Dreams come true, not free. Money is often the one thing standing between the entrepreneur and starting their dream business.
The first thought is usually to take out a business loan, which would be great except for the fact that your dream, in particular, is to open up a restaurant—and banks don’t exactly jump on the opportunity to give out high-risk loans. Statistically speaking, 60 percent of restaurants fail within the first three years of their opening. However, this usually has to do with a lack of startup capital to become profitable.
Enter: the restaurant investors.
Finding private investors may be the key to your restaurant’s success, but that doesn’t mean it’s without obstacles of its own. If you’re on a mission to find restaurant investors—or trying to become one—then keep on reading.
How to Find Restaurant Investors
Opening a restaurant is just like starting any other business—it depends on a lot of factors that must work together in order for the business to thrive. Of course, in the business of dining out, it’s all about the food (and cocktails). But aside from being appealing to the publics’ appetites, you need a creative team and investors that are on the same page.
The food is usually the easy part—it’s finding dependable investors that get tricky. So before buying a restaurant space, you’re going to want to do your homework, because it’s not just about finding investors but finding the right investors.
Here’s where you should begin:
Do Your Research
First things first, get to know your market. This is your first crucial step in creating a business plan for two reasons. The first reason is that you want to keep your table turn-over high each night. To do this you have to make sure your concept will be widely agreeable with a large audience. That means you have to be sure that your food, cocktails, location, theme, and pricing are all on point.
The second reason is that you want to show your potential restaurant investors that you know what you’re doing. And yes, you’ll have to crunch the numbers on this. You want to show potential income at full capacity as well as any potential deficits. You want to present them with a viable business opportunity, which means that you’re going to have to show them the money first.
You’ll also need to come prepared with exactly how much you’ll need to start the restaurant. From the construction to supplies to the rent to the staffing—come up with an approximation, not a ballpark number. Restaurant investors like to see efficiency and they certainly don’t want to worry about you coming back to ask for more before the place is even open.
Cultivate a Network
It takes a village. Find and align yourself with people that are familiar with all aspects of the restaurant business. That means lawyers, other restaurant owners, consultants, and even the marketman. These people don’t necessarily have to be your investors, but networking and creating business relationships is another key to success.
Of course, they can invest in your restaurant if they want which may come with some perks—for example, you may catch a break on the rent for your restaurant space if the landlord is interested in investing.
Your potential investors will appreciate your capacity to leverage your connections and gather resources that could lighten their load in terms of expenditures.
Steer Clear of Poor Partnerships
Poor investor relationships can really make or break your restaurant. It’s really important to find investors who will look at this as a partnership, not just a business deal. This also means that they’re going to be involved in the process from construction to opening and throughout the longevity of the restaurant if they should choose.
A good investor will not feel threatened by any legal or financial review on your end. They’ll want to make sure you understand the complete structure of your agreement, so any pushback on those kinds of things is a red flag. You also want to avoid having too many investors, especially because the more people that invest, the less the business is yours.
It’s also a good idea to resist taking money from those who are close to you. Whether it be friends, family, or aquaintences,—money can change the dynamic of those relationships.
Once you do find an honest and transparent partnership, you’ll want to keep the lines of communication open. Remember, an investor can pull your funding at any time, so make sure to keep them updated on new installments or any issues that arise.
Where to Find Investors
You most likely won’t be able to find investors organically. If you have a solid concept and a fine-tuned business plan (and a backup) plan, you’ll want to look for a restaurant investment group.
Investment groups aren’t as elusive as they seem. They’re essentially groups of people who pool their money together to make one investment that everyone will benefit from.
They make their money by your mutually agreed payment structure. They provide you with the capital you need, and once your restaurant is open, they are paid back on either on a “straight” schedule or based on their percentage of ownership. They may also work out a “preferred rate” of return.
Thinking About Becoming an Investor?
If you’re on the other end of the spectrum and looking to become an investor, there are a few things you’ll want to figure out.
For example, will you be an active or a passive investor? In other words, you’re either going to be hands-on, or you’re not. Why is this important?—because most people love to eat and drink, but less than half of those people know squat about running a restaurant. So if you’re going to be an active investor, you’re going to have to learn the ropes of the hospitality industry.
Here’s what you need to have an understanding of before becoming an investor:
Hospitality Business Structure
Restaurants choose their business structure based on ta advantages, liabilities, and control. You’ll want to understand the differences, advantages, and disadvantages of sole proprietorships, partnerships, and corporations. Then you can decide how you’ll invest.
Concept and Financial Considerations
The concept involves everything from the decor, to the location, to the type of cuisine being served at the restaurant. You want to make sure the concept aligns with the target customers.
Financially speaking, you’ll want to be sure that this restaurant “ages” well. In other words, you want to assess the food and equipment costs, conditions and repairs, gross profits, and present and future management.
Research the number of restaurants in the area. The more restaurants people have to choose from means a dent in potential profits. This holds true even if your potential investment is located in a highly-populated area.
Demographics and Neighborhood
The type of restaurant you’re investing in should be directly related to its demographic and neighborhood. You want to invest in a restaurant that will have solid backing from the residents in the area.
In other words, you don’t want to stick a greasy hotdog and burger joint in an upscale neighborhood.
Possible Future Developments
Always check with city planning commissions and local and state governments to keep track of any future developments that may have a negative impact on business. This means changes in traffic patterns due to long-term construction, zoning changes, etc.
You also want to be wary of new restaurants opening-up closeby since they may take away business from your investment.
gentrification and rapidly changing neighborhoods can be very risky investments. Pay attention to the location and whether or not it’s in transition. You also want to be aware of an aging population base. Remember, college kids, leave for a third of the year, people tend to fly south for the winter, and senior citizens aren’t dining out as frequently.
The Concepts of Return on Investment and Risk
Look at restaurant investing as a long-term plan, not a get-rich-quick scheme. Make sure you understand that you won’t be getting your money back all at once, and in some cases, you may lose everything.
This is why it’s important to look at profit projections and create a structured payment schedule with whomever you’re working with. Cash flow projections should yield at least a 20 percent rate of return or higher in terms of a ten-year calculation.
Know the Business
Whether you’re looking for restaurant investors or thinking about becoming one, it’s important to understand the risks as well as the rewards. Above all, it’s crucial that whether you’re opening a restaurant or investing in one that you understand how the hospitality industry works.
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