Restaurant Investment: Worth The Risk?

Investing in restaurants is a popular idea, but it's not always a successful venture. The restaurant industry is notoriously difficult to navigate, with low profit margins and high competition. However, many people are drawn to the idea of investing in restaurants because of the allure of owning a restaurant and the potential for high returns. The average startup cost of a restaurant is $375,500, which is a significant amount of capital that not everyone has access to. This is where investors come in. They provide the necessary funding to get a restaurant off the ground, but it's important to remember that investing in restaurants is risky. The failure rate is high, and even successful restaurants may not provide a substantial return on investment due to the low-profit margins.

Self-funding or private investment

One way to self-fund is to borrow money from family and friends, which can be returned as debt once the business starts generating profits. If you plan to enter the industry in the future, saving and investing wisely can help you accumulate the required capital over time. Another way to self-fund is to form a partnership. It is always better to have a partner in the restaurant business as it not only eases the investment burden but also reduces the risks by sharing future profits and losses. If it is your first restaurant venture, try to look for a partner with experience in the restaurant business. Choosing a partner can be tricky, but it is essential to partner with a like-minded person who shares your vision. Every deal and partnership structure should be formalised and backed by a notarised partnership deed. Ideally, partners should not be close relatives or best friends, but acquaintances who know each other well enough to have a formal relationship.

Bank loans are also considered a great way to get the initial investment and working capital for your restaurant business. However, bank loans are not easy to obtain as they require collateral property and extensive documentation. With a proper business plan and suitable collateral, bank loans can be an option for those seeking to self-fund their restaurant venture.

Friends and family

There are multiple advantages to asking friends and family for funding. They are likely to be more flexible with repayment schedules and interest rates, and obtaining funding is likely to be less expensive without the application fees charged by traditional lenders. Traditional lenders such as banks may also have stringent requirements, such as a stellar credit rating, that can be challenging for small business owners to meet. Friends and family, on the other hand, are more likely to be flexible and are unlikely to ask for a credit score.

However, there are also challenges to asking friends and family for funding. As a business owner, you will still need to prepare business documents similar to those required by a lender. This includes a business plan with financial statements, income statements, and cash flow statements. You will also need to make a pitch to your friends and family, just as you would with unknown investors or lenders.

It is important to choose wisely when deciding which friends and family members to approach for funding. They should be people who are in a position to help financially and who are interested in backing you. It is also crucial to communicate clearly and ensure that both parties feel fairly treated during the funding process.

When asking friends and family for funding, it is essential to consider the potential impact on your emotional bonds and relationships. To mitigate this risk, it is recommended to get the funding details on paper and make it official with a promissory note. If you obtain a loan, you will need a contract specifying the amount, payback schedule, and interest rate. If they will have equity in the business, a contract should specify their ownership percentage and any associated rights and responsibilities.

In summary, while friends and family can be a great source of funding for a restaurant business, it is important to approach the process with careful consideration and ensure that all parties involved are comfortable with the arrangements.

Angel investors

When looking for an angel investor, it is important to find someone who is not afraid of a challenge and is willing to get involved and lend a hand when necessary. The ideal investor will use their experience and connections to help solve problems and take the business to the next level.

• Talk to other restaurant owners who have worked with investors.
• Participate in an incubator, such as Branchfood in Boston or The Hatchery in Chicago.
• Attend networking events and conferences to build relationships and connect with investors.
• Utilize LinkedIn to search for investors by city, industry, and company. Ensure your profile is complete and robust.

When pitching to angel investors, it is important to have a well-thought-out business plan and a visual presentation that showcases why your restaurant is special and why they should invest. Be prepared to share key figures, such as the overall worth of the business, profit margins, and growth forecasts.

Venture capital firms

Some venture capital firms focus on investing in restaurants, while others may invest in food and beverage companies more broadly. For example, First Beverage Group in Los Angeles invests in companies with revenues between $1 million and $10 million, while Khosla Ventures primarily backs technology and innovation projects.

In recent years, there has been a shift in venture capital investment in the food industry towards foodservice technology. During the Covid-19 pandemic, investment flowed into e-commerce, food delivery, automation, and robotics companies. This shift is expected to continue as investors seek to capitalise on the growth of new technologies.

Local restaurant associations

• National Restaurant Association (NRA): The largest foodservice trade association in the world, representing over 500,000 restaurant businesses. They provide industry research, resources, advocacy, and networking events.
• Massachusetts Restaurant Association (MRA): Provides access, influence, and protection to restaurant professionals in Massachusetts, which has a thriving restaurant environment.
• Florida Restaurant & Lodging Association: Serves the state of Florida, offering support and resources to the local restaurant and lodging industry.
• Asociación de Hoteles, Restaurantes, Confiterias, y Cafés (HRCC): The leading foodservice association in Argentina, offering personalized support and advice to its members.
• Associação Brasileira de Bares e Restaurantes (Abrasel): Represents over 6 million companies in 27 states of Brazil, promoting growth, entrepreneurship, and quality of life for its members.
• The Canadian Restaurant and Foodservices Association (CRFA): The largest hospitality association in Canada, providing a range of services to help businesses in the foodservice sector.
• Asociación Chilena de Chef (ACCHEF AG): The first Chef Association in Chile, running initiatives to improve and standardize the careers of cooks in the country.
• Asociación Colombiana de la Industria Gastronómica (Acodres): One of the most important foodservice associations in Colombia, influencing public decisions and advancing the development of the gastronomy sector.
• The Independent Restaurant Coalition (IRC): A fast-growing organization dedicated to saving local restaurants affected by the COVID-19 crisis, advocating for financial support and representing the interests of local restaurants.

These are just a few examples of local restaurant associations that you can explore. Each association will have its own membership benefits, requirements, and costs, so be sure to research the ones relevant to your region and needs.

Frequently asked questions