Restaurants can be good investments, but they have a high rate of failure within the first five years, making them a high-risk investment. If you must invest in a restaurant, choose an established one (ideally a franchise) and study the financials before signing on the dotted line.
In this article, we’ll discuss further whether restaurants are a good investment as well as talk about the type of investor roles you can fulfill. You’re not going to want to miss it!
So, Is a Restaurant a Good Investment?
Investments are a tricky business. Sometimes, even if it seems like your investment is a surefire thing, you can discover with horror as your money drains away that you made a bad investment.
Perhaps you did invest in bad ventures once or twice before and you want to be smarter with your money going forward. Or maybe this will be your first investment and you’re not sure where to funnel the money.
Restaurants are a popular choice, and those who think they’re a good investment versus a bad one are very vocal about their opinions. In this section, we want to present both sides of the coin so you can better decide whether to invest in a restaurant.
The Pros of Investing in a Restaurant
In a recent post on the blog, we listed several reasons why investing in a restaurant is a worthwhile venture. If you missed that post, we highly recommend going back and reading it, as it complements the information we’ll discuss today.
Per that article, here are a handful of reasons we think investing in a restaurant can be a sound business decision.
An Economic Upswing Is in Play
The health of the economy plays a major role in whether now is the right time to invest. That goes for restaurants and any other industry you were thinking about putting money into. As the early 2020s got underway, the economy in the United States and other parts of the world was admittedly shaky, especially due to the pandemic.
There was the risk of an economic recession on par with what transpired in the US in 2008. While economic hardship certainly did occur in the early 2020s, fortunately, it wasn’t to such a huge extent as the 2008 economic crash.
The pandemic undoubtedly changed how people live their lives and thus spend their money, yet the economy is still looking up. Could that change? Due to the vulnerable, unpredictable times that we’re currently living in, yes, it could.
Yet growth could be on the horizon. Don’t get us wrong, we’re not about to enter an economic boom. Economic growth is going to occur, but at a slow projected rate of about 2.6 percent if you recall from our latest blog post. Some growth is better than none, so even if the economy moves at a glacial pace, it is still moving.
Some investors might want to wait for even more profound economic growth before choosing to invest in a restaurant. That’s your decision, and while we wouldn’t tell you how to manage your money, it’s hard to say when more profound economic growth will occur. It certainly doesn’t seem like it will happen any sooner than at least 2022.
In the meantime, there are plenty of great restaurant investment opportunities that could be passing you by.
The Restaurant Industry Is Secure
Did the pandemic cause a lot of restaurants to have to shutter their doors? Absolutely, it did. Yet just as many restaurants changed their strategies, switched to online ordering or takeout, and did whatever they could to survive. Even better is that it worked!
Although we have fewer restaurants today, there will always be new ones to open in the places of those that unfortunately had to close. For the establishments that survived the pandemic and all the uncertainties of the time after, they’re more unshakeable than ever.
As we’ll talk about a little later, the restaurant failure rate is high, especially within the first year but even within five years. That’s always something to keep in mind, but as a whole, the restaurant industry is a secure one to invest in.
People will always want to go out to eat. According to Merriam-Webster, it’s been that way since 1765, when a man named Boulanger opened the first restaurant to ever exist.
Restaurants are not only a place to get food when you don’t want to cook (although they can be that too). They’re the settings of business meetings, family reunions, first dates, wedding proposals, and so many more important life moments. They’re a place to meet with people you care about and build memories while enjoying delicious food.
Even today, when the average person can buy just about all the cooking equipment the pros use or have chef-created food delivered straight to their door, restaurants still fulfill a need in society.
Restaurants Look Great on Your Portfolio
Let’s say that you did invest in a restaurant, such as a franchise or a chain (which are the safest picks). Now you can add your restaurant investment experience to your portfolio. An investment portfolio should include all funds, stocks, and bonds you’re currently investing in.
More importantly, you can review your investment portfolio to determine how close you are to meeting your financial goals. Investing in a restaurant could be what it takes to help you finally achieve that financial milestone you’ve been aiming for!
The Cons of Investing in a Restaurant
It’s only fair that we examine the potential downsides and risks of investing in a restaurant. Please weigh each of these points carefully against the upsides of restaurant investment from the last section.
You Can Get Sucked in If You’re Not Careful
We’ll talk more about active investors in the next section, but as the name implies, your role requires more responsibilities than simply providing money to the restaurant owner.
