The Best Legal Advice for Restaurant Startups in Texas
I have been representing restaurants and startups in the hospitality industry for over 30 years and have concluded that this industry is one of the most difficult businesses to maintain success over time. Other than maybe the legal industry, restaurants present their owners with significant challenges. Interestingly, these obstacles have very little to do with the choice of cuisine but with reoccurring legal/business issues which surface during the course of operations. The list which follows is some of the key areas of concern that I have discovered as a restaurant and hospitality attorney which may be of help to anyone thinking about starting a restaurant. Here’s my list of issues to consider if you are considering the startup of a new restaurant in Texas, the Texaplex, Dallas, Houston, Austin, Midland, Odessa, Amarillo, Lubbock, and Abilene:
- Choose your Texas landlord with great care. This is one of the key issues which is often overlooked by startup restaurants in Texas and particularly the major urban areas in Austin, Dallas, and Houston. There are so many factors to consider, that the choice of the landlord and lease agreement may be of secondary importance. This is a huge mistake. Typically, a major factor in the failure of a restaurant is the relationship between the restaurant and landlord as to the facility. A problematic landlord will create problems at every step of the way from improvements, use of the sump pump, hours of operation, and restrictive covenants on operations. Any one of these items could cause severe operational challenges for a startup restaurant. Your ability to negotiate basic terms with the landlord at the beginning is a great indicator of how things will progress later on. If it’s difficult, better to jettison that property and find another location. You will need the cooperation of your landlord with regard to further extensions of the lease, expansions of the facility, and other items that might come up. I have seen this challenge recur over the course of many years with restaurant clients and there is very little that an attorney can do to rectify a bad relationship.
- Get legal advice on reviewing your first Texas lease agreement. The concept here is not to cut corners. You might save a little money by looking at the lease yourself or having a friend take a look at it, and that is a massive mistake. The terms of the lease will have a direct bearing on whether your restaurant venture is successful or not. Only an attorney that’s experienced in restaurant law can really identify the issues of concern. For example, you need to have proper language with respect to the extension of the lease term and option. I’ve seen numerous situations where a restaurant is extremely successful and then hits a brick wall with respect to negotiating a simple extension of the lease with the landlord who attempts to leverage its power to get a better deal which is totally improper but permissible as a matter of law. You want to make sure that the lease term options are clear, the rent and whatever escalator is set forth with specificity, and there’s nothing left to chance. I’ve seen more than one restaurant go down the drain because of this problem. Other items of concern relate to events of default under your lease if a payment is late, your ability to add trade items and fixtures to the premises, and a problematic term known as percentage rent. If you see anything that states percentage rent for a small restaurant run for the exit door as it allows the landlord to get a percentage of your income in addition to rent. This is not unusual for large franchise restaurants but should be avoided at all costs for smaller operations. Sometimes it finds its way into lease simply because it was present in a prior transaction. Never sign anything unless you know what every term means. Bottom line-get legal advice before signing any lease agreement as you may lose your venture before you start.
- Trademark violations. This may sound obscure but is a recurring issue that leads to restaurant failure. Please don’t hold this against me, but my firm is often hired to go after startup restaurants that are violating their intellectual property rights. Specifically, I have clients that have a registered trademark for their name and logo which is violated by another startup somewhere else in the United States. As we have a valid trademark, I will go after those infringers aggressively with a cease-and-desist letter and then a lawsuit to shut them down. There’s nothing wrong with this and I would highly recommend that new restaurants seek the services of a trademark attorney before launching any venture. A big mistake that is often made in Texas is that owners believe that the registration of their entity name with the Texas Secretary of State is equivalent to trademark protection. That is dead wrong. If you use a name that another company has used in any other state and trademarked, you are at risk of being shut down at any point. What that means is you could have a successful restaurant operation for years and then get a cease-and-desist which would require you to change your branding immediately. That would be disastrous. Bottom line, before you select a restaurant name in Texas and particularly the larger urban areas of Austin, Dallas, and Houston, seek the advice of an experienced trademark attorney.
- Protect your trade secrets in Texas. This again is often overlooked. Restaurant owners typically have some kind of special menu items either passed down through their family history or training. These menu items define their cuisine and the reputation of the restaurant. Menu items are protected not through any kind of public filing such as copyrights but through protecting trade secrets. There is a protocol for how to do that under Texas law which requires the assistance of an attorney. You don’t want your employees running off with your menu items. This leads us to the next item.
