Sequoia Sized Issue: It’s Time to GROW!!

We all know that money can’t buy us happiness or love but it can bring us peace of mind.  A certain level of financial wealth is helpful to our mental health especially in the hospitality industry where payroll pressures loom and we ruminate about rent. And while the public perceives restaurateurs as rich, so many owners struggle to earn a comfortable living in our industry despite your endless hours and heroic efforts.

If you read the down and dirty exposés in Eater or the NYT, you would be led to believe that all restaurant owners are capitalist creeps and emotional barbarians.  Of course, we know this is not true and that most restaurant owners treat their employees with kindness and care and cope with the fact they are often making way less per hour than them.

But nobody realizes that or cares for that matter. So, no more boohooing friends. It’s time to take matters into your own hands and embrace the philosophy that it’s okay and even a must, to get paid well for your hard work running bars and restaurants. Especially, here in NYC, the most inhospitable city to the hospitality industry. So, let’s try to figure it out together.

HL has seen a lot in our 20 years representing the industry. We have been on the inside of the wild successes, the heartbreak closures and everything in between for so many restaurants and bars. We have helped groups grow from the seedlings of a first restaurant to hundred-million dollar powerhouses and we have sadly witnessed super-talented restaurateurs and chefs struggle to get traction and fade after their first success.

Along the way, we have taken notes and learned some lessons and we have developed some ideas of how to set up a hospitality group to be on the plus side of the equation and how restaurateurs can make more money and earn a better living.

If I were starting a restaurant group today (and it has to be a group mentality from the outset), I would plan for it to consist of a variety of hospitality ventures following our first few leased brick and mortar spaces.  My first move would be to establish a brand that meant something to us and we would establish a strong ethos that would guide and drive that brand.  Then, we would establish our first and flagship restaurant for that brand. It could be Michelin fancy or neighborhood caszh but it would have a clear and unique POV that would garner attention and put us on the map.

We would raise enough money both to do this first one right and also to fund the second shop.  It would be a two-for-one deal because we know we can’t rest on one restaurant success and we would let our investors know that from the jump.  We would partner with the best designers, architects, PR firms, accountants and lawyers to give ourselves every chance to succeed ’cause we gotta make a splash and knock the first one outta the park.

With a success plan in place, we would have our next concept developed and ready to go after operating OG for a year or so.  There are many choices at this stage.  We could start a new restaurant concept that fits within our hospitality group brand or we could do an offshoot in the form of a more casual or fancier version of the same restaurant.  Maybe a bakery or other retail concept. Here is where we will show the industry that we are not a one hit wonder and that our group has legs.  As long as there is brand cohesion and we are building a good reputation and we are showing our investors that we can make money, we will be golden.

After success number two, we would pause on raising more money and focus on lining up some management, licensing and consulting deals to expand our group’s portfolio and beef up our cash reserves. Vegas licensing deals, hotel management agreements, airport lounges and kiosks, etc.  Anything to add guaranteed money to our bottom line so we can start to build our infrastructure by making key hires and filling in our team as we grow our global culinary company.  As we can afford it, we will hire a DO, HR Director, Culinary Director, Director of Development, CFO etc.

Once we have our core team in place, we would supercharge our branding efforts so everyone in the industry and those who care and write about F&B ,here and across the globe knows who we are.  Our chef/partner would be our lead singer and we would land guest spots for them on competition shows, morning TV and Fallon. They could publish a cookbook, go on tour and star in an American Express commercial all the while building their Q Score and bringing attention to our group.

As the brand blows up we will be ready for some overseas consulting and licensing deals in Dubai, UAE, Japan, Europe and beyond.  All these deals just feeding our profit center and growing our brands and making us a player in the global hospitality industry.  Then, it’s all management, licensing and consulting deals forever.  We’ll get Durst and Peterson on board and have them source development deals for us and before long we are opening up big places with huge budgets all over the world and just crushing it like Catch and Major and Starr and Jose.

Finally, once we are fat, flush and famous, we will get our CPG line into production and it’s off to the races as we bang like Chang and go for the big, finance bro score.  We sell our product line to some corporate behemoth and our restaurants to Landry’s and we cash out and finally, finally, get to take a damn vacation like the rest of the world and give our bodies and mind a well-deserved rest.  Then, in our newly healthy state for mind, we probably just go back to doing what we do because as much as we gripe and complain, the hospitality business is all that and a bag of chili crunch chips.

Growth Strategies
by Andrew Fine, PartnerA recurring conversation we’ve been having with clients this year is the one surrounding expansion and growth. It’s a fun and exciting conversation, and reflects a general optimism surrounding the hospitality market. Many large hospitality groups have read the economic tea leaves and have concluded that 2024 is the year to expand. The question becomes – how best to do it?

