A restaurant management company separates your management team from the rest of your restaurant operations so that you can scale and grow safely and efficiently. A management company can:
- consolidate and streamline ownership of your managing/founding partners and leadership team;
- create an extra layer of liability;
- create economies of scale and buying power;
- streamline management, administration, and marketing of multiple restaurants;
- provide equity and options to employees without having to change ownership in individual restaurants; and/or
- allow your management team to participate in consulting and management deals without having to run them through your restaurants or a holding company.
Whether you need a management company depends on your goals. We highly recommend setting up a management company if you aim to raise money from outside investors, open 3+ locations, and have a single management team oversee growth and operations. Watch Dissecting the DNA of a Hospitality Group from Helbraun Levey to determine whether you need a management company and how to structure a restaurant group for legal purposes.
Structure and Logistics of a Management Company
Legal Structure and Logistics
A management company should generally be a separate legal entity from your restaurants and your holding company (if you have one) and organized as a Limited Liability Company (LLC). If the management company ownership is the same as the holding company, your holding company can also serve as your management company. However, separating the two entities for liability might be beneficial. Founders, managing partners, and owner-employees typically own the management company, not the investors.
The management company typically employs your leadership team and pays for corporate expenses. This includes but is not limited to salaries for the CEO, CFO, COO, Director of Operations, Culinary Director, Director of Marketing, Public Relations, etc., and office rent, accounting, legal fees, etc. Expenses that benefit your overall restaurant group can be run through your holding company or your management company, depending on the terms of the agreement with your investors. If the management company covers more than just management services, the management fee will reflect that. The next section will outline the ideal management fee.
You could benefit from a management company after your second location because economies of scale kick in and you hire a corporate leadership team. However, you may want to consider setting up a management company from your first location if you plan to grow aggressively so that you’re not having to restructure and incur legal fees later.
A management company can also grant equity in your restaurant to other key leadership employees without diluting your investor’s ownership. For example, assume you have five restaurants owned wholly by a holding company with two classes of ownership – class A, owned by investors, and class B, owned by managing partners. If the management company owns your class B shares, you can indirectly give key employees ownership in the holding company by giving them ownership in the management company. You can grant equity to your key employees via sweat equity or ask them to buy in. Check out Incentivizing Restaurant Employees with Ownership Equity and Profits to do this strategically for tax purposes.
By separating your management into a separate company, you can participate in external management agreements and licensing deals with other restaurants, food halls, hotels, etc. Otherwise, you would have to run these deals through your restaurant or holding company and share the profits with investors who didn’t earn this income. You need to ensure your investors allow you to do this. You can also use the management company to enter contracts that give you buying power with vendors.
Restaurant Management Company Tax Structure
Usually, a management company with multiple owners will be an LLC taxed as a partnership. However, an S-corporation election may be beneficial for tax purposes. S-corporation shareholders don’t pay self-employment taxes (Medicare and Social Security) on their share of S-corporation income. Partners in a partnership pay self-employment taxes on their share of partnership income and guaranteed payments (partner’s equivalent of a paycheck). Employees pay payroll tax (Medicare and Social Security taxes) on their share of wage income. Moving managing partners’ ownership from a restaurant or holding company to a management company converts a portion of their earnings from partnership/guaranteed payment/wage income to S-corporation income. Depending on their personal tax situation, this can save managing partners a significant amount. You can refer to The Best Tax Classification for Your Restaurant to determine your management company’s ideal tax entity type.
The Ideal Management Fee
Each restaurant in a restaurant group pays the management company a percentage of sales, a fixed amount, or a combination of both for providing management services. The ideal management fee is a percentage that reflects the value of the management services provided to the restaurant by the management company. The management fee should be the market-based wage you would otherwise pay employees to provide the same services. They typically range anywhere from 1-6%. Generally, the more restaurants the management company manages, the lesser the management fee as a percentage of sales because the model scales and becomes more beneficial with more units. Expenses that the management company incurs on behalf of the restaurant(s), such as insurance, public relations, legal fees, accounting, etc., will also impact the management fee. These are typically corporate expenses but can be covered by the managing company and included in the management agreement.
To determine the ideal management fee percentage, we need to separate management company responsibilities into indirect and direct management responsibilities because these responsibilities are captured separately on each restaurant’s P&L.
Direct Management Responsibilities
Direct management responsibilities are those typically performed by a general manager, beverage director, sommelier, executive chef/chef de cuisine, etc. The salaries and wages for these positions are grouped under the management labor section of your P&L and included in your labor costs. If your management fee covers direct management responsibilities, the fee base or percentage should accurately reflect the value of these duties. When budgeting for the management fee, your overall management labor costs (including the managers on payroll for the restaurant) shouldn’t exceed 10% of sales. For example, if your management labor costs with the management fee are 5% of sales, and the management company charges the restaurant 5% of sales per month to fulfill the role of a general manager, the management labor ends up being 10%. Management fees are not typically included in the P&L, according to the National Restaurant Association (NRA) uniform chart of accounts, so you must calculate this manually. Alternatively, you can contact us to set up your financial accounting so you can view your management fee with labor.
Indirect Management Responsibilities
A management agreement typically covers a lot more than direct management responsibilities. Indirect management responsibilities such as marketing, general and administrative costs (G&A), accounting, legal support, etc., are also covered in management agreements. These expenses are typically scattered throughout the Operating Expenses section of your P&L in various categories such as marketing, direct operating expenses, G&A, etc. When covered by a holding company or management company, these expenses are reported below operating income in the Corporate Overhead, Interest, and Other section of your P&L. Unlike direct management responsibilities, these expense categories are harder to distinguish and budget for. Therefore, when budgeting for a management fee that covers indirect management responsibilities, you should focus on the overall effect on your bottom line (or net profit). You want to design a management fee that will yield an overall store-level profit of at least 3-5% for full-service restaurants and 6-9% for quick-service restaurants, while your management labor shouldn’t exceed 10%.
Your management fee should be designed to ensure each restaurant is more profitable due to the management agreement. Let’s look at two examples. In example 1, the management agreement covers the role of a general manager (direct management responsibility) and asks for 5% of monthly sales. As a result, 5% of management salaries and wages are shifted to the management fee expense, and net profit is healthy at 10%. In example 2, the management agreement covers minor direct management responsibilities (such as assistant GM) and marketing, accounting, insurance, telephone, and software. As a result, 1% of management salaries and wages are shifted to the management fee expense, 1% of marketing is shifted to the management fee expense, 3% of general and administrative is shifted to the management fee expense, and the net profit is healthy at 10%.
As you can see, a restaurant management company can greatly benefit your leadership team and restaurant group. If structured correctly, you will protect yourself from liability, scale efficiently, provide value to your investors, and gain more profitable opportunities. A primer to calculating the ideal management agreement and fee is to have a solid and scalable bookkeeping and accounting infrastructure that provides weekly insight into your financials. If you need help setting up your restaurant group and management company for scalability and growth, don’t hesitate to schedule a discovery call with The Fork CPAs.