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Managing Partner, MK Legal Service, Attorney
Restaurant Business: Legal Tips to Start and Scale Up
It has been a long-popular dream for certain entrepreneurs to open restaurants, pizzerias, cafés, coffee shops or confectioneries. This goal is becoming more and more real every year. And this is not surprising, because hospitality is written in the genetic code of Ukrainians.
Even severe quarantine restrictions in connection with the Covid-19 pandemic were not able to destroy such a cherished dream, only delaying it for certain restaurateurs. Likewise, over the past year, they managed to open many new catering establishments. For example, our client, the burger network Yudgin Burger, has opened 8 new burger outlets in the last 18 months.
So, how do you start a restaurant business to make it successful and profitable? When do you need to scale and which way should you choose? It is important to answer these questions from the views of different restaurant market players. The tasks for a novice restaurateur and the seasoned restaurant owner vary, requiring different strategies and tactics and, therefore, the diverse approach of legal support.
There are several ways to start a catering business. The first option is more or less obvious: you can open a catering establishment under a new unique brand.
The second one requires you to join as a partner in an existing restaurant or a chain by acquiring a stake in the company or by purchasing a restaurant 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 and absolute freedom to implement their own business concepts.
On the other hand, it is both the riskiest and the longest one in terms of return on investment. After all, you need to start from scratch: legalize the business, look for suitable premises, recruit staff, establish relations with suppliers, organize the brand’s promotion, and many other different business processes. Besides, there is no guarantee that the newly-built restaurant will attract visitors, become popular and profitable.
We have prepared a list of mandatory steps required for the legal support of the opening of a new catering establishment and its safe and lawful operation:
1. Registration of a legal entity:
The most common forms for this industry are sole proprietorship (group II or III single tax payers) and limited liability companies (if annual income exceeds the limits for a sole proprietorship or the owner plans to sell alcoholic beverages other than low-alcohol drinks).
2. Choosing a tax system:
The Tax Code of Ukraine provides for several options:
- General taxation system (suitable for LLC and sole proprietorship),
- Simplified taxation system in the form of a single tax payer under group II (suitable only for sole proprietors) or a single tax payer under group III (suitable for both LLCs and sole proprietors).
The best option should be chosen depending on planned annual income, the number of employees, and other factors. At the same time, business owners need to know about the importance of competent corporate structuring which, among other things, enables you to reduce the tax burden on business.
3. Proper paperwork for the restaurant:
Here you need to pay attention to such key points as the absence of encumbrances on the premises, the purpose of the premises, the lease term, whether the premises or part of them is a cultural heritage site, and so on.
In addition, you should also issue documents for the sign of the catering establishment and the permit for the summer platform in the event of its presence separately.
- Registration of capacities of market operators:
Law of Ukraine № 771/97 provides for the obligation to register the capacities of the market operator before the catering establishment is opened. If you fail to register them before an inspection finds it, a fine of UAH 66,000 for sole proprietors and UAH 120,000 for legal entities may be imposed.
- Introduction of HACCP quality control standards:
Law of Ukraine No. 771/97 obliges all market operators to develop and apply these standards, train staff and appoint personnel responsible for their observance. In the event of violation of this requirement, fines of UAH 90,000 for sole proprietors and UAH 180,000 for legal entities are expected.
- Registration of fire declaration:
The Civil Protection Code of Ukraine allows a real estate object to be used only after registration of the declaration of conformity of material and technical base to requirements of the legislation on fire safety. In case of the absence of such a declaration, fines of up to UAH 34,000 are imposed.
- Registration of cash register:
This requirement is provided by Law of Ukraine No. 481/95 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 goods sold.
- Obtaining the necessary licenses:
The sale of alcohol and tobacco products is legal only with the prior receipt of appropriate licenses.
- Proper registration of relations with employees and contractors:
The current legislation of Ukraine provides for significant financial sanctions for violations of labor standards and accordingly, the status of each worker of a catering establishment must be properly formalized via employment or civil contracts.
For clear and coordinated work of a restaurant or café, it is necessary to fix all the essential conditions of cooperation in written agreements.
- Protection of intellectual property rights:
You should protect your catering business from plagiarism and other misuses of the brand, trade names, gastronomic concepts, and other unique designs by registering a trademark, copyright, and obtaining a patent for a utility model or innovation proposal.
