There must be a lot of concerned restaurateurs out there over the past couple of weeks. I have been fielding lots of emails and calls over the past few days about how to develop an asset protection plan for restaurant owners.
This subject is near and dear to my heart because this was the catalyst that got me into this business. As a lifelong entrepreneur, I have started, bought and sold several businesses over the years in several niches.
In my opinion, two of the most dangerous industries from a litigation perspective are real estate and restaurants. I have done both. Actually, I have done both simultaneously which is what prompted my interest in asset protection planning.
About 10 or so years ago I owned 2 separate, but related businesses. One company was a service company that provided home installation of products like fitness equipment, indoor game equipment, and outdoor play equipment. The company had service providers in about 18,000 zip codes (there are about 27,000 zip codes in the US).
The other company owned and rented real estate. Like many other small business owners, this started because I wanted to own the property where my other business was housed, so I bought the building. Then I bought another. And another. And so on.
Like every other self respecting 20 something business mogul, I also wanted to realize the ultimate dream of owning a bar.
So I bought one. It was actually a bar and grill across the street from a college campus so we did serve food, but ultimately, it was a bar.
As many of you may already be aware, running a restaurant is hard. And very time consuming. I had a partner, but he also had another business so the both of us were not able to devote the time it takes to be successful at this venture.
We did ok, made a few bucks and sold it a year later for 50% more than what we paid. In the process of selling, I began to think about shielding my other assets from any potential litigation that may arise from the risky endeavor of owning a bar.
During this time, I learned a lot about asset protection planning. While this stuff is intuitive to me now, at the time it was a revelation to learn what you can do to create a veil of privacy around your assets while keeping them legally disconnected from the rest of your business interests.
• I learned that you never, ever want to own any significant asset in your own name.
• I learned that you always want to segregate valuable assets into separate entities to limit the liability to that one asset.
• I learned how to legally eliminate equity in my real estate holdings to make them appear unattractive to creditors while still retaining that equity position through other entities.
• I learned how to limit my liability for each asset to a nominal value thus keeping my other assets safe from any predatory creditor.
• I learned how to make my assets invisible to prying eyes.
It’s a good thing I took the time to learn this stuff and implement my own asset protection plan too.
One year after we sold the restaurant, we were served papers by the local sheriff. We were being sued by the landlord of the property for failure to pay rent.
It seems that the landlord kept us on the personal guarantee for the commercial lease for the remaining 4 years and the party that bought our business defaulted on their lease just a few months after taking over.
We were being sued for about 3.5 years of monthly lease payments plus interest and penalties.
We were also being sued by the girls that bought the restaurant for misrepresentation of the business. They claim we lied about the revenue and the potential for the business.
Of course this was complete bullshit, but it didn’t stop them from finding a parasitic lawyer willing to take their case. They were suing us for the purchase price of the business, all of their monthly rents and expenses during their ownership, their loss of income based on what they thought they were worth professionally, and legal fees, plus interest.
Ultimately, we were being sued because we were perceived to be wealthy. Plain and simple. The landlord saw that we were the deeper pockets and the parasitic lawyers thought they had a payday.
Luckily for me, the asset protection plan I had developed worked like magic.
In the due diligence phase, the landlord’s attorneys could not find any assets that we legally owned so they offered a settlement. The settlement was negotiated down to about 10% of the original amount.
The lawyer for the girls who bought our business couldn’t find any assets either so he went back to his client and told them that he was not willing to take the case on contingency (commission) as originally offered and would need a large retainer (I don’t know the amount) to take the case. Since the girls had no money, they were forced to drop the case.
Restaurants are risky business. Potential creditors can come in many forms;
• Anyone who is on the premises either inside the building or in the parking lot
• Anyone who drinks alcohol at your establishment can have a claim based on your decision to potentially over serve
• Injuries from fights at the bar
• ABC board (agency that regulates alcohol purchases in some states)
• And the list goes on and on
These are just ‘inside creditors’, or potential liabilities that arise from the activity of your business.
There are also ‘outside creditors’, or potential liabilities making claims to the profits of your business from your personal activities. Most people think that by placing their restaurant inside a corporation, they are completely shielded.
This is incorrect. The shares of your company are an easy target for outside creditors just as like your shares of public companies like Walmart or GE. With your company shares at risk, a creditor can end up as your business partner or even owning your company outright giving him or her the right to liquidate the business to satisfy their claim.
There are many options when creating an asset protection plan for your restaurant business. There is no one size fits all approach.