical tips for restaurant business on scaling and development for Ukrainian Law Firms publication. 
After all, in 2020 and 2021, many new catering establishments of various formats were opened. For example, our client, the Yudgin Burger chain, has opened 10 new establishments over the past 2 years.

So, how to start a restaurant business to make it successful and profitable? Do you need to scale and what method to choose? We give an answer to this question from the point of view of the interests of different players in the restaurant market, because for a new restaurateur and an existing restaurant owner have different tasks, which require different strategies and tactics and, accordingly, different vector legal support.

There are several ways to start a catering business:

1) open an establishment under a new unique brand;
2) to join an existing establishment or restaurant chain as a partner  by:
A) purchase of a share in the company;
B) acquisition of a restaurant franchise.

It should be noted that usually each of the methods listed above involves the opening of a new catering establishment. After all, investing in an institution/network that needs financial resources and does not plan to scale is a rather risky and questionable business.

In the vast majority of cases, investment in the restaurant business is the opening of a new catering establishment independently under a new brand or with partners - by diving shares or the opening of a franchise.

Legal aspects of opening a new catering establishment

Opening a catering establishment under a new brand is the most suitable way for those who want to have complete independence in management activities and absolute freedom to implement their own business concepts. On the other hand, this is the most risky and longest option from the point of view of return on investment.

After all, everything needs to be started from scratch: legally register a business, look for suitable premises, recruit staff, establish contacts with product suppliers, organize promotion and popularization of the brand, and many, many different business processes. And there is no guarantee that the new restaurant will appeal to visitors and will become popular and profitable.

Here is an example of a list of mandatory steps that are necessary for the legal opening of a new catering establishment and its safe and legal astivities:

1. Registration of a business entity:
Ø The most common forms for this industry are individual entrepreneurs (II or III group of single tax payers) and LLC (if the annual income exceeds the limits for individual entrepreneurs or establishments plan to sell alcoholic beverages other than only low-alcohol).

2. Choosing a taxation system:
Ø The Tax Code of Ukraine provides several options:
1) General taxation system (suitable for LLCs and individual entrepreneurs),
2) Simplified taxation system in the form of a single tax payer in the II group (suitable only for individual entrepreneurs) or a single tax payer in the III group (suitable for both LLCs and individual entrepreneurs).
The optimal option should be chosen depending on the planned volume of annual income, the number of employees and other factors. At the same time, business owners need to know the importance of competent corporate structuring, which, among other things, allows reducing the tax burden on business.

3. Proper processing of documents for the restaurant premises:

Ø Here you need to pay attention to such key points as: absence of encumbrances on the premises, purpose of the premises, term of lease, whether the premises or its part is a cultural heritage object, etc.
Ø In a separate order, you need to issue documents for the sign of the public catering establishment and a permit for the summer terrace, if any

4. Registration of capacities of market operators:

Ø Law of Ukraine No. 771/97-ВР provides not only for the obligation to register the capacity of the market operator before opening a catering establishment, but also a fine for the absence of such registration in the amount of UAH 66,000 for individuals and UAH 120,000 for legal entities.

5. Introduction of HACCP quality control standards:

Ø Law of Ukraine No. 771/97-BP obliges all market operators to develop and apply the specified standards, train personnel and appoint persons responsible for their compliance. Violation of the specified requirement will result in a fine of UAH 90,000 for individuals and UAH 180,000 for legal entities.

6. Registration of fire declaration:

Ø The CCP of Ukraine allows the use the a real estate object only after registration of a declaration of compliance of the material and technical base with the requirements of the legislation on fire safety. For the absence of such a declaration, the Code of Administrative Offenses provides for fines of up to UAH 34,000.

7. Registration of the cash register (PRO):

Ø This requirement is provided for by Law No. 481/95-ВР for the sale of alcoholic beverages and tobacco products. Liability for its violation is a fine in the amount of 100% of the value of the goods/services sold by the violator.

8. Obtaining the necessary licenses:

Ø The sale of alcohol and tobacco products is legal only if the relevant licenses are obtained in advance.

9. Proper registration of relations with employees and contractors:

Ø The current legislation of Ukraine provides for significant financial sanctions for violations of labor standards, and accordingly, each employee of the catering establishment must be properly registered (employment or civil law contracts)
Ø For the clear and coordinated operation of the restaurant/cafe, it is necessary to fix all the essential conditions of cooperation in written business contracts.

10. Protection of rights to the catering establishment:

Ø It is possible to protect yourself from plagiarism and other illegal use of the brand, commercial names and other unique developments by registering a trademark, copyright and obtaining a patent for a utility model or innovative proposal.