If you’re someone who already has a full-time job and just dabbles in investments for fun, as a hobby, or as a means of earning extra income, the increase in work that can come with investing in a restaurant might be more than you can handle. Rightfully so!
We do want to mention that getting sucked into the fray of restaurant ownership or management is not something that’s guaranteed if you invest in a restaurant. By making your intentions and desired role very clear from the onset, you can avoid being roped into doing more work with the restaurant than what you wish.
Restaurants Have High Failure Rates
One of the biggest risks of investing in a restaurant by far is the high rate of failure. According to a 2016 article from CNBC, within the first year of opening, 60 percent of restaurants will fail. Within five years, it’s up to 80 percent.
That is a steep rate of failure. Although those numbers are from 2016, they appear to hold steady even today, as more current projections are not available.
This is a simple risk assessment in action. If you knew that an investment of yours had a 60-percent chance of failing within its first year and then an 80-percent rate of failure within five years, would you put forth the money?
That’s an answer that only you can provide. Many investors will say no and walk away. Others still think they can be the one to beat the odds and financially back a new restaurant that will soar into the stratosphere and survive for decades. That rarely happens exactly as the investor imagined.
The ones who are most ready to invest in a restaurant are aware of the failure rates as well as the other risks yet believe that investing in a restaurant could still be worthwhile.
Most of the Risk Is on You
Whether you’re a restaurant franchisee or an investor, as soon as you get involved in a franchise, you’re accepting a huge portion of the risk. If the restaurant goes belly-up like so many of them do, then poof, all the money you put into the restaurant is gone.
Before you make a deal with a restaurant owner, you must ensure that what you’re investing isn’t so much money that your life would be negatively impacted if you never see it again. This can prevent you from pouring your life savings into a restaurant or making your house collateral.
Which Type of Restaurant Investor Are You? Why It Matters
We’ve touched on the different types of investors throughout this article, so now it’s time to devote a section to the four kinds. Depending on which type of investor you are, your financial risk and restaurant responsibilities can be higher.
A passive investor, as we wrote about recently on the blog, is relatively hands-off. They give money to the restaurant, but they don’t participate in the restaurant decision-making that occurs on a regular basis.
They’re still aware of the risks of investing (all investments are a risk to a degree, not only restaurants), so they’re not just throwing in their money blindly. They’ve met with the restaurant management and the stakeholders and continue to do so when necessary.
Rather than work as a general partner though, they’re a limited partner. The restaurant still benefits from the investor’s financial offerings while the investor has enough time to work on their full-time work or other philanthropic involvements.
The opposite of a passive investor is an active one. As we touched on before, active investors want to do more than just give the restaurant money. For that money, they request involvement in the restaurant’s operations.
The purpose of being so hands-on is so the active investor can watch fluctuations in price, even small ones, and make decisions ahead of average returns on the stock market. Thus, their role might be that of a portfolio manager. They can also be a general partner.
An active investor must be well-educated in assets, bonds, and stocks. If an investment is about to go sour, the investor would know before it happens so they can get out, hopefully with most of their money intact.
Active investing can be great if you’re making the right decisions about investments, but what if you don’t? That’s when this type of investing can come back to bite you. You could cause a restaurant to fall, not the owner. The acrimony between you and the restaurant owner could be serious, and they might even try to pursue litigation.
The third type of investor is called an angel investor. Since angels are regarded as saviors, that too is the role the investor usually plays. Why? Well, because angel investors decide to invest in restaurants and other companies while banks and other lenders have said no.
Angel investing can be a smart venture if you’re well-versed in investments and you take the time to thoroughly review the financial portfolio of the restaurant before investing. There’s usually a reason that other companies and individuals won’t invest in a business before an angel investor steps in.
It’s your job to figure out what that reason is. Then you must decide if the restaurant’s financial standing is too risky to invest in.
Venture Capital Firm Investor
The last type of investor is those in venture capital firms. Unlike angel investors, who take downtrodden restaurants under their wing, a venture capital firm is all about profit, profit, profit. They review business portfolios and decide to invest in companies that seem like they’ll make the most money.
Of course, venture capital firms can be wrong, just as any investor can. Yet supply chain recommendations and other connections usually point venture capital firms in the right direction for investments.
If you weigh the risks and the rewards, you’ll realize that a restaurant can be a good investment. To protect your money, choose a franchise or chain that’s been around for longer than five years, as up to 80 percent of restaurants can still shut down within their fifth year. Good luck!