Equity Strategies For Restaurant Investors: Maximizing Your Stake

Investing in a restaurant can be a risky business, but it can also be a rewarding one. Before you dive into the world of restaurant investing, there are a few things you should consider. First, it's important to understand the different types of investors and the roles they play. Friends and family are often the first port of call for entrepreneurs seeking funding, and they tend to be more lenient with interest rates than traditional lenders. Angel investors, on the other hand, are wealthy individuals who are willing to take a chance on businesses that others may consider too risky. And then there are venture capital firms, who invest in startups and small businesses with the potential for high profits. When it comes to investing in a restaurant, it's crucial to have a comprehensive business plan and a clear understanding of the financials, including cash flow projections and occupancy costs. While the restaurant industry may be romanticized, it's a highly competitive market with tight profit margins. Bringing investors on board can provide much-needed capital and expertise, but it also means giving up a degree of control and ownership. Deciding whether to work with investors is a personal choice, but it's important to go into it with your eyes open and a clear understanding of the risks and rewards.

Understand the different types of investors

Understanding the Different Types of Investors

There are several types of investors that you may consider approaching when figuring out equity for your restaurant business. Each type of investor has its own advantages and disadvantages, so it is important to understand the differences before making a decision. Here are some of the most common types of investors:

• Friends and Family: This is often the first source of investment for many entrepreneurs. Friends and family tend to offer more flexible terms and lower interest rates because the loans are based on trust. However, there is a potential risk of straining personal relationships if the investment goes wrong.
• Angel Investors: Angel investors are wealthy individuals who invest their own money in early-stage businesses. They typically have expertise in the industry and can offer valuable business advice and connections. Angel investors usually aim for a return of 20%-25% on their investment. However, they may seek significant equity in the business.
• Venture Capitalists (VCs): These are firms that invest in startups and small businesses with high growth potential, typically in exchange for a significant share of the company. VCs can provide large amounts of capital for growth but they also have high expectations and seek significant control over the business. They usually aim for a higher return of around 40% due to the higher risk they take on.
• Banks and Traditional Lenders: Banks and traditional lenders provide loans based on the business's creditworthiness and plan. The advantage of this type of investor is that no equity is required. However, the repayment terms are usually strict and come with interest.
• Crowdfunding: This involves raising small amounts of money from a large number of people, typically through online platforms. Crowdfunding broadens the investment base without losing equity. However, it requires a significant marketing effort and there is no guarantee of success.

When deciding on the type of investor to approach, it is important to consider your business needs and goals. Each type of investor will have different expectations and levels of involvement in the business. It is also crucial to find investors who understand your vision and can contribute beyond just capital, such as offering industry insight, mentorship, and networks.

Weigh up the pros and cons of bringing investors on board

Weighing up the pros and cons of bringing investors on board is a critical step when considering restaurant investors. While investors can provide much-needed capital and expertise, there are also challenges to be aware of.

Pros of bringing investors on board:

• Capital Injection: Investors can provide the necessary funds to launch or expand a restaurant, reducing the financial burden on the owner. This is especially important in the restaurant industry, where opening a new location requires a significant amount of capital.
• Business Growth: Investors can fuel the growth of your restaurant by providing capital for opening additional locations, expanding the menu, or investing in marketing campaigns.
• Expertise and Experience: Some investors bring valuable industry knowledge and experience. They may offer guidance on business decisions, sharing their in-depth knowledge of restaurant operations, marketing strategies, or culinary trends.
• Networking Opportunities: Investors often have extensive networks within the industry, facilitating connections with suppliers, distributors, and other professionals. These connections can lead to cost savings and growth opportunities.
• Risk Sharing: With investors on board, you share the risks associated with the business. If the restaurant encounters financial challenges, the investor will absorb some of the losses, reducing your personal financial risk.
• Access to Resources: Investors can provide access to resources such as marketing support, management expertise, and technological innovations, enhancing the restaurant's operations and competitiveness.
• Long-Term Stability: A reliable investor can provide ongoing financial support, increasing the chances of long-term stability and survival for your restaurant.

Cons of bringing investors on board:

• Loss of Control: Investors may take partial ownership and will typically have a say in the decision-making process. This can be frustrating if you don't own the majority of the restaurant, and it may feel like your business is no longer truly yours.
• Profit Sharing: Investors expect a return on their investment, usually in the form of a share of the profits or equity ownership. This reduces the owner's earnings and can be particularly challenging in the restaurant industry, which is known for its low profit margins.
• Difficult to Find Trustworthy People: Finding trustworthy investors can be challenging. As Miami restaurateur Mike Beltran advises, it's essential to have a good lawyer and to find investors who are "partners and not just investors" and who share your passion for the concept or food.
• Pressure for Quick ROI: Investors may put pressure on the restaurant to generate profits quickly, which can impact long-term sustainability and strategic decision-making.
• Exit Strategy: Planning an exit strategy, such as selling the restaurant or buying out investors, can be complex and costly.

