Restaurant Funding. How to Find Restaurant Investors
February 18, 2020 • 16 minutes
If you can cook and love to entertain, the idea of owning a restaurant may appear glamorous to you. This idea becomes even more enticing if you have an ultimate recipe of a dish you just know the world at large would drive miles for. Apart from that, you might be tired of your day job and want to be your own boss.
At some point, you might feel there’s every indication that it’s time for you to become a restaurateur. Next, you find yourself thinking about the business side of how to start a restaurant. And finally, you ask yourself: «Where and how am I going to get funding?» Although you may be fueled by encouragement from friends or family, getting your restaurant startup funded may prove to be a real challenge. Deciding whether to give you money or not, investors or lenders will evaluate the level of your business skills, resourcefulness, and fortitude for overcoming all the challenges ahead.
You may get potential investors inspired by your concept and enthusiasm but anyway they’ll want to know if you have a solid plan. We asked Roger Beaudoin, a 21-year veteran restaurateur and Host of the Restaurant RockStars Podcast, to share his opinion on what can help you secure funding. Read the article and follow Roger’s advice on how to prepare a business plan and a pitch investors just won’t turn down.
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Learn how to find investors for a restaurant despite high failure rates in the industry
Every business opportunity has a potential upside balanced with risk. You’ve probably heard the statistics. The restaurant business has one of the highest failure rates.
The April 2019 issue of FSR Magazine reports that 60% of restaurants don’t make it past the first year and 80% go out of business within five years.
This clearly explains why savvy investors and lenders have traditionally shied away from funding restaurants. But don’t lose heart! If the driving force within is still sending you a strong message to open that restaurant, then I encourage you to follow that dream!
Consider all available restaurant funding options
When looking for financial help to start your business, you’ll have to choose between two ways of restaurant financing options: debt or equity. There are many types of lenders and investors in the restaurant business all with different goals, requirements, and expectations. First, you should consider them all:
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Restaurant angel investors are usually high net worth individuals looking for interesting business opportunities that also offer a high level of return for the amount of perceived risk.
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Venture Capital firms are looking for the next Starbucks where they can make a generous return, and then profit handsomely from an «Exit Strategy» when this empire is sold to an even larger empire.
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Banks, Credit Unions, and other lending institutions exist by earning interest on loans and investing customer deposits. Due to timing and other market conditions they are always looking for potentially strong entrepreneurs and new businesses in which to lend.
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Seasoned restaurateurs are often looking to expand their own brands with new locations or to even franchise. If a successful restaurateur doesn’t have their own plan at the moment, you may be able to interest one in yours. Again, this will be determined by the potential of your opportunity, the strengths you bring to the table, and your proposed location.
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Crowdfunding platforms such as www.crowdfunding.com and www.gofundme.com are an interesting phenomenon not to be overlooked. Believe it or not, there are many people out there willing to support someone else’s cause or opportunity. It’s worth exploring even on a small level.
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Family and friends that may be eager to support you and your plan. Depending on their resources, you might find all the funding you need or at least part or all of a necessary down payment.
After considering all the available ways of how to get funding for a restaurant, you should choose whether to borrow and repay the money (debt) or give someone an ownership stake (equity) in your business.
Check if borrowing money from banks is a good alternative to finding investors for a restaurant
Nothing in life comes without a price and lenders are not in the business of losing money. To borrow, you need assets and lenders will require security. Usually, this means signing both a personal guarantee that you will pay back the money if the business does not succeed, as well as a lien on your house or other valuable assets.
Beware that it may take many years of successful operation and positive cash flow performance before a lender will agree to release the lien on your home or personal property.
Depending on where you live, there may be many competing banks or lending institutions. Possibly there are large regional banks near you, in addition to small local banks that support and are supported by the local community. Opportunity is where you look for it. You won’t know which type of institution offers you the greatest chance of approval because it depends on timing, market conditions and other factors in the bank’s best interest.
It’s only smart to apply to several banks, credit unions, or financial institutions. By applying to several lenders, depending on the strength of your plan, you may be in a position to negotiate the best terms to your advantage if several lenders show interest in funding your venture.
