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Restaurant 101: Investing in a Restaurant

Looks like Mike Modano and Brett Hull are about to invest in the restaurant business. Why not? Lots of athletes do it, especially in the twilight years of their careers. Good idea or bad? Usually not unless they have trusted their money to a professional restaurateur. I asked Miss Amy, our Restaurant 101 professor, to send some light. She replied with a beacon of knowledge:

If you are thinking about investing in a restaurant, the first thing you should do is schedule an MRI of your brain. Just kidding. Actually, my husband, Sevy, and I were discussing the rash of restaurant closings and the opportunities it could provide with the right formula. All over town commercial brokers are making cold calls for finished-out restaurant spaces “going cheap” and equipment is being auctioned for below cost. It brought back so many memories of opening our own place in 1997 in a space formerly occupied by Loma Luna which had gone out of business. So I asked him, if approached by some young and eager entrepreneur, what would we require before handing over our hard-earned savings?

Here is our check list for investing in a restaurant, whether it’s your own or someone else’s:

1. Invest in the lead person. If they believe and have the right combination of experience and drive, it can mean success. A good indicator is if they are willing to risk some of their own savings in the business, not just yours.
2. Does the concept make sense? It must be a well thought out concept, if you hear “kind of like” or “sort of” a lot in the description, run.
3. Location, location, location. Make sure you are in the immediate geography of the guests you want to attract. Don’t eliminate a location where a restaurant has closed.
4. The business plan has to spell out everything, and then it must be followed. No business plan, no deal.
5. Hire a lawyer and a CPA. The money you spend will save you more in the end.
6. The partnership agreement has to be a win/win. Investors should receive their initial investment back in 3 years or less. The operations side should have some long term incentives.
7. Plan on 10% more time and 10% more money than you planned to open the doors. Cash at opening should equal 4 – 6 months of expenses to bridge a possible slow start.
8. Talk to other people in the restaurant business while still in the planning stage. You may be able to “save some mistakes”.
9. Have a long term plan. Success can be surprising sometimes, and you want to keep the team focused on the vision.
10. Be willing to market your own investment. Word of mouth is a powerful tool and investors are the group who should believe the most in the success of a restaurant.

Well, the truth is, our hard-earned savings will be paying college tuition for the next 7 years, so this discussion was purely theoretical. Entrepreneurs will follow their dreams, putting together a plan and raising the capital needed to fund them. There are investors looking for the lucrative return (not to mention the panache) that owning a successful restaurant can bring, and willing to take the financial risk. And if anyone looking for a smaller investment, check out our no-return sweet investment in Cheerleader Chocolates.

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One comment on “Restaurant 101: Investing in a Restaurant

  1. Also, many investors who put money into the first unit of a concept believe they own a piece of the entire “concept,” whether it’s one location or 10.

    Make sure the entity documents spell out exactly what you’re investing in, and how you get paid if a big private equity fund decides to buy the whole shebang.