Partnership as an Effective Way to Invest and Scale a Restaurant Business
If you don’t have enough skills and desire to build a business from scratch, a potential owner can become a partner of an existing catering establishment or a network of well-known and successful brands. Popular establishments often look to attract additional investment resources, primarily to scale and generate additional profits.
One way to set up a 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 purely financial, as there is no benefit for experienced owners and it is very risky to delegate management to new investors. However, only a financial partnership requires a detailed examination of possible risks for both parties and, most importantly, the written confirmation of all agreements in writing. After all, partnerships involve many compromises, and in the event of a dispute, written contractual obligations will always prevail over oral statements.
Legal support 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 responsibilities of partners, as well as the goals of all parties. For example, investing in a non-structured business will require additional preliminary agreements and protocols of intent, while acquiring corporate rights in an existing business provides for the conclusion of a share purchase agreement and a corporate agreement.
So, for a partnership in a restaurant business to be successful, you need to perform certain mandatory actions:
- Carry out a detailed legal inspection of the investment object and partners;
- Analyze the corporate structure of the business and, if necessary, carry out corporate structuring, which will provide the investor with control over the investment and the project as a whole, and the owner with smooth management and operational activities;
- Develop a package of agreements that will regulate the smallest details of the partnership and areas of responsibility of the parties;
- Carry out investment transactions in strict accordance with the law, which will provide the future evidence base and legal position in case of disputes related to investments.
Most of our clients in the HoReCa industry invite investors as partners, but the most common and fastest way to scale a catering business is through franchising.
Franchising in the Restaurant Business: Popular, Fast, Efficient
A franchise is a set of rights to use the brand, commercial experience, and business reputation, which are transferred by one party (franchisor) to the other party (franchisee) for a fee and under certain conditions specified in the franchise agreement. The process itself is called franchising or, as defined in Ukrainian law, a commercial concession. In essence, franchising is a special type of partnership that benefits both parties.
Thus, for the owner of a catering establishment, the opening of a franchise provides the following advantages:
- Fast business scaling with a minimal investment;
- Receiving additional income in the form of a lump sum, royalties, and advertising fees;
- Saving overhead costs compared to opening a new facility on your own.
An investor buying a franchise gets the following benefits:
- Minimizing the risk of business failure, because the franchisee receives a successful business model, a popular brand, and, accordingly, a wide target audience of potential visitors at the very beginning.
- Free consulting and technical assistance from an experienced team of the franchisor: the turnkey development plan of an establishment, personnel management, detailed description of all work processes, etc.;
- Discounts and bonuses from franchisor suppliers; the franchisor can also act as a supplier or train staff and help with the restaurant’s test launch.
However, along with the benefits, there are, as always, risks. For example, a franchisor must constantly control high-quality standards and the solvency of the franchisee. The latter should check for hidden payments and restrictions on management.
In addition, the opening of a catering establishment under a franchise, as well as under a new brand, implies the need to take almost all the above-mentioned steps.
It is simply unrealistic for a potential restaurant business owner to check all the risks and comply with all legal requirements on his/her own, because commercial issues are always the priority. The solution comes with an experienced legal advisor who has expertise in the HoReCa industry.
An Experienced Legal Advisor is the Key to Successful Business Start and Expansion
We would like to share our insights coming from the practice of full legal support for HoReCa industry leaders and newcomers over the past 10 years. Systematic legal support for both the launch of a catering establishment and its further operation and scaling provides guarantees for owners and investors protection of their interests at all stages in relations with all counterparties.
In particular, an experienced legal advisor can ensure:
- Assessment of the legal risks of a specific business model and business plans;
- Development of a scaling strategy in the HoReCa market;
- Creation of an optimal corporate model to attract investment;
- Support for the turnkey opening of catering establishments;
- Receipt of the necessary permits and protection of intellectual property;
- Full support of the launch of the franchise business model;
- Support of inspections by the State Service of Ukraine on Food Safety and Consumer Protection and other state authorities;
- Dispute resolution and protection of interests in court.
So plan the creation and operation of your restaurant business wisely, as it is better to rely on an experienced legal partner, who can deal with all regulations and paperwork and let you focus on business development.