The first step is the most standard. To succeed in hospitality, you must first offer a proof of concept. In almost all cases, you have to sign a lease and operate a bar or restaurant for a few years that receives good reviews and, perhaps more importantly, turns a profit. Then, you might consider opening a second, then a third.

During the course of this expansion, successful brand owners will be working towards building a scalable infrastructure. This means a few different things. For one, you should form a holding company to establish a bridge between your branded locations. You want to make sure your name and logo are trademarked so that any money you put into advertising and branding amounts to a long-term investment. You probably want to create a payroll company, shore up your employment practices, hire and retain appropriate talent, and figure out how best to divide your A-team across your various locations. You may also want to create a management company to hire your key personnel, collect management fees, and order inventory at the bulk level. Getting here is hard, but it’s doable. For those who have made it, the most common question they ask is – now what?

The good news is that there’s lots you can do from here. Building the infrastructure we described above opens up all kinds of options. This is the time to ask yourself: what kind of hospitality group do you want to be?

For example, are your hospitality concepts successful because the food is just that good? Is it good enough that customers would go out of their way to buy your special pasta sauce, your unique hot sauce, or your one-of-a-kind ice cream? If so, you might consider putting your reputation and brand leverage behind a CPG concept and getting those special goods on store shelves. We’ve had many clients this year do exactly that, and they’ve been surprised at the success they’ve had. Successful restaurants help drive business towards CPG, and vice versa. Customers who fall in love with the goods they buy at a store are more likely to try that originating restaurant, and your regulars probably can’t wait to try their hand at recreating some of their favorite dishes at home (not as well, of course). Not only does this result in more money, but it results in a higher value brand.

Other hospitality concepts decide that their value lies with their management team. Maybe you’ve secured a rockstar chef, an impeccable GM, a whiz of a CFO, and have made inroads with architects, accountants, lawyers, brokers, real estate developers, and the rest of a hospitality entourage. If that’s the case, you may feel like you can take on any project and turn a promising but struggling concept into a profitable gem. If you feel that way, you’re probably right. Hospitality groups that fall into this category often invest their time and resources into management and licensing deals with hotels and real estate developers. Those developers are willing to pay top dollar for the right management team. It’s a lot of work upfront, but once you get the concept up and running, it becomes more or less self-sustaining, freeing your team up for even more consulting and management opportunities. The most profitable hospitality groups out there derive at least 30% of their revenue from these types of deals. In some cases, it’s upwards of 50%.

Perhaps your brand’s value lies in its brand, and in people’s recognition and appreciation for that brand. In these cases, hospitality owners might consider the franchise route. If you feel you have a recipe for success that is learnable by others, you can build an empire through third party operators anywhere in the world. Of course, you have to be careful navigating franchise regulations, but many of our clients who have taken this leap have been surprised at how straightforward the process can be once you’ve opened one or two (with the help of qualified counsel, of course). Not to mention how profitable the model can be! Businesses that want to expand their reach to other cities or states often benefit from the franchise model, because you can more easily find operators who know their city and can more seamlessly integrate your concept into it.

Finally, there’s the good old-fashioned corporate expansion. You may want to continue to sign leases, build your management team, and own and operate your concepts more directly. The great news is that you can do so, and the bigger you get, the easier it will become to negotiate better terms with landlords, investors, lenders – you name it. But the secret is that most hospitality groups do this in addition to at least one of the other avenues above. If you want to make money in this business, you have to be creative, and you have to be aggressive.

There’s no one recipe for success in hospitality, but economic trends the past few years have made one thing very clear to us here at HL – diversification is key. Once you’ve established proof of concept, you’ll want to build a team and legal infrastructure that allows you to explore expansion across a few different channels. You don’t have to do everything, but you do want to do a combination of things to maximize your brand’s exposure and to add new channels of revenue (which, in turn, can accelerate growth). It’s definitely a challenge, but with the right team, you can do it. Here at HL, we’re extremely proud to be part of so many of those teams.

Please don’t hesitate to reach out to us if you’d like to explore expansion opportunities. We’re here to help.

Make Sauce!!
by Teepoo Riaz, HL CPG AttorneyAcceleration.  Every day we are moving at warp speed, and with that our capacity to consume information has grown exponentially.  This impacts everything around us – including our relationships with people and things.  The pros and cons of living life at this pace can be argued ad nauseum, but one outcome of this era that no one will argue is the ability to make an impression instantly.  We are clearly seeing this in the consumer-packaged goods space, which is a great thing for you.