Lenders work by committee. To get the loan, you first have to convince a loan officer of your sound idea, experience, commitment and chances of success. The lender will then need to take your plan to their committee for approval which commonly takes many weeks.
You should realistically plan on at least two months or more from the submission of your business plan to a loan closing date. You may spend many weeks waiting for an answer only to be turned down, so it’s imperative to have a Plan B.
If you are approved for the loan, you will have to provide the lender periodic reports on your progress, cash flow, and financial position. Lenders will expect you to contribute a minimum of 20% of the loan in the form of a down payment as your «skin in the game». If you’re not willing to invest your own money in this venture, why should the lender?
If you have solid experience in the restaurant industry, you may prefer borrowing money from a bank. It will be easier for you to convince bank employees that your idea is viable. You may be able to negotiate an interest-only loan to keep your payments low for the first year before paying down the principal. One more advantage here over finding investors for a restaurant is that you won’t have to share profits with the lender or give up any degree of control or decision making.
Think whether it’s better to find a business partner and share equity
Right off the bat, wouldn’t it be great to share the risk with an experienced partner and not have to pay back the money? If you get along well with this partner and have complementary strengths, you will seemingly be able to achieve better results much faster and increase your chances of making a go of the place.
Think twice whether you want to move forward if your investor and partner has no restaurant experience. Ask yourself if they will be a silent partner or have the right to weigh in on major decisions?
On the flip side, challenges here include anything from minor disagreements on how the business should be run to overbearing partners, major conflicts of interest, lack of equal time spent in the business and other frustrations.
Will your potential partner also expect you to contribute a similar or equal amount of money in addition to your concept and location? How will you decide how much your partner’s investment stake is worth and how will you determine the ownership percentages?
Despite all the challenges that partnership brings in, if you are new to the restaurant business, finding a partner could be a real benefit for you as they can contribute their experience along with their money. Having run restaurants before, they’d help you make decisions on hiring, kitchen equipment and restaurant POS system choice, and everything in between.
Decide between leasing and buying a property
When making a plan on how to get investors for a restaurant you should take into account some property-related risks. Investors or lenders will take a close look at them while evaluating your plan. Losing sight of those risks may diminish your chances of getting funding to open a restaurant.
Pros and cons of buying a property for your new restaurant
Generally speaking, when you own the property you can control your destiny. In particular, owning the property has several distinct advantages:
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The investor/ lender will have a security interest in the property making the investment more appealing, while lessening the risk to the investor.
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There are additional tax advantages through depreciation on the building besides the furniture or restaurant tools and equipment.
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You are not at the mercy of an indifferent landlord whose plans on leasing the property may change.
Aside from the pluses mentioned above, owning the property means you will need more money to fund a restaurant in addition to you being required to contribute a larger down payment.
Pros and cons of leasing a property for your new restaurant
Let’s take a closer look at landlords. They are always looking out for their best interests. Things may be all well and good for your business in the first few years until the landlord decides he can make more money by tearing down your space and building condos.
I’ve seen several successful restaurants and other businesses losing their lease and being forced to move their location. After years of blood, sweat and tears building a loyal customer base, these once successful businesses struggled to regain their following in the new location, and some were even forced to close their doors.
If you have to move your restaurant, you may find a new location miles from the old one, possibly even in another community. You may have to start all over again to rebuild your business if forced to move.
Even if you find a perfect landlord there are risks that depend on you. When you sign a restaurant lease you are generally committed to that space for a minimum of three to five years. But what happens if your business does not succeed? Will your lease agreement allow you to sublet the space? Are you willing to assume the risk that the sublessee will succeed? How many months can you sustain your lease obligations to find someone to sublet the space?
Assuming you are doing well, what happens when inevitable problems develop with the property. What if the roof leaks, the heat or air conditioning goes on the blink, the parking lot needs repaving, there is a strong septic odor, etc.? Will the landlord be willing to make necessary repairs to fix the problems affecting your business?
Be careful of expensive escalation clauses in your rent payments once the first term of your lease has expired, in addition to «CAM» or common area maintenance charges that inflate the amount of monthly rent you will pay right from the start.
