What's the Best Way to Add Limited Partners for a Bar?
What is the best way to structure taking on limited investors for a restaurant/bar looking to expand? I would like to consider offering investment opportunities of approximately $25,000 or another appropriate amount per share. I have a S corporation in California, but should I entertain an LLP? I would be the general operating partner/manager but I want to make it fair to all. How should the investors be paid and over what period of time? I would also like the investment to be transferable only upon death and I'd like to have the first option to purchase and right of refusal to the named successor.
This is not an area where you should go it alone. In short, you are selling securities, broadly defined as a form of "ownership investment." Securities are highly regulated, both at the federal and state level, and it isn't a subject to mess with. Investors need to be screened carefully to ensure that they have the financial wherewithal to make this investment--and that if they lose their shirts, it won't render them bankrupt (unlike taking the last pennies in Great Aunt Sophies retirement fund). Whether or not the financial terms you are considering make sense depends on how you worked the numbers in your business plan, the nature of the restaurant/bar concept, whether franchising is a possible expansion tool, and whether this concept will work equally well in other locations.
You also want to give serious thought to your exit strategy -- what happens if you are no longer involved in the business. Will that continue to make it attractive for these investors? The most important step you can take next is to consult with a local attorney and accountant who are familiar with and have done deals related to restaurant expansions. They should have their fingers on the pulse of industry standards, what return on investment that investors expect, the legal form of business entity that makes the most sense, and threshold buy-in amounts.
Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.