Throughout my career as a hospitality and liquor license lawyer, I have been on the front lines of many successes and challenges in the industry. From the inception of the business through succession, I have learned from countless scenarios of permit delays, partnership disputes, unexpected regulatory costs, and regulatory oversight with Pennsylvania’s Liquor Control Board (PLCB). With this context, I would like to provide a simple 9 step plan essential for a smooth start in this industry.
When considering opening a restaurant, whether a small eatery or a large establishment, securing funds is paramount. The costs of launching a restaurant with a liquor license in Pennsylvania can easily range from $300,000 to $1.5 million, and finding suitable partners or investors becomes crucial to realizing the vision. Networking, building relationships, and seeking potential investors are vital steps.
Traditional bank financing may be one option, especially small business loans funded by the U.S. Small Business Administration. Another option could be crowdfunding. Federal legislation signed by former President Barack Obama on April 5, 2012, known as the Jumpstart Our Business Startups Act (JOBS Act), eased securities regulations and authorized crowdfunding for startups and small businesses. Restaurant entrepreneurs can benefit from online crowdfunding platforms like Honeycomb Credit, Kiva and StartEngine, among others, to raise start-up funds.
Once the groundwork is laid and money is secured, enlisting the services of an experienced hospitality lawyer becomes pivotal. This stage involves quick actions, swift negotiations, and securing finances promptly. As a hospitality and liquor license lawyer, my role encompasses negotiating commercial leases, ensuring compliance with municipal codes, conducting due diligence on the property, orchestrating the acquisition and transfer of your restaurant’s liquor license, and outlining profit distributions, all of which help establish a strong foundation for your restaurant.
Many pitfalls can arise when signing a lease without legal guidance, especially concerning zoning and liquor licensing. I have heard business owners say the following regarding commercial leases: “I didn’t want to spend money on a lawyer to review the lease because it’s all boilerplate language anyhow” and “I’m a small business owner and the landlord is a national commercial real estate company…I was told that the landlord won’t make any concessions, so why hire a lawyer?” and “the landlord and I are friends so we’ll work through any problems regardless of what the lease says. I don’t need a lawyer to mess things up.” Don’t be this person!
A commercial lease is one of the first, and could be one of the most important, legal documents that a restaurateur will need to sign. Commercial landlords will not typically agree to a lease term that is shorter than five years. In fact, most restaurant leases are for ten+ years. With this length of commitment, and average monthly rents of $9,000 a month, a lease agreement could create a $1M+ liability for the business owner, so caution should not be thrown to the wind.
In Pennsylvania, different municipalities have varying zoning regulations, and all liquor license acquisitions are subject to approval by Pennsylvania’s Liquor Control Board. As a result, restaurant lease agreements should be contingent upon PLCB approval, government permitting, and zoning approval. Without legal assistance, aspiring restaurateurs might encounter unforeseen hurdles or even discover limitations on the sale of alcoholic beverages, which can significantly impact revenue.
When you start your restaurant, your liquor license will likely be your business’s most significant investment. The first thing to know about liquor licenses in Pennsylvania is that there are many types. Every liquor license is issued by the PLCB, an independent government agency of the Commonwealth of Pennsylvania that manages the state’s alcoholic beverage industry. Each license has different requirements and privileges. Your business plan will determine what kind of liquor license you will need. For example, a hotel owner will likely need to apply for a Hotel “H” license, while a restaurant will need a Restaurant “R” license.
The most common types of liquor licenses in Pennsylvania are:
The PLCB’s thorough investigation into an applicant’s finances for a liquor license transfer often becomes a source of unexpected frustration for many individuals. The depth of scrutiny applied by the PLCB, especially when using personal or investor funds, can leave applicants feeling exasperated and caught off guard by the intensity of the process.
One applicant expressed their frustration, saying, “I never expected such an intrusive examination of my financial history. It felt invasive, and I found myself increasingly frustrated as the investigation continued, almost as if my entire financial life was under a microscope.”
Another individual echoed this sentiment, stating, “dealing with the PLCB’s financial investigation was incredibly frustrating. I felt like I was constantly being asked for more and more documentation, making the process arduous and time-consuming.”
