What should I know before I invest in a restaurant?

October 22, 2010 2:49 PM

What should I know before I invest in a restaurant?

I am going to be investing in a restaurant. I am a total newbie at doing this and I've asked around for advice, but most people (including those with some relevant experience) just tell me not to. No one had any particular objections to this restaurant, but the common advice was that restaurants were in general poor investments.

The sum of money involved is relatively small for me (I was probably going to buy a mid-life crisis Porsche with it), but the people I asked aren't really aware of that fact, so their advice might have been different had they known.

I need to know some specifics about how these restaurant investments are structured typically (I'm in San Francisco), what kind of documents are typical, etc. Because, I am going to put money in, I just want to know how do do it properly.

posted by anonymous to Work & Money (27 answers total)

Have you talked to a CPA? Some of them specialize in the restaurant industry.
posted by Blazecock Pileon at 2:52 PM on October 22, 2010

I need to know some specifics about how these restaurant investments are structured typically (I'm in San Francisco), what kind of documents are typical, etc. Because, I am going to put money in, I just want to know how do do it properly.

Has an attorney been involved in structuring the business organization of the venture? If not, I strongly recommend hiring a competent attorney to go over everything, lest you find yourself liable for more than your investment in case of bankruptcy or a lawsuit, amongst other possible pitfalls.
posted by jedicus at 2:57 PM on October 22, 2010 [1 favorite]

That most restaurants fail, and badly. That this is because most chefs and restaurant owners are terrible terrible terrible businesspeople. That their brilliance in cooking does not qualify them to meet payroll or order supplies. That the build-out for a restaurant is very costly, and that there are lots of strict city/local code requirements. That staffing is a real headache. That liquor margins are much higher than food margins, so a liquor license is a good idea. That you are very very likely to lose your investment.

If it brings you pleasure to hang around the restaurant, go for it. But it is not a good investment simply because so many restaurants start out under-capitalized and fail. As to structuring, jeez, see a lawyer, no one's going to be able to do a promissory note or agreement over Ask Metafilter.
posted by seventyfour at 2:58 PM on October 22, 2010 [9 favorites]

As long as it's money you can afford to lose, then...make sure that the people you are investing with are going to be hands-on. A friend of mine did this very thing and was working with his father's money as well as his own, trusting that a hired manager would do day to day while he lived several hours driving distance away from the restaurant-that was a, pardon the expression, recipe for disaster.

Make sure that the person opening the restaurant HAS restaurant experience, not just business experience. Many otherwise excellent businessmen have had their hineys handed to them in the restaurant biz. Because it really is THAT different. I would want the person to have restaurant management experience under their belt at the bare minimum.

And I hate to say this but many people who work restaurant jobs have absolutely no compunction re stealing, etc. There are tons of honest restaurant workers but you cannot look at people and tell the difference. Make sure that procedures are in place so it isn't made easy to be ripped off. Keep a gimlet eye on inventory.

And the number one thing is KEEP A REALLY REALLY REALLY CLOSE EYE on food costs. That is what makes or breaks you. Little things add up to big losses if you aren't careful.
posted by St. Alia of the Bunnies at 3:08 PM on October 22, 2010 [3 favorites]

I have a lot of experience in the restaurant business (the business side of it just as much as the actual labor).
I would never "invest" in a restaurant. If you aren't able/willing to work the actual place, then you should keep your money away from it. I assume if you're an investor, you take a portion of the profits. There are so many ways to reduce the bottom line (i.e. the profits)..some people call it skimming..whatever you want to call it. Unless you are deeply involved, or you are investing with people you know and trust very much, I would not do it. Not worth the risk. There are just too many ways to rip off an 'investor'.

I know you didn't ask for it, but I'll just throw it out there: Don't buy a Porsche. If you decide against the restaurant, find another investment. But, to go from possible investment to the alternative of a depreciating asset is not cool! :-) I say this with love, of course. Put your money to work!
posted by Yunani at 3:08 PM on October 22, 2010 [1 favorite]

I think it's a bad idea unless you're passionate about the restaurant and you want to put in time working there.

You could do a lot more worthwhile investments with 50,000-100,000, including buying a midlife crisis car.
posted by zephyr_words at 3:23 PM on October 22, 2010 [1 favorite]

I think my stock answer for all the "should we get married" questions also applies here. If you know so little that you are asking about a significant financial investment on AskMeFi then you have absolutely no business making the investment. Unless of course, you are just looking to reduce your net worth by the amount of the investment.
posted by COD at 3:34 PM on October 22, 2010 [3 favorites]

Agreed with St. Alia. What is your role in the restaurant going to be? You say that you are a newbie with no experience in restaurants, so if you are interested in throwing your money away, I'd say this is the perfect opportunity for you.