But first, let’s take a step back to 1930’s California. Marie Callender started making pies and with that a name for themselves, resulting in their first eponymous restaurant opening in 1964.  Callender’s became famous for their pies and eventually in 1994 sold their CPG business to ConAgra for $140M ($295M in today’s dollars!). The restaurant branded CPG was born, but Callender’s success was a 50-year evolution.

Likewise, the gold standard for a restaurant CPG brand and the one that everyone invariably talks about is Rao’s.  For many, it can feel like an overnight success story, but similar to Callender’s, it was a success story decades in the making.  Launched in 1992 by a then single-location 100-year-old NYC-based restaurant that no one could get into, Rao’s created the super-premium bottled pasta sauce category.  Not necessarily an obvious recipe for success.  The local brand grew slowly and organically until 25 years later it was sold to Sovos Brands in 2017 for an unconfirmed $415M dollars and sold again recently (with a couple of other brands – Michael Angelo frozen meals and Noosa Yogurt) for $2.7B to Campbell’s – yep, the condensed soup folks who recognized that the premium CPG category has the most room for growth.  Interestingly, Rao’s massive acceleration occurred only recently, going from $100M in sales in 2018 to $750M in 2023.  Modern CPG brands are also moving at this breakneck pace.

We see this evolution in both Momofuku and Carbone Fine Foods.  While these 2 brands may seem huge, both groups are fairly small, operating a handful of restaurants in a few major US and international cities.  However, their CPG businesses have quickly made nationwide waves.  Momofuku launched its CPG business in 2019 and has been able to raise a total of $27.5M in capital to expand its operations, resulting in their CPG business pulling in the same amount of revenue as its restaurants for a total of $100M. Today, Momofuku products are sold direct-to-consumer and in over 3,500 stores, a feat accomplished in about 5 years.  Likewise, Major Food Group rolled out Carbone Fine Foods in 2021 with bottled pasta sauces.  In just 3 years, it has gotten into over 10,000 stores and sold over 2M bottles of sauce.  Compared to Callender’s or even Rao’s, the pace at which Momofuku and Carbone Fine Foods are scaling their businesses is exponential.

There are numerous factors at play that benefit today’s CPG brands – expansion of grocery brands, desire for quality products, e-commerce/digital marketing, and access to capital.  These are the essential building blocks that can accelerate modern CPG brands like never before.  Grocery stores now have massive footprints (remember when Whole Foods was only in Austin and Wegman’s was only in Rochester?) and placement of product into a few stores can lead to selling in all.  Consumers today know and appreciate quality and are willing to pay for products that are differentiated with a point of view.  CPG brands from the outset control their identity and can connect directly with their customers nationwide like never before through strong PR and online marketing.  And lastly, with the explosion of venture capital and private equity (which has certainly been reset in the era of higher interest rates), there is a new avenue of money that typically did not exist for CPG companies even a decade ago, allowing for unprecedented scaling of business.  Solid brands are still attracting capital.

So, take away a few things from reading this: One – feel inspired to go big.  Two – a quality product is always in demand.  Three – take advantage of our smaller world to make your impact. Four – let us know how we can help.

Beyond Leases in NYC
by Christopher Miskolczi, Senior AssociateWhen you’re planning for your first restaurant or bar, the leasing process often ranks high among the most intimidating aspects of getting the business up and running. You’ve got to find the perfect location, sign on your first general contractor, learn the language of landlords, and put what feels like all the capital you’ve raised so far into landing your lease – all monumental moments for a first time F&B operator. Then you’ve opened and you’re in it and every day of service accumulates into your reputation as a new, promising, and eventually successful operator.

The playing field for real estate, and your position in the game itself, changes when you get beyond your first location. Having two, three, four concepts in your portfolio gives you unique leverage for expanding your hospitality group even further. Your hospitality group’s brand and reputation create real value for you, especially as you start to gain recognition among developers and real estate professionals, which can lead to new opportunities for expansion.

Once you have some leverage, you can make the real estate landscape work for you. Specifically, we encourage you to keep two key strategies in mind for how you can go big with real estate: invest in creative deals, and don’t be afraid of new leasing markets.

Creative deals allow you to think beyond the standard lease and landlord/tenant relationship and find more interesting avenues for growth. Management deals, licensing deals, consulting deals, and other hybrid deals all bring their own unique sets of pros and cons, and are worth investigating within the context of your growing hospitality group. These deals provide avenues for growth without footing as much of the startup costs, particularly on the real estate component of the venture.