Partnership as an effective way of investing and scaling the restaurant business

If there are no sufficient skills and desire to build a business "from scratch", the potential owner can become a partner of an existing catering establishment or a network of a well-known and successful brand. Moreover, the number of such brands is constantly growing every year. Popular establishments often do not mind attracting additional investment resources, primarily for scaling and obtaining additional profits.

One of the ways of partnership is to acquire a stake in a new establishment of a popular brand. As a rule, in the restaurant business, such a partnership is exclusively financial, since there is no benefit for experienced owners and, on the contrary, it is very risky to delegate the management function to new investors. However, an exclusively financial partnership requires a detailed examination of possible risks for both parties and, most importantly, a written confirmation of all agreements in writing. After all, partnerships involve a lot of compromises, and written contractual obligations will always prevail over oral testimony in disputed matters.

Legal registration of investments in Ukraine includes a wide range of agreements. The choice of the most suitable contract depends on various factors: the type of investment, the corporate structure of the business, the form of investment, the rights and obligations of partners, as well as the goals of all investment entities. For example, for investing in an unstructured business, preliminary agreements and protocols of intent will be required, and for the acquisition of corporate rights in an already existing business, an agreement for the purchase and sale of a share in the authorized capital and a corporate agreement.

So, in order for a partnership in the restaurant business to become successful, a number of mandatory actions must be taken:
Ø carry out a detailed legal due diligence of the investment object and partners;
Ø analyze the corporate structure of the business and, if necessary, carry out corporate structuring, which will provide the investor with control over investments and the project as a whole, and the owner with unhindered management and operational activities;
Ø to develop a package of contracts that will regulate the smallest details of partnership cooperation and areas of responsibility of the parties;
Ø carry out investment transactions strictly in accordance with the law, which will provide a future evidence base and legal position in the event of disputes related to investments.

Most of our customers in the HoReCa industry take investors as partners, but the most common and fastest way to scale the catering business is franchising.

Franchising in the restaurant business: popular, fast, effective

A franchise is a set of rights to use a brand, commercial experience and business reputation, which are transferred by one party (the franchisor) to another party (the franchisee) for a fee and under certain conditions defined by the franchise agreement. The process itself is called franchising or, as defined in Ukrainian legislation, a commercial concession. In fact, franchising is a special kind of partnership that gives advantages to both parties.

So, for the owner of a catering establishment, opening a franchise provides the following advantages:

1) Fast business scaling with minimal investment;
2) Receiving additional income in the form of a lump sum payment, royalties and advertising fees;
3) Savings in general business costs compared to opening a new establishment on your own.

An investor, buying a franchise, receives the following advantages:

1) Minimization of the risk of business failure, because the franchisee already receives a successful business model, a popular brand and, accordingly, a wide target audience of potential visitors.
2) Free consulting and technical assistance from the franchisor's experienced team: a ready plan for the development of the establishment, personnel management, a detailed description of all work processes, etc.;
3) Discounts and bonuses of the franchisor's suppliers. Also, the franchisor itself can act as a supplier or conduct staff training and help with the test launch of the institution.

However, along with the benefits, as always, there are risks. For example, for the franchisor, it is compliance with high quality standards and the solvency of the franchisee. And for the latter, these are hidden payments and limitations on the management function. In addition, opening a catering establishment under a franchise involves the need to carry out almost all the steps listed above, as when opening an establishment under a new brand.

It is obvious that it is simply unrealistic for a potential owner of a restaurant business to independently check all risks and fulfill all legal requirements, because the priority is commercial issues. The solution is an experienced legal advisor with expertise in the HoReCa industry.

An experienced legal advisor is the key to successfully launching and scaling a business

From the practice of full legal support of leaders and newcomers of the HoReCa industry over the past 10 years, we can note that systematic legal support of both the launch of a catering establishment and its further activities and scaling guarantees owners and investors a realistic assessment of all risks and protection of interests at all stages and in relations with all counterparties.

In particular, an experienced legal advisor can provide:

Ø assessment of legal risks of a specific business model and business plans;
Ø development of a scaling strategy in the HoReCa market;
Ø creation of an optimal corporate model for attracting investments;
Ø supporting the opening of turnkey public catering establishments;
Ø obtaining the necessary permits and protection of intellectual property;
Ø full support for the launch of the franchise business model;
Ø support of inspections of the State Service of Ukraine for Food Safety and Consumer Protection and other regulatory authorities
Ø settlement of disputes and protection of interests in court