Serving Up Legal Insights for Los Angeles' Food and Beverage Industry

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To make some sense of this unpredictable realm from a legal perspective, the Los Angeles Business Journal turned to attorney and trusted advisor, Benjamin E. Helfman of Greenberg Glusker LLP to share his insights and assessments regarding the current state of the industry that Angelenos most certainly couldn’t live without.

This was originally published in the Los Angeles Business Journal Food and Beverage Outlook - A Legal Perspective

While on the road to recovery from the COVID-19 pandemic, how would you describe the outlook as we reopen for the food & beverage industry?

HELFMAN: The industry has already withstood the worst of COVID and is emerging stronger than many had feared. Food and beverage companies demonstrated incredible resilience during the pandemic, whether it was restaurants opening marketplaces and/or converting to outdoor dining, grocery stores embracing delivery, or CPG companies navigating supply chain issues. 2020 was certainly a difficult year for the foodservice industry, with revenue dropping year-over-year by roughly $250 billion. With restaurants operating at or near full capacity throughout the country, that money should now be flowing back into the space. After all, food brings people together—and after being isolated for much of the past year and a half, people are eager to socialize and return to a new normal. Two things to look out for moving forward are the impacts the labor market and rising inflation could have on the industry.

What lessons/learnings from the past 15 months can the food & beverage industry take away from the experience?

HELFMAN: There are several takeaways, but I’ll focus on a few. First, stay true to your brand and build genuine relationships with your customers, while at the same embracing change and innovation. Customers will continue to trust and support mission-driven brands that are authentic, deliver quality products, and can adapt to customer demands. Second, it’s important to secure relationships with your supply chain and to have contingency plans. While supply chain management may not be sexy, it pays dividends. It’s also a way for companies to align with partners (for example: farmers, processors, manufacturers, co-packers, distributors, or suppliers) that share their values. Third, the functional and plant-based “trends” are here to stay. Now more than ever, people are concerned with what they’re consuming—conscious of the impact on both their health and the environment.

What new business opportunities have presented themselves for food and beverage companies in recent months?

HELFMAN: While COVID disrupted businesses and forced many to permanently close, it also presented an opportunity for people with hobbies to organically turn their passion projects into successful businesses. We represent several clients in the industry that launched businesses during the pandemic, including CPG companies that sell functional and plant-based products, bakeries, and a DTC coffee business. Social media certainly helped these founders with customer acquisition, as people were especially eager for human connection while on lockdown and resonated with the founders’ personal stories. Ultimately, however, it’s the quality of the products that drives customer retention and loyalty.

What would you say are current trends in the food and beverage industry?

HELFMAN: Four trends come to mind, though I believe these trends are here to stay: (1) Foods with functional ingredients, like ashwaganda and mushrooms (e.g., chaga, cordyceps, lion’s mane, and reishi); (2) The ongoing shift away from animal-based to plant-based foods, both for health and environmental reasons; (3) Along those lines, the growing expectation that food will be produced in an environmentally sustainable and socially responsible way; and (4) Consumers’ expectation for convenience, including the growth of ghost kitchens and grocery delivery.

What advice would you offer to an early-stage restaurant company seeking growth capital in 2021?

HELFMAN: Several questions need to be answered: (1) Do you have a comprehensive and realistic business plan? (2) How much money does your business need? (3) Are you looking to raise debt and/or equity? (4) What ownership and control rights are you willing to surrender? For debt financing, traditional banks are likely out of the picture given the risk profile. You may want to explore SBA loans, as well as equipment financing. For equity financing, founders often turn to family and friends, as well as angel investors, as an initial source of capital—whether through a SAFE, convertible note, or series seed round. Finally, as eager as you may be to receive funding, be sure to also do your diligence on any potential investors. Ideally, you’re looking to establish a long-term strategic partnership, so you should ensure that you want these investors along for the ride.

What are the most critical legal issues that a new start-up food/beverage company should allocate its limited resources to addressing at the very beginning, and what items can wait a while until additional funds have been secured?

HELFMAN: While the pandemic rattled the industry, the legal fundamentals haven’t changed. A start-up should ensure that it’s properly licensed to do business and that its legal structure addresses its founders’ concerns. Protecting intellectual property is also essential. IP counsel should file trademark registrations (after conducting searches) to protect the company’s name and logo; additional filings can wait until the company has more funding. The company should also enter into confidentiality and invention assignment agreements with its employees and consultants. The company should ensure new employees aren’t misclassified as exempt. More formal HR policies and training, while important, can also wait until the company has more cash on hand. On the regulatory front, the company should make sure that its products and suppliers comply with the Food Safety Modernization Act and other applicable laws. Finally, the start-up should post its privacy policy and terms of use on its ADA-compliant website.

What is a good piece of advice you would share with your clients?

HELFMAN: It’s often cheaper to get your lawyers involved sooner rather than later. On several occasions, clients have brought us in once a term sheet has already been signed to help them paper and close an equity financing round or sale of their business. More often than not, several of the terms our clients have agreed to have been incredibly unfavorable to them. It’s a lot harder to re-trade on positions once a term sheet is signed and this often leads to deal fatigue. Although we welcome the additional attorneys’ fees, we’d prefer to save our clients the headache and make the transaction process smoother.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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