- Ensuring employee confidentiality in Texas and particularly the larger urban areas in Austin, San Antonio, Houston, and Dallas. This is often overlooked as a restaurant would not consider its operations to be complex enough to require any kind of confidentiality regime. This is again absolutely incorrect as the menu items need to be protected from rogue employees who will learn everything about your business, smile, and then quit and compete against you with the exact items. I see this happen over and over again. The only way to protect against rogue employees is to require them to sign a confidentiality agreement and potentially a non-compete agreement before they start. This is perfectly appropriate with regard to protecting the confidentiality of menu items and other specifics. However, non-competes can only be utilized in certain situations and you need to consult with a Texas attorney before engaging down that path.
- Watch out for the chef. This is often overlooked and an area of concern for slightly larger operations or specialty restaurants like Japanese or Italian. The chef, of course, is often the king or queen of operations when it comes to the preparation of the cuisine. With this status often comes ego and oftentimes problematic behavior as the chef will often look at the quality and presentation of the food which is understandable versus the commercial success of the venture. For example, in a very famous Italian restaurant that I represented over the years, the chef would typically go for the most expensive seafood item which would drive down the profit on any particular item. Although this could easily be rectified, the chef would not change his point of view which led to serious conflict in the organization. Ultimately, the chef was replaced. The way around this is to make sure that other members of your staff particularly a sous chef are available to fill in if the senior chef is replaced at any time so there is no disruption. You also need to maintain tight managerial controls.
- Watch out for sexual harassment in Texas and particularly the larger urban areas including Austin, San Antonio, Dallas, and Houston. In larger restaurants, this is continually a problem. Given increased sensitivity to this issue which is understandable, employees male and female will raise a claim if they can. These issues are highly problematic and expensive to deal with in Texas as they are investigated by the Texas workforce commission also known as the TWC and the federal government. Absolutely consult with an employment attorney and understand the protocol for training before you open your doors in a larger operation. Sexual harassment training is a defense to a suit for sexual harassment and the absence of such a predicate can be disastrous to your case. It can easily be rectified and inexpensively. Similarly, you need an internal protocol to investigate sexual harassment and a procedure that is made available to everyone within the organization. Critically, you do not want a system wherein an alleged offense must be reported to management as such key employees within an organization are often the subject of the harassment its yeah elf. Again, consult an experienced employment attorney for advice on this issue.
- Watch out for the TWC. The Texas workforce commission, unfortunately, is almost entirely employee-oriented in Texas-in my opinion. There are specific rules for when a company can utilize independent contractors versus employees and you need to know the difference before you open your doors. Typically, anyone working at a Texas restaurant is going to be deemed an employee which means you have to take out their withholding and other taxes. A lawyer can help you with the legal definition between independent contractor employees, but the TWC will typically take the position that a worker in a restaurant situation is an employee. Do not utilize independent contractors without legal advice as you may end up being investigated by the TWC.
- Choose the right entity in Texas. This may seem like a no-brainer, but is a major factor in the failure of restaurants in Texas and elsewhere. Almost everyone understands that it’s a bad idea to operate your restaurant as a sole proprietorship. You never want personal liability in any kind of restaurant operation. The more complex question is whether to select an LLC or Texas limited liability company versus a corporation. 99% of the time I recommend an LLC as it is the easiest entity to operate without making operational or legal mistakes which could create liability inadvertently. Once an LLC is set up, there is very little to do in terms of his legal maintenance. Unlike a corporation that requires annual meetings and minutes to the corporate record book, there are no such requirements for limited liability companies. Accordingly, the selection of a corporation typically for a restaurant is a very bad choice. Moreover, I am aware of at least several instances where stubborn business owners selected a C Corporation as the entity status for their Corporation subjecting themselves unnecessarily to tens of thousands of dollars in tax liability. In one such case, a high-priced hamburger restaurant in West Texas failed to heed my advice and shortly thereafter went out of business. I always shake my head at that type of decision-making.
In conclusion, opening a successful restaurant poses specific legal challenges. Based on my 34 years of experience in this area, you are more likely to succeed if you have access to a highly experienced restaurant attorney in the startup and maturation of your restaurant business.