Restaurants live on razor thin margins, especially in an area like san francisco, where there are 2 billion amazing restaurants.

Having worked in the kitchen in plenty of restaurants, I kept hearing the same joke over and over- "what does it take to make a small fortune in the restaurant industry- a large fortune."

If you are looking for an investment with a real return, I'd suggest looking elsewhere. If you are looking for a crazy, hairball scheme that will probably not make any money, that you want to do because you are sick of your job and want to do something new and have the means to do so, I'd say go for it. Just watch the bottom line very carefully. Know what money is going out and where it is going. Learn all you can about the ordering process for food and alcohol. Make sure the margins stay good- food waste will destroy your business (make sure it doesn't happen).

If you don't want to be involved to that degree, I'd say find something else to invest in.

As everyone else here has said, get a lawyer to look over the papers before you sign anything. You may want to think about incorporating as well if you could be on the hook for any failings and lawsuits.
posted by TheBones at 3:36 PM on October 22, 2010 [1 favorite]

A few years ago I was talking with the owner of my local bar. I mentioned that, if I won the lottery, I'd love to open or invest in a bar just like his.

He looked at me like I just grew a second head and asked, "Why would you buy trouble?"
posted by robocop is bleeding at 3:39 PM on October 22, 2010 [6 favorites]

I have a friend who was a partner in a restaurant venture (in the SF Bay Area). She couldn't figure out why the place wasn't making any money, 'til she realized that her partner in the business was pulling cash out before it hit the registers and snorting it. And of course once she figured this out there were the tax liabilities from all that unpaid sales tax and more.

However, I did offer to invest in her restaurant when she was looking at trying to take over the lease and start fresh.

I guess nothing of real insight in that other than to say that there's a lot of ways to embezzle cash out of a restaurant. I know a number of people who've done fairly well in the restaurant business, but if you don't trust the principals pretty thoroughly there are a hell of a lot of ways to get screwed.
posted by straw at 3:41 PM on October 22, 2010 [1 favorite]

Just send the money to me.

Seriously, you know nothing about resaurants, so where did this great opportunity come from, and how do you know it is a great investment? I hope you would be happy to lose the money, if that is what eventuates. Presumably there are other attractions (beyond free meals) which flow from this investment.

Never mind typical, do you know the legal structure of this business? Seen audited accounts? Checked cash flow, cash reserves? Premises owned or leased, if the latter have you seen the lease? Seen tax returns, checked for outstanding tax or other debts? How reliant is the business on key staff (especially the chef)? Get an experienced business accountant to examin the books in the knowledge that you are looking at buying into the business.

You will be either buying a share (or shares) in a corporation, or entering into a partnership agreement if it is unincorporated. This is where you need legal advice, as it is sooo easy to lose not just your investment, but your house and any and all other assets you have.

That Porsche is looking good to me...
posted by GeeEmm at 3:44 PM on October 22, 2010

Have you read Kitchen Confidential?
posted by gyusan at 4:00 PM on October 22, 2010 [5 favorites]

Part ownership of a restaurant will get you laid more than a Porsche. Just don't expect any of your money back.
posted by nicwolff at 4:02 PM on October 22, 2010 [2 favorites]

Not a direct answer to your questions but...

I say if you do it, write a blog about it ... lots of people want to do this kind of thing, but the word around town is, as you can see, that its a terrible idea.

You seem pretty set on it though, so if you do it, write a blog about your experiences... who knows, the revenue from hits/ads/book deals/moviestarringMerrylStreep (in order of decreasing likelihood) might increase the value of your investment.

If not, at least there will be an interesting historical account of what its like to invest in a restaurant with no prior experience.

Good luck!
posted by Admira at 4:02 PM on October 22, 2010 [2 favorites]

What everyone else said, plus: What criteria are you using to value your share? If you don't understand the question you have no business investing in a small business.
posted by ZenMasterThis at 4:58 PM on October 22, 2010

Employee theft is rampant in the restaurant and bar business. Do thorough background/reference checks on anyone you hire. It's worth it to pay a little more and get someone trustworthy.
posted by Jacqueline at 5:10 PM on October 22, 2010

Having owned a restaurant for almost 8 years I would suggest you find something better to invest your hard-earned money. Only a small percentage of restaurants are in business after being open 3 years. It is a disastrous area to make money. It does happen, of course, but it isn't the norm.
posted by JayRwv at 5:12 PM on October 22, 2010

How long would you expect the Porsche to be fun? Do you think the restaurant would stay running that long? And would it give you the sort of fun you're looking to find? Me, with just those two choices, I'd go with the car. At least when the fun passes you'll have the asset to sell to someone else. Not a likely outcome with a restaurant.
posted by wkearney99 at 5:51 PM on October 22, 2010

I would never "invest" in a restaurant. If you aren't able/willing to work the actual place, then you should keep your money away from it.

