Question of the week #17
The restaurant world is a very different type of an investment than the start-up world. First and foremost it is much riskier, at least I think so and the returns will rarely be as large. We invest in restaurants for a few reasons. We want to support the community as much as we want to support smart entrepreneurs. It is also a bonus being part of a restaurant if it is a place that you can personally frequent and enjoy the success. So this is why I chose this question for the week.
You mentioned some restaurant you were an investor. Could you share some info about the typical funding structure of restaurants (preferred/debt etc ) ?
All restaurants are structured a little differently. Many accelerate payment back to investors first and then begin to pay themselves afterward. You tend to give up a little upside that way but it makes investors feel safer. There are 3 factors (none are surprising); amount of seats, amount raised and rent. Obviously those numbers change based on location and city but those are the 3 things that I look at in regards to being a worthwhile investment. There are investments that I have passed on just because of the huge number they were raising because I did not believe they would be able to pay us back based on the number of seats that they were covering every night. I could end up being totally wrong and I hope so for them but that is how I look at it.
I expect the restaurant owner to take 50% of the investment off the bat unless it isn't their first place. The investors cover the other 50%. The amount you put in of the 50% is your piece of the place. For instance, if they raise $400k then $400K is 50% of the business. If you put up $50K then you own 8%. You will get paid back 8% of the profits. Sometimes, as I said earlier, the deal is that the owner will pay out an accelerated amount to the investors until they get their original money out and perhaps a 10% overage and then will return to paying out the investors annually based on their investment.
Each deal is different but the ones that I have seen basically follow this thread.