Be sure to conduct due diligence before entering lease agreements. It’s one of the most worthy pieces of advice you can get on how to get funding to open a restaurant. Investors/ lenders will expect that you retain a competent attorney to look after yours and the lender’s best interests.
Write a plan before pitching potential investors
‘How to find restaurant investors? ’ is a tricky question. However preparing to pitch those potential investors may be even trickier. Get your strategy down on paper before talking to potential investors. Think of this exercise as a roadmap to your venture’s future success. After all, you’ve heard the old saying, «you can’t arrive at your destination if you don’t know where you’re going»!
It’s imperative to have a clearly-thought-out plan for getting investors for a restaurant. The plan should not overinflate your strengths and smarts but show you have everything needed to succeed. To meet the potential lenders’ and investors’ expectations be sure to formulate the following:
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A concise one page Executive Summary of the opportunity.
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The amount of money you’re looking for.
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A list showing what you’ll spend the money on.
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An estimate of the way and time you’ll pay the money back.
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An estimate of the investor’s ROI or the lender’s Principal and Interest.
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Property and location (will you own the real estate or lease space from a landlord.)
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Desired type of business organization (Limited Liability Company, Corporation, etc.)
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Market research that supports the opportunity.
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Financial projections for 3 years (conservative and worst-case scenarios).
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A marketing plan (how you will get new and repeat customers and build a brand.)
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Timeline forward to opening day.
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Your relevant business and/or restaurant experience and that of your team.
A realistic and well-crafted business plan will demonstrate your readiness to overcome the obstacles ahead that are guaranteed to come your way. It will also help you focus your ideas and provide guidance as you move forward. As an aside, a checklist and timeline to opening will also serve you well as you proceed.
Network to find restaurant investors who will trust in your business
To find your money, you will need to open many doors and talk to many people. After all, you never know who you know that might also know someone looking for your opportunity. The internet is a marvelous resource that may provide the key to launch your venture.
Start by searching for restaurant investors and restaurant lenders in your city. Many metropolitan areas or areas of wealth have Angel Investor Groups. These individuals often pool their funds to share the risk and return of a potential opportunity, while business community Incubators exist in progressive areas looking to create jobs and grow the local economy.
For example, in the US there is a volunteer organization of retired and former successful business people in many communities called Service Corps of Retired Executives or SCORE (score.org). These professionals and business mentors will help refine your business plan, strategize your opportunity, point out areas of weakness and even provide other network contacts all for free.
That’s right, such organizations as SCORE are comprised of dedicated volunteers who are looking for nothing other than to help. Fortunately, if there is no a SCORE location near you, the virtual world allows you to work with them remotely. Finally, if you’re going to be in the restaurant business you should join restaurant associations that exist in your country.
For example, in the US, there is a National Restaurant Association www.restaurant.org as well as State Restaurant Associations in every state.
These organizations provide invaluable knowledge, resources and lobbying activity to benefit the restaurant and hospitality industry as a whole. They are also a great place to meet other restaurateurs through industry shows and other events.
Refine your pitch to persuade restaurant investors
It’s called an «Elevator Pitch» for a reason. You have just a few short minutes to compel a potential investor/ lender to take a closer look at your idea. How well can you describe your opportunity and what’s in it for the funder in two minutes?
Take plenty of time reading and re-reading your business plan focusing on the greatest strengths of your concept and idea, and then practice delivering your pitch over and over to anyone who will listen. Only then will you be prepared to approach potential investors or lenders.
Follow your dream and solve the time vs income conundrum
The restaurant industry is a leading contributor to the healthy economy of every country and is both a passion and a calling for many of us. If you truly believe in your idea, work hard, find others with complementary strengths and follow your dream, you can succeed in this business.
Be prepared to make endless phone calls and often lengthy discussions of your opportunity. Although many of these discussions may be discouraging, know that this process only makes you stronger for your next pitch.
Remember that getting funding for your restaurant business is just the beginning of your story. At least for the first year, you will need to be on-site far more hours than your current occupation requires to get the business on its feet. Therefore you should think ahead about how you’ll support yourself after you leave your primary income source before your restaurant starts bringing you profit.