For example, in a typical management deal, the developer/landlord builds out a restaurant, and contracts with the operator to consult in and manage the pre-opening development, design, menu creation, and ultimately the operation of a new restaurant or a new location for an existing restaurant, all without taking on the burden of entering into a daunting lease and personal guaranty. While the developer is ultimately the owner of the restaurant, the operator generally receives a management fee and a share of net profits for as long as the arrangement lasts. Similarly, a licensing deal allows an operator to license its brand to a developer, where the developer will independently operate a restaurant up to brand standards specified by the operator.

Expanding outside of NYC can also gain you major traction: consider metropolitan areas where populations are booming, F&B is thriving (or has the potential to), and rents are significantly lower. Austin, TX, Nashville, TN, and Palm Beach, FL are all very recent examples of markets that have really supported the expansion of NYC-based hospitality concepts, and the payoff of moving beyond the Big Apple can be quite considerable. These markets are full of untapped customer bases and have much less competition between restaurants than in NYC. Some cities have much more favorable business climates, such as economic incentives for growth and lower operational and employment costs. Additionally, growth into new cities could help boost your brand recognition as a national operator, and open the door for management and licensing deals.

Opportunities for expansion are there for you to grab – work with your team, identify the opportunities that are right for your group, and make the leasing landscape work for you.  HL’s Real Estate team is here to help you strategize your next management deal, your next location, and your next project. Give us a call.

Hire an HR Person!
by Hamutal Lieberman, PartnerExpanding and scaling a business from one location to multiple locations presents several challenges with respect to employment practices. As many of you know firsthand, it is a minefield for employers out there. There are so many laws to follow including what to include in a job description, what you can ask during the interview process, how to properly onboard employees, forming a handbook, setting in place tipping and other workplace policies, developing ongoing practices for investigations and discipline, and conducting regular audits of your wage and hour documents, just to name a few. Now, think about multiplying all of those things for every new location and every new employee from the corporate ones down to the dishwashers. There is no doubt that there is a lot to do to get started and a lot to maintain along the way.

So, you might ask, how do I do it? Our advice is to hire a dedicated Human Resources professional to add to your leadership team who can develop an HR strategy that can be implemented in each new location. This person would be directly responsible for developing and implementing holistic employment practices that the Company can apply across all of its locations. Many of you may be cringing at the thought of hiring another full-time salaried position. However, the money is well worth it. Hiring an in-house HR position (and potentially more, depending on the amount of your employees) is the secret sauce to scaling a business from the employment practices perspective. Having a dedicated individual that understands the culture of the business and can set and implement policies that are best for your business will not only keep you compliant, but will also provide employees a sense of comfort and clarity as to who to go to if they have an issue in the workplace.

Hiring a fractional or outside HR professional may be tempting due to the alleged cost-savings, but the risk that an error is made is far greater. An outside HR company will not be able to navigate the expansion of your business as well as an internal hire because they are disconnected from the daily activity and management. They will not be able to identify problems before they occur because they are not there regularly meeting with leadership. There is simply no replacement for an internal HR professional that is solely concerned about your business and dedicated to engaging and overseeing your employees, setting policies and setting up systems in place to protect the company.

Protect Your Hustle!
by Hamutal Lieberman, PartnerWhen thinking of scaling your business, you must make sure to have a clear brand strategy in place. Where is your business now? Where will it be in 5 years? In 10? Having a brand strategy will guide you in the ways to expand your business and what expansion opportunities to pursue.

The first step is setting up a federal trademark portfolio of your business name, and the name of key products or services and taglines. Federally registered trademarks give you the protection across the entire United States to not only expand into different cities, but also prevent others from using the name of your business and your products. Without a federal trademark, a business owner is left relying on common law trademark rights based on use in a certain geographic location which will often times close the door on opportunities with investors or collaborators. Setting yourself up to be attractive to these types of opportunities by locking down your intellectual property is very important.

Right now, it is taking about one year to get through the Federal trademark process, but you have three years to show proof of use once the mark is approved. Therefore, we are advising clients that any products or concept they intend to implement in the next 4 years, should be considered for trademark applications in order to preserve the name and the brand. Planning for the future is critical to the success of your business! Do you want to open up brick and mortar stores, sell online, start a summer pop-up, start a podcast, write a book? The possibilities are endless, but planning for them is key so that your brand can scale with you in an intentional way.

Don’t Get Sued!
by Hamutal Lieberman, PartnerYou can’t expect to grow if you are always getting sued, and it only takes one devastating lawsuit to wipe you off the map. So, here are five things to do now to protect your business:

1) Do your due diligence before entering into a deal with any partners, investors, landlords or key employees. Oftentimes we are not starting a business on our own and it is tempting to go into business with people you know from the industry. However, do your due diligence. Ask around if anyone has worked with a particular individual, investment group, or landlord. You would be amazed by how many people enter into business with people they barely know, which can result in real trouble down the road. Some landlords are known as slumlords for a reason!