“Having to provide such a vast amount of financial information was aggravating. It felt like an endless cycle of paperwork, and the constant requests for more documentation added to the frustration,” voiced another applicant.
The PLCB’s investigation covers a wide spectrum of financial aspects, requiring applicants to disclose extensive information such as six months of bank statements and explanations regarding the source of larger credits that appear on any of the statements. The reason for the PLCB’s investigation is rooted in the Liquor Code, which requires the PLCB to determine that the applicant (and its members of shareholders, if any) are the only persons financially interested in the business.
Choosing between individual ownership, partnerships, or involvement in restaurant groups requires careful consideration. Partners are not for everyone. A successful food and beverage owner told me: “one of the best meetings I ever had with a lawyer was when my potential partners and I met with you, and you explained to us how decisions are made in a member-managed company.” He added, “We left your office, and I decided not to proceed with the potential partners.”
Keep in mind that investors with extensive restaurant experience can offer valuable insights but might also seek a more hands-on approach. How you structure your company will likely determine the level of control an investor can have in the day-to-day decisions of the restaurant. However, collaborating with partners who understand and believe in your vision fosters patience through potential hiccups in the business journey.
Another reason to carefully screen potential partners is that the PLCB will do background checks on each partner. The Liquor Code generally prohibits any person from simultaneously having an interest in a manufacturing license and a retail license. If your potential partner owns an interest in a manufacturing license (or has a criminal record), this person could jeopardize your company’s chances of acquiring a restaurant liquor license for your business.
If you decide to bring on investors and partners to help finance and/or run your restaurant, you should have in place a detailed partnership, operating agreement, or shareholders agreement. Creating a detailed governing document for your restaurant is like a prenuptial agreement in a marriage, outlining roles, responsibilities, and dispute resolution mechanisms.
Just like marriage divorces, business divorces can occur when one partner or member of the company attempts to break off and start a competing endeavor. These documents become indispensable tools to resolve conflicts or severe misconduct, setting clear grounds for potential removal of partners or the sale of partners’ interest in the restaurant. Legal fees for a “business divorce” can be daunting, quickly exceed $100,000 in Pennsylvania, not to mention the loss of morale among employees and distractions from the restaurant and your customers. You will be better served with a carefully drafted partnership agreement so that disputes can hopefully be avoided.
Having an employment lawyer create and oversee your restaurant’s employee handbook ensures that the business adheres to legal standards and protects against potential liabilities. In this post-#MeToo world, it is crucial to have appropriate levels of employer liability insurance coverage and an employee handbook.
An employee handbook sets the rules of the road for your restaurant, aids in legal compliance, and can help your managers deal with potentially difficult employee relations issues. Handbooks are also typically one of the first things requested in litigation or government investigations, so having one that is effective and up to date is critical. Paying close attention to equal employment opportunity policies, including those protecting against discrimination, harassment, and retaliation, is obviously important.
Maintaining control over the restaurant’s brand is crucial. Pursuing the registration of a federal trademark or service mark with the United States Patent and Trademark Office (“USPTO”) is among one of the most advantageous and essential first steps for a new restaurant business owner. Brand awareness is a necessity in today’s grueling market. Registering a company’s mark in its earliest stages allows for the unveiling of a trustworthy product or service, likely to be followed by a strong consumer base. Waiting too long to pursue federal trademark registration, only after the company has gained significant recognition and good-will, invites others to “piggyback” upon your brand’s initial success.
Starting your branding search early, and utilizing skilled professionals, can help you avoid frustrations that could later arise. For example, is the brand sufficiently unique to warrant protection? Is the brand name or mark already registered by another company? Or, even if the brand is not registered by another company, is it being used in another state? These items should be considered as early as possible in the company’s formation process to avoid the possibility that your brand is not able to be used or protected.
While it might seem expensive or unnecessary, engaging legal counsel at the outset is an investment that far outweighs the risks of potential legal entanglements down the road. By understanding the complexities and possible pitfalls, aspiring restaurant owners in Pennsylvania can mitigate numerous issues that could otherwise lead to substantial financial and operational setbacks. For more information, contact Daniel Conlon at (412) 594-3951 or at email@example.com.
December 08, 2023
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