This is the truth. Unless you are buying into a Rich Melman sort of established restaurant infrastructure and established money making machine, kiss it goodbye. You might as well buy a fractional ownership in a Gulfstream or a thoroughbred.

Bars and restaurants make wayyyyy less than it would seem like when you are paying $10 for a martini.
posted by gjc at 6:05 PM on October 22, 2010

Restaurants don't fail as often as everyone says. Look around your neighborhood; do you see a high churn of restaurants?

Read this, and maybe this.

That said, if you plan on investing in anything, you should research the heck out of that thing, whatever it is. And if what you're investing in is a small business, you should make sure you have enough clout in whatever agreement you make that you can make sure things go well. Also, you should have a plan for getting out. You can sell a car in ebay in a week or two; selling 1/6 of a restaurant (say) might well be impossible. If you plan on investing for the long haul, that's less of a concern.

If your investment is sucessful, please come back and let us know; I've got a restaurant concept that I would love to talk an investor about...
posted by novalis_dt at 6:07 PM on October 22, 2010

I'd call it money better-spent than a Porsche. A restaurant in San Francisco? If the sum of money involved is relatively small for you, think of it as an entertainment/experience expense. If the restaurant doesn't succeed, hey, at least you kept yourself *very* busy for a while. It will make for better stories when you're old than a car would. If it does succeed, you're set for food.

Any list of documents to worry about will include tax forms. Here are some links from the IRS. Here are some resources on city paperwork for starting a business in San Francisco. This page is specifically about starting a restaurant there.
posted by aniola at 6:23 PM on October 22, 2010 [1 favorite]

And, when you either look at the books yourself or get someone else to look at them, be very very VERY sure that they are accurate.

I quit a book-keeping job when I couldn't handle being forced to make incorrect - and utterly illegal - entries on MYOB (accounting system). The owner was trying to sell the business, and desperately wanted the balance sheet and profit-and-loss statements to show the business as profitable despite it actually losing around AU$10,000 a month. Thankfully she couldn't sell it and just shut up shop with a $100,000 business loan still to be repaid. Kharma in action.
posted by malibustacey9999 at 6:52 PM on October 22, 2010

Look around your neighborhood; do you see a high churn of restaurants?

Yes, on the new ones. New restaurants fail at a high rate, once they are established you are correct. But we are talking (I assume) about a new one.
posted by gjc at 8:06 PM on October 22, 2010

There are other risks that have nothing to do with structuring your investment. When I was much younger, I invested a small sum of money into a bar/restaurant along with my then-boyfriend (the manager) and his best friend (the head chef). The current owner wanted to sell the business and we were game. I grew up working in resorts and restaurants, my uncle owned bars and restaurants, so I wasn't in strange territory.

At the time, my straight job was working as a paralegal. Fortunately, one of the attorneys at my firm checked out the business for me and discovered two pending lawsuits, one for broadcasting the World Cup without permission and one stemming from an underage kid who broke his arm when he fell while drinking at the bar. I got my money back and walked away feeling like I dodged a bullet.
posted by Majorita at 12:18 AM on October 23, 2010 [1 favorite]

Make sure the contracts are quite clear on the mechanism for getting out when you want to -- as in what your percent of ownership is, do the other partners/shareholders have any say in if/when/how you sell your share.

Make sure the contract is clear on how you get access to the restuarant records for audits and such, should you need to. Make sure there is a clear process for resolving conflicts among the partners/shareholders.

Make sure the contract outlines your responsibilites. Are you a silent partner or a minority shareholder? What is your status exactly? Are you personally on the hook for a lawsuit if one of your chefs poisons someone?

Get an attorney.

Don't invest in a restaurant.
posted by dzot at 9:24 AM on October 23, 2010

It's possible to make a lot of money if you do it right. Set up in a newer suburb with lots of wealthy people and few restaurants, keep service extremely reliable, advertise heavily, open new locations as soon as possible. Basically, operate like you're a regional manager for Olive Garden. The quality of the food doesn't really matter; stick with 5-10 menu items, a couple of expensive drinks (that a non-bartender can make) and some tap beers, and get desserts made by someone else rather than hiring a dessert chef. Make sure there's always a table available, you never run out of anything, and food is on the table in exactly 20 minutes. I've watched several different restaurants grow into multimillion-dollar businesses using this approach.

But a family-owned restaurant led by a talented chef? Financial disaster!
posted by miyabo at 9:47 AM on October 23, 2010

Have you read Kitchen Confidential?

Seconded. Pay particular attention to the bits about how restaurants are a great way for people who don't understand the trade to lose all their money.
posted by rodgerd at 10:59 AM on October 23, 2010