2) Once you have selected your business partners, make sure that you have contracts in place clearly setting forth your business arrangement. Putting together an Operating Agreement/Shareholders Agreement/Employment Contract is the best way to iron out the way you foresee working with someone, paying them, and what every person’s responsibilities are. This way, there are no questions later down the road.

3) Pay your landlord on time and if you can’t, communicate. You’ve signed the lease and agreed to pay the rent, so just pay it. Unfortunately, Courts don’t care about your ability to pay, or the issue with the gas on the premises. They also do not take kindly to “self-help” usually seen in the form of tenant’s stopping to pay rent. The Courts will throw the book at you, while your landlord will charge you late fees and threaten eviction. If you are having issues, the best thing to do is keep you landlord updated. Landlords hate late rent payments and the more your arrears pile up, the less they are going to be incentivized to help or accommodate.

4) Perform regular audits of your Human Resources practices and wage and hour documentation. We recommend conducting a quarterly audit to review all of your onboarding documents, pay stubs, wage and hour notices, I-9s and other forms. The statute of limitations (the time to sue) is 6 years for a wage and hour claim, meaning that your liability expands back 6 years. By conducting regular audits you can catch errors and mistakes that will protect you from law and hour claims down the road.

5) Do an American with Disabilities (ADA) compliance check of your locations. Are the door handles, bathroom mirrors, and seating arrangements all ADA complaint? If not, there are many things you can do easily and cheaply to lower your risk of exposure to ADA claims. This also extends to your website. If you haven’t already, consider hiring an ADA website compliant widget for your website to avoid claims that your website is not ADA compliant.

Outdoor Dining Applications Update
by Joseph Levey, Founding PartnerThe Outdoor Dining application window has been open for about a month now, and we’re testing the limits of NYC’s new online permitting portal. And if you’re going to blow it out, you’ll need the extra seats and revenue that outdoor dining provides.

In speaking to our clients about the new outdoor dining program over the last few weeks, we’ve noticed that there is a lot of misinformation swirling about.  There are some major misconceptions about what is permissible, important dates, the application process, etc., so we want to make sure that our clients and friends understand what’s what.

#1 Get your dates right. If you currently operate a sidewalk cafe or roadway shed that is a product of the Covid-specific program, you don’t just get to continue operating through November.  You only get to continue your operations uninterrupted IF you file for your new, legal versions of outdoor dining by August 3^rd.  If you don’t, you must shut it all down August 4^th.

#2 Know if your outdoor dining is legal.  If your shed is illegal, it has zero grandfather rights/privileges.  The ability to continue operations of your covid-born outdoor dining space is predicated on a) the outdoor dining space being legally compliant; and b) the future, permanent version also being legally compliant.  Non-compliant sheds/structures are not entitled to any grandfathered rights. If you aren’t sure if you’re legal, contact us.

#3 Hire professionals to help.  We know the guidance says that you don’t need to spend money to hire an architect, but guess what? You should!  There are elements of the application where you’d be best served engaging with an architect.  Don’t skimp here please.  You truly get what you pay for.  If you’re working with us, we take the guess work out of it.  We have experienced, vetted professionals ready to work with all of our clients.

#4 You gotta deal with the SLA.  There’s a liquor component to the application process. When the City rolled out the outdoor dining program during the pandemic, the liquor authority took the position that no operator had to go through the hassle of amending their liquor license to account for the outdoor space.  The rationale was that this was a temporary program, and it wasn’t worth the additional work. Well, this new program is of the permanent variety, so the liquor authority is going to require that everyone participating file Alteration Applications, to extend their respective licenses into the newly permitted outdoor areas. So, not only must you file your new outdoor dining application(s), but you then have to make a SLA filing as well. And guess what that means?  You guessed it: Community Board involvement!

We’re here to help guide you through this process and we are now submitting applications for our clients for all outdoor dining permits and SLA applications. Please contact us if you have any questions by giving us a call: 212-219-1193 or emailing us at cara.onofrietti@helbraunlevey.com.

R.I.P.  Norman Jewison (Moonstruck!), Carl Weathers (Rocky!), Chita Rivera (West Side Story!), Richard Lewis (Everything!), Luis Gossett Jr.(Officer and a Gentleman!), Richard Serra (Go to Dia Beacon!).

As Jerry and the Boys say: Let it Grow/Richly Grow/Greatly Yield

Happy Spring!

David