Do You Need a Franchise Owners’ Agreement?

Do You Need a Franchise Owners’ Agreement?

by | Mar 29, 2019 | Blog, For Franchisees

You are a successful restaurateur, managing and running multiple eateries in multiple locations for several years. You started with a single location. It opened and was a hit. So you opened a second restaurant in a different location which turned out to be just as popular. You decide to protect your restaurant’s name by registering it, your trademark, with the United States Patent and Trademark Office.

A few years later, a friend of yours notices your success and asks if he can become an investor and help you open a third location. You realize that with your operations know-how and his capital and manpower, there is no reason not to open a third…So, you do.
You form a partnership, and under that umbrella, you open a restaurant using your trademark name. Your friend invests money to acquire the location, lease the equipment and buy inventory. You contribute your know-how and teach your friend everything he must know to manage this new operation. In exchange, you both agree to split the profits 50/50.  All goes well and before you know it, your third location is up and running — another success.

If you haven’t read your partnership agreement since you signed it, do it now. how will you know:

  • Whether your actions are in compliance with that agreement?
  • What will happen to your ownership interest if you want to retire?
  • If you can you sell your company or even your stake in the company? And, if so, to whom?

What is a partnership agreement? 
What is a shareholders’ agreement? 
And are they the same or different?

They are both contracts. A partnership agreement, also known as an operating agreement for limited liability companies (LLCs) or a shareholder agreement if your company is a corporation, is a contract between the owners of a company. It sets out the terms and conditions between the owners, including:

  • The ownership percentages and distribution of profits and losses;
  • A description of the management powers and duties of each partner;
  • The grounds by which the contract (and partnership) can be terminated;
  • What happens in the event one of the owners dies or becomes disabled; and
  • How and to whom, each owner can sell his or her share of the company.

Do you need an agreement among owners?

Yes. And it’s critical to create it at the beginning of any undertaking – the “honeymoon” phase of any business relationship.
Let me tell you a story. A few years ago, a couple of best friends planned to open a restaurant. They had worked together in another restaurant for over 20 years and decided that the time was right for them to start their own business. It seemed like a perfect match. One friend was a chef. He would run the kitchen. The other was an experienced manager. He would handle the business aspects of the concept – employees, vendors, books. The two friends figured they knew each other so well, they didn’t need to spend the money to hire an attorney to prepare an owners’ agreement. Why bother? They intended to own the restaurant 50/50.  What could go wrong?

What breaks up partnerships?

Life events. Miscommunications. One day the head chef partner stopped going to work.  Just stopped showing up.  He was in the midst of a divorce and had other personal problems. The manager partner had to pick up the slack. He scrambled for a while but finally found a new chef to run the kitchen.
He consoled himself with the thought that with the chef partner out of the picture, he at least would have 100% control of the business. But not so fast.
Flash forward a year. The chef partner resurfaces and demands access to the restaurant and the books and records. His former best friend, the manager partner tells him to “go jump in a lake” as he seemed to have abandoned the business.  But the chef partner disagrees. He files a lawsuit and suddenly the two partners are embroiled in expensive, time-consuming litigation.

Had they had taken the time to produce a written agreement clearly outlining the separation process should one of the partners leave (or abandon) the business, the lawsuit could have been resolved quickly and perhaps even avoided entirely.
Bottom line: An ounce of prevention is worth a pound of cure.  Sure, there is no problem until there is a problem. But if you are in business with partners, make sure that you have an agreement among the owners to protect all of you in the event of something unexpected. Got questions? Feel free to email them to me, Julie Lusthaus at jl@lusthauslawpc.com  and let’s talk.

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