When it comes to investors approaching restaurants, there are multiple points of negotiation that must be considered. Like any business, a restaurant has to be evaluated for it’s flow of money (a given) but money alone cannot determine if a restaurant investment makes sense or not. The restaurant industry is a complex beast where only the most detail oriented people succeed. If you are an investor (first time or non) that is considering to buy into a restaurant business, here are some important things you should consider, to find out if the investment opportunity makes sense for you.
1. Do your research on owners
This might sound like a given, but if you’re buying into a partnership of a restaurant (percentage of equity or similar) then you need to have a solid understanding of who the people you’re investing with, are. What are their backgrounds? Interests? How about the obvious one: previous restaurant ownership experience? In some cases, restaurants will be selling ownership due to the realization that their current team is managing the business poorly, and they’re hoping for someone to step in and turn the business around. If you’re looking to turn the business around year after year, the maybe this is for you. If not and you find yourself adopted into an unproven business plan, you might find yourself in a world of hurt and frustration. Take the time to research the current or previous owners to evaluate if this is a good investment for you. If no, you might want to move on to a new location.
2. Is the restaurant volume-driven or rate-driven?
How does your target restaurant make its money? Is it because they have an enormous quantity of foot traffic- this is often the case with a new restaurant, which attracts an initial wave of interest but dies off if the value isn’t there. How does a volume-driven restaurant affect the importance of staff management?
Or, is the restaurant’s cash flow based on rates- higher cost due to scarcity or limited market? You might want to consider the importance of customer retention versus shotgun marketing, as one of your restaurant operators.
3. Evaluate your target demographic
People will always want to eat out with their friends and family, but the types of people that would be willing to spend a pretty penny on a meal in New York are much different than those in Seattle, WA. Even within cities, different neighborhoods have different demographics and as a potential restaurant investor, you need to feel confident that you understand the local communities preferences and tastes (pun intended).
4. Keep “never ending expenses” in mind
This mostly applies to first time restaurant investors as opposed to active investors, but remember that there are an assortment of fees and administrative costs associated with owning a restaurant, many of which are determine at the state or city level. Some examples include tax, liquor fees, damages and repairs, not to mention the more obvious ones like payroll. A general word of advice: only invest what you’re actually able to lose.
Whether you’re seeking to become a managing partner or restaurant investing on your own, there are large amount of variables to consider. In addition to reading through tips and guides like this one, I suggest partnering with a team of trained partners who know the market and know how restaurant purchases work. If you’d like to schedule a consultation with our team of professional at BizPappa, please visit our home page for contact info.