Best Practices for F&B Companies

Food & Drink

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There are many best practices that could and should be followed by all F&B companies. Here’s a partial list of some of the more important practices for start-up and newer companies.

Organizational Structure- A limited Liability Company (LLC) offers the most advantages over all other entity types. Even with the new tax law, C Corporations can still be doubly taxed and S Corporations have limitations. It is usually always preferable to aggregate similar types of entities (operating entities with operating entities and real estate entities with real estate entities) into parent-sub relationships to take advantage of filing one tax return but always be careful of legal issues with this type of structure.

Trademarks, Licenses and Designations-getting your intellectual property protected and insuring you have the proper licenses and regulatory approvals in place is critical. Also, having a written plan to deal with recalls is essential. Traceability is a major concern and blockchain might fit the bill for some companies.

Proper capitalization-Setting up a company with sufficient equity without giving up too much of the pie to others is always a balancing act. Too thin capitalization results in multiple rounds of securing equity and too little working capital.

Appropriate Financing-having a strong bank with an appropriate line of credit or long term debt is a must. Having a good relationship with your bank is critical to short term and long term success.

Good Record Keeping-all too often, companies start without good records. Filing tax returns, attracting investors, reporting to your bank and shareholders all require good records. There are inexpensive and effective systems such as Quickbooks which can serve your purpose. However, many companies wait too long to convert to a full blown ERP system. As a company grows, the systems must grow with it.

Chart of Accounts-this is the map of your balance sheet and profit and loss accounts. Poorly constructed charts can cost you a lot of money to correct when your accountant works with you. Also, there are generally accepted ways of setting these up to conform to industry standards and enable you to benchmark. Record all transactions on a timely basis and reconcile all of your key accounts such as banks, accounts receivable, inventory and accounts payable.

Good Advisers-are invaluable to your business growth. Accountants, attorneys, insurance professionals, and other consultants will add value to your business and guide you in the right direction.

Shareholder or Operating Agreement-this document is one of the most important in any organization and is often overlooked. The shareholder agreement addresses many key areas and here are the ten most important:

  1. Equity Sharing-determines how much ownership each shareholder has.
  2. Profit Sharing-determines how profits and losses will be allocated to the various parties.
  3. Roles and Responsibilities-dictates how much time each person devotes to the business and who does what.
  4. Compensation-how each shareholder gets compensated for their services
  5. Voting-dictates how each person votes which can be different than ownership percentage.
  6. Capital and Loans-determines how much each person must contribute to the company.
  7. The last four deal with buyout provisions and are extremely critical to survival. Implicit in these is a valuation method for the company whether it’s formula driven or subject to an outside appraisal. The first provision deals with if one of the owners dies. The valuation amount would be paid to that person’s estate and should allow for payment over several years. This amount is often funded by life insurance.
  8. The second provision deals with disability. How long does someone continue to get paid and share profits if they are totally disabled? Also, how long does the company have to make the valuation payments. Disability income and disability buyout insurance is available to assist in this area.
  9. Retirement-specifies a mandatory retirement age and method for payment.
  10. Withdrawal-voluntary (you asked to be bought out) or involuntary (you are fired). Again, appropriate payment terms over a period of years are essential so as not to cripple the cash flow of the business.

In the next article on best practices, I will drill into critical operational areas.

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