Business: Tips For Newcomers On Opening Restaurants

by Jack Zwicker BA, LL,B., LL,M.

Jack Zwicker is a business and real estate lawyer, negotiator, and lecturer who practises in Markham, Ontario.

If you are thinking of buying a retail food franchise or of opening a restaurant, there are a number of issues you need to consider before entering into any binding legal commitments. Whether or not you choose to get into the restaurant business as a franchisee, or as an independent business-person, the one common denominator which often separates success from failure is your willingness to research the market and to set realistic time frames for each step in the process.

Before making any decisions, the first issue with which you need to deal is the value you place on your own independence. Let's assume that you strongly value your independence, and do not want to be in the position where all major business decisions are controlled by someone else. Should this be the case, it is unlikely that buying a retail food franchise will work for you. Canadian franchising leaves control of all major business decisions with the franchisor (ie, head office). For example, decisions relating to menu, interior and exterior design, advertising, suppliers, and business practices are always made by the franchisor.

While some franchisors may be more receptive to suggestions from their franchisees than others, ultimately, decision-making lies with the franchisor. What this means is that franchisees who may want to experiment with menu items, or food presentation, or decoration, risk being notified by their franchisor that they are in breach of their franchise agreement. Larger Canadian franchise operations have staff who visit their franchises periodically and report any violations. And when such violations are not corrected within the time frame set out in the franchise agreement, the franchisor has the right to end the agreement, pay out the 'book value' (depreciated value) of the restaurant's assets, and evict the franchisee. Sometimes, the franchisor operates that location until a new franchisee offers to buy it.

In addition, all franchise agreements require payment of a deposit and down payment, together with monthly royalties that generally run about five percent of gross sales, and an additional two to three percent as a contribution to the franchisor's advertising programme.

While most of the larger franchisors advertise extensively, some smaller franchise operations do little, if any advertising. As well, the larger, better known and more successful food franchises are expensive and financing is required either from family members, private banks, or from the Business Development Corporation of Canada by way of a small business loan. These bank loans are government guaranteed. Every year newcomers to Canada who are anxious to get into franchises put themselves at risk by rushing to purchase. So it is extremely important to carefully research the market place before making any commitments. Provided that your personal independence is not an issue, and that the return on your investment after paying all of your standard operating expenses, royalties, and bank loan is sufficient, franchising may be right for you. Franchising does have the advantage of placing the responsibility on the franchisor for building, equipping and stocking the restaurant so that it is ready to operate.

If, on the other hand, your personal independence is important to you, you may want to consider setting up your own restaurant. Once again, you need to leave yourself sufficient time to research the market. As is always the case with real estate, location can make the difference between quick success and quick failure.

Before looking to lease commercial space from a landlord, check with the building department of the town or municipality where you want to set up your restaurant, to see whether the location in which you are interested is zoned for restaurants. As well, make sure to check out available parking, and municipal parking regulations with both the landlord and the appropriate building department. Lastly, be sure to find out whether you will require a building permit, and the length of time the building department usually takes to issue a permit.

Because most current commercial leases are 'net net' leases, you can expect to pay rent at an agreed per square foot price, plus TMI (municipal taxes; maintenance and insurance) which represents your proportionate share of all of the landlord's operating expenses. In addition, most commercial leases require the tenant to arrange for and pay the premium for comprehensive property and casualty insurance. In virtually all commercial leases, any construction work such as partitioning, flooring, and fixturing that the tenant wants to complete has to be approved in advance by the landlord. And some landlords may insist upon an approved contractor doing this work, or upon their architect/consultant approving the work.

Regardless of the specifics, it is absolutely vital that you have a commercial lease reviewed by your lawyer to ensure that you understand your obligations, and that you are leaving enough time to do all of the things that must be done before the restaurant is ready to open.

So remember, before making any legal commitments, be sure to get all of the information you need, and work with an experienced lawyer who can help you spot any of the hidden traps you may face along the way.

CNM