In a social media post shared to a local community group, a proprietor of a newly opened restaurant announced the business had permanently ceased trading. While many online reviews were complimentary of the food, they also referred to an atmosphere where tensions between team members were palpable and, at times, uncomfortable. It may come as little surprise, then, that the reason cited for closure was that the managing parties could not reach a mutually acceptable agreement for the future operation of the business. As a result of this impasse, the restaurant ceased trading. While every situation has its own nuances, this is a familiar story.
Interestingly, the contrast with businesses that do get it right can be stark. One of my favourite restaurants in Norfolk (recommendations available upon request) is a family-owned business that is consistently fully booked. While I have no knowledge of its internal workings, it is clear from the moment you walk through the door that customer service sits at the heart of everything they do. I was therefore very pleased to learn this weekend that they have expanded their offering to include a takeaway service, particularly welcome given I wasn’t organised enough to secure a table on this trip. It is a reminder that when a business model works, growth and adaptation follow naturally.
Pressures that strain relationships
Many successful businesses in the food, drink and hospitality sector are born out of a shared idea, a handshake, or a common vision between friends and family members. That entrepreneurial spirit can be a real strength, but it can also create vulnerability when relationships are put under pressure.
As a Partner in the Commercial Litigation Team, I often see otherwise viable businesses unravel, not because the concept has failed, but because those involved could not find a way to move the business forward together.
The food and drink sector is fast paced and uniquely demanding. Tight margins, long working hours, staffing challenges, and rising costs all place strain on directors and shareholders. Decisions often need to be made quickly and, where views diverge, disagreements can escalate fast.
Common flashpoints include:
- Whether to expand, refinance or consolidate
- How to respond to cashflow problems
- The level of personal involvement expected from directors
- Exit strategies and valuation
- Unequal workloads or perceived imbalance of reward
Without clear governance arrangements, these issues can quickly become personal. Once trust begins to break down, it can be difficult to repair the damage.
The hidden cost of leaving things unsaid
By the time solicitors are instructed, positions are often entrenched. What might once have been resolved through constructive dialogue becomes a dispute involving threatened legal action, allegations of unfairness or breaches of duty, and sometimes the closure of an otherwise viable business.
Addressing issues early is not about confrontation; it is about clarity.
Contracts and agreements are not a sign of mistrust
In entrepreneurial businesses, particularly in this sector, there can be resistance to formal documentation. Shareholders’ agreements and service contracts are sometimes viewed as unnecessary or even divisive. In reality, the opposite is true.
Well-drafted agreements:
- Set expectations clearly from the outset
- Provide mechanisms for resolving disagreements
- Define decision-making authority
- Include exit strategies if working relationships break down
- Reduce the scope for misunderstanding
This is where early input from experienced advisors can make a real difference. Our James Burton and Nicola Lindop and the Company Commercial Team at Nockolds regularly supports clients in putting robust documentation in place at the outset, helping to create strong foundations for growth.
Planning for disagreement is not planning for failure
A phrase I often hear from shareholders is: “we didn’t think it would ever come to this.”
Planning for potential disagreement is not pessimistic, it is prudent risk management. Food, drink and hospitality businesses plan meticulously for risks such as food safety, staffing shortages and supplier issues. Governance and ownership risk deserve the same level of attention.
Clear provisions around deadlock, funding obligations and share transfers can make the difference between a business navigating a difficult period and one that simply cannot move forward.
The Litigation Perspective
Litigation is sometimes necessary, although almost everyone would rather avoid it but where a party is being excluded, assets are at risk, or trust has irretrievably broken down it can be necessary, albeit a last resort.
As a Partner in the Commercial Litigation Team, my primary focus is on helping clients find a practical way through disputes at an early stage. That often involves structured, strategic negotiation, creating the space for constructive dialogue and steering parties towards a commercially sensible resolution. Where appropriate, this may be supported by mediation, with formal proceedings always remaining a last resort rather than the starting point.
The closure of any business is regrettable, particularly where it still has potential. In many cases, where at least one party is committed to continuing the business, a solution can be reached, often by way of a share transfer or another form of agreed exit that allows the business to move forward.
For founders, directors and investors in the food, drink and hospitality sector, getting the legal fundamentals right early creates the space to deal with pressure later. From documenting arrangements at the outset to supporting businesses through more challenging times, the team at Nockolds is well placed to assist.