Tuesday, June 7, 2016

5 Key Pieces of Advice for Securing Restaurant Investments

coffee bar
When restaurant developers begin thinking about a new startup eatery, they have a number of financing options they can choose from. Because new restaurants are expensive endeavors, it’s not uncommon for restaurateurs to pursue multiple avenues of funding, such as traditional loans, small business loans, and even private investment.

The latter option is desirable for a number of reasons, including the fact that private investment often comes with business advice and has much less risk than traditional loans. At the same time, partnering with investors also means giving up some autonomy when it comes to the company. Before signing a deal, restaurant developers should ensure that the business relationship is a healthy one that will let both parties grow. Below are some important tips for securing an investment.

1. Prove your operational skills.

Investors will not hand over money to people who they don’t trust to manage it well. Before agreeing to a deal, investors will want to see a clear business plan and an outline of why the concept will succeed. The business plan should include a full outline of expected expenses and likely income for at least the first year of operation. While it’s impossible to predict these numbers with absolute precision, restaurateurs should be able to provide a realistic rationale for each estimate, as savvy investors will question these numbers.

Operational skills also include your tangible skills and background in the restaurant industry. In addition, many investors like to see restaurant developers with some experience in business administration or accounting, which provides some assurance that they understand how to operate a business successfully. Of course, pointing to past restaurant successes can help convince investors, but many restaurateurs are opening their first business. In this case, investors will want to see other experience in the industry, which could include anything from serving to cooking, as well as managerial experience. The key point is connecting the lessons you have learned in these settings to the new enterprise.

2. Find a business partner.

business partner
Investors are more likely to give money to an enterprise with two partners than a new business headed by a single individual. In a way, a partner provides a sort of insurance for the investor, especially if both individuals have different but complementary skill sets. However, restaurateurs should avoid finding a business partner simply to make investors happy. If you truly want to hold all responsibility for your business, you might come to resent a partner, which could cause the business to fail if tensions grow too high. A partner can help divide the workload, but you’ll only feel comfortable if you can truly trust him or her. Restaurant developers who have the tendency to micromanage may find themselves poring over everything their partner does, which actually creates more work and can result in burnout.

3. Show investors what the restaurant does.

One of the best ways to get investors interested in a product is to let them experience it. This is no less true with restaurants. If you’ve already worked out a concept with a head chef, then bring samples of the food to investors or hold a special event, whether a lunch, dinner, or happy hour, where the investors have the opportunity to see the food and discover for themselves what will make the restaurant stand out from the crowd. Giving investors a sample of food provides them with a personal connection to the product and if they are adequately impressed, then they will have the confidence they need to sign a deal. This brings up another important point—restaurant developers need to seek out investors who are familiar with, or at least interested in the food industry. Private investments in restaurants are increasing, but an investor who works primarily in tech or finance may be wary to support a new eatery.

4. Play the field.

piggy bank
Restaurant developers sometimes get stalled when they try to put all of their eggs in a single basket. Sometimes, finding one investor to cover all expenses is simply impossible, especially in particularly expensive East Coast markets like New York City and Washington, D.C. Rather than looking for a single investor, it may be possible to get smaller investments from a number of different people or organizations to obtain the capital necessary to launch the project. Investors often prefer to make smaller investments at first, because it’s less risky, so restaurant developers are more likely to get a “yes” when they ask for smaller amounts of money. When taking this approach, however, it’s important that restaurateurs make sure they do not give away too much equity. Keep track of your investments and consider how your promises to investors will impact the bottom line of the restaurant.

5. Add value for investors.

The most common deal that restaurant developers strike with investors is based on equity. Through this model, the investor owns a portion of the restaurant and claims a percentage of the profits. This model works for investors because they aren’t held responsible for interest payments when sales are slow. However, some restaurateurs end up creating deals that are more favorable for investors. One typical approach is to treat part of the investment like a loan with a fixed interest rate, which guarantees some form of payment even when sales are slow. However, restaurant developers need to make sure that they don’t back themselves into a corner and go bankrupt to pay this monthly bill.