Know how investors get paid

There are two main ways that investors can get paid:

• Dividends: Once the restaurant is profitable, equity investors will earn money from dividends. This is when a portion of the profits is divided among shareholders.
• Selling shares: Investors can also earn money by selling their shares in the restaurant.

The type of investor will determine the return they expect on their investment. For example, angel investors typically aim for a 20-25% return, whereas venture capitalists, who take on more risk by investing in projects during the development stage, expect a higher return of around 40%.

When deciding on an investment, it is important to consider how the Federal Reserve's rate hikes may impact investor perspectives. With interest rates higher, investors may be looking for a higher risk-adjusted return.

Understand what investors look for in a restaurant concept

When it comes to investing in a restaurant, there are several key considerations to keep in mind. Firstly, it is essential to understand the different types of investors, including friends and family, angel investors, and venture capital firms. Friends and family often invest based on trust, while angel investors are individuals with industry expertise, and venture capital firms provide resources and connections.

When seeking investors, it is important to have a well-prepared business plan and pitch deck. Investors will also want to see key figures and financial projections to assess the potential return on their investment. The cash flow projections are crucial, as they indicate the projected cash flow relative to the investment amount.

Investors will also consider the scalability of the restaurant concept and the talent acquisition strategy. They will look for experienced operators who have successfully launched locations and built brands. Additionally, the occupancy costs, including rent, insurance, and taxes, should not exceed 8-10% of sales, depending on the location.

When evaluating a restaurant concept, investors focus on several key areas:

Vision

Investors look for passionate founders with a unique story and a clear vision for growth. They want to see a strong brand with a rich story that resonates with customers. It is essential to articulate the desired trajectory for the brand, whether it be expanding locations, opening corporate units, or franchising internationally.

Store Economics

Investors seek restaurant concepts with strong unit economics and replicability. They focus on the cash-on-cash return ratio, which is the store-level profits as a percentage of upfront costs to open each location. A ratio of 40% or higher is desirable, indicating the potential for strong returns. Investors also consider average unit volume, margins, capital expenditures, product mix, traffic, average ticket growth, lease schedules, buildout costs, and technology stack.

Management

A strong management team is crucial for investors. They assess the strengths and weaknesses of the team and identify gaps in their knowledge base. Investors want to see a team that understands its customers, the menu, and effective marketing strategies. It is important for the management team to have "command" of its business and be able to make informed decisions.

Social Impact

Increasingly, investors are also considering the social impact of the brand. They seek brands with authentic purposes and ethical and sustainable practices that engender customer and employee loyalty. Evaluating the environmental, social, and governance factors is not just ethical but also crucial for the long-term success of the brand.

In summary, investors in the restaurant industry look for passionate founders with a unique vision, strong unit economics, a capable management team, and a positive social impact. By focusing on these key areas, investors aim to make informed decisions about the potential success and longevity of the restaurant concept.

Learn how to find reliable investors

Finding the right investors for your restaurant can be challenging, but it's essential to ensure your business's success. Here are some strategies to help you find reliable investors:

• Network within the industry: Talk to your peers and colleagues, especially those who have already found investors for their restaurants. Ask them about their experiences, who they work with, how they found their investors, and if they have any recommendations or know anyone actively looking to invest.
• Participate in industry incubators: Food and restaurant incubators, such as Branchfood in Boston or The Hatchery in Chicago, can be excellent resources for connecting with potential investors and accessing other valuable tools and resources.
• Attend networking events and conferences: Events like HITEC and FSTEC offer opportunities to meet and interact with people in the industry, build relationships, and connect directly with investors.
• Utilize LinkedIn: Leverage the power of LinkedIn to search for potential investors interested in your field. Ensure your profile is complete and showcases your experience and expertise.
• Seek legal and financial advice: Consult with lawyers and financial advisors who are familiar with investments and can review deals and support you in making informed decisions.
• Look for investors who align with your values: Find investors who are willing to partner with you and not just focus on their financial gains. Investors who are open to structuring the partnership to benefit both parties can help create a more positive and mutually beneficial relationship.
• Be clear about your vision and goals: Before approaching investors, ensure you have a well-thought-out business plan, including your unique concept, long-term goals, management structure, and financial projections. This demonstrates your seriousness and helps potential investors understand your business better.
• Consider the investor's experience and track record: When evaluating potential investors, consider their experience in the foodservice industry, the size and outcome of their previous investments, and their strategic orientation.
• Be mindful of red flags: Trust your instincts when dealing with potential investors. If something doesn't feel right during the initial conversations or if they are pressuring you to make a quick decision, it may be a red flag. A good investor will not be threatened by due diligence and will encourage you to take the time to understand the deal thoroughly.

Remember that finding reliable investors takes time and effort. By networking, seeking advice, and clearly articulating your vision, you can increase your chances of finding investors who are genuinely interested in helping you succeed.

Frequently asked questions