Investors can provide enough capital for your restaurant aspirations to come true. However, the question of how much to offer them can weigh heavily on your mind. What is the right amount?
A fair percentage for an investor in the restaurant branch varies depending on their role, with angel investors expecting a return of 20 to 25 percent and venture capitalists up to 40 percent or more.
This guide to restaurant investing will discuss how to obtain investors, what to pay them, and how to maintain a mutually beneficial relationship.
What Are the Benefits of Working with an Investor in the Restaurant Branch? What About the Downsides?
Restaurant investors are angel investors, companies, or venture capitalists who invest their cash into a restaurant they want to see succeed. They personally work with restaurateurs and other staff to bring the establishment’s goals to fruition.
Any means of funding your restaurant has its pros and cons. For example, paying out-of-pocket requires you to have a lot of money saved up, and if your restaurant fails, you’re out that money forever.
Investors eliminate that personal risk but have their downsides. Let’s investigate.
The Upsides of Working with a Restaurant Investor
- Funds: The biggest reason to consider working with a restaurant investor is for something you desperately need that they have in abundance: cold, hard cash. With the investor’s help, you’re one step closer to finally opening your restaurant, something you probably can’t do with your funds alone.
- Connections: First-time restaurateurs can enter the industry with few if any connections, which makes it tough to grow. A restaurant investor has a long history in the hospitality industry and can introduce you to parties who can ensure a smooth transition into opening your establishment.
- Expertise: An experienced restaurant investor will have seen restaurants succeed and fail. Even though they weren’t in an ownership position themselves, they understand what it takes to run a restaurant and can offer you valuable nuggets of wisdom.
The Downsides of Working with a Restaurant Investor
- Tough to find good ones: Restaurant investors are a dime a dozen, but quality investors you can trust? That’s a different story. You can spend a long time finding an investor worth inviting into the fold.
- Potential control loss: Investors don’t simply hand you the cash and run. They’re not donating. They want your restaurant to do well, so part of their terms might involve an ownership or management stake. They can guide your restaurant, for better or worse.
- Will lose profits: Investors will often ask for a cut of the profits your restaurant makes. The question becomes, how much will they want?
What Is a Fair Percentage for a Restaurant Investor to Ask?
As you begin meeting with investors and talking money, the topic of their profits will come up. Rather than require you to pay them X amount per month–which an investor realizes will be hard given that you’re opening a restaurant and paying for a lot in relation to that–they ask for a percentage of the profits.
How much is appropriate for an investor to request?
That depends, in part, on the value of your restaurant, the type of investor you’re working with, and how involved they are.
An angel investor will ask for a return of 20 to 25 percent. These investors provide startup capital in exchange for ownership equity or convertible debt.
A venture capitalist might throw in a lot more money toward your restaurant than an angel investor, so it’s wise to offer them a larger cut in return. A fair rate is about 40 percent.
If in doubt, a good rule of thumb is at least 20 percent.
How to Find the Right Restaurant Investor
Are you contemplating working with a restaurant investor? Here are the steps to follow to make it happen.
Carefully Weigh the Pros and Cons
As we discussed earlier, investors of any kind have their upsides and downsides. Before you seek an investor, you might look into your other options for funding your restaurant to ensure an investment is the only way.
Ask yourself some questions. For example, is this the most cost-effective avenue? Are you okay with someone else being involved with the direction of your restaurant, possibly for years? Can your restaurant survive if you pay an outside party 20 to 40 percent of your profits?
These are serious questions that require careful, conscientious answers before proceeding.
Know The Restaurant
Investors will want to know every last little thing about your restaurant, such as what it’s about, whether you rent or own the building, how much staff you have, what you serve, who you’ve hired and need to hire, what your short-term and long-term goals are, and how much money you make.
You should have created a business case before you opened your restaurant. If your restaurant hasn’t opened yet due to lack of funds, you should still put together a business case before you seek an investor’s assistance.
Investors like seeing a restaurant on the verge of success that needs a bit of a boost, so any kind of history on your establishment, like profits, expenses, and customer numbers, will help you catch an investor’s eye.
Begin Within Your Network
Where are all the investors hiding? They’re closer than you think.
Start within your immediate network. Reach out to personal and professional contacts and ask around.
Reach out on social media, especially on platforms like LinkedIn. If you fall short within your own network, seek the contacts within the network of those at your restaurant, like your servers or even vendors.
Attend Restaurant Events and Expand Your Network
If you still have yet to find an investor, you must broaden your search. Find restaurant, foodservice, and hospitality events, expos, and conferences in your state or online and attend. Print off business cards, meet as many people as you can, and spread your contact information around.
Consider augmenting these efforts by taking local classes (such as at a community college), shopping at nearby restaurants and small businesses, getting involved with nonprofits, and attending parades, performances, and farmers markets in your town.
Expand Your Online Presence
What kind of presence does your restaurant have? You must be online and easily found.
You can build a website for your restaurant in a day, and it’s less expensive than you may realize. Of course, you should consider hiring a coder and graphic designer to make the website appealing, but you can create a simple site yourself with drag-and-drop features and templates.
You must also have a strong social media presence, posting consistently across major platforms like Twitter, LinkedIn, Facebook, and YouTube.
Consider a Pop-Up Spot
What if you need an investor to open your restaurant and can’t impress them by showcasing what you do? Perhaps you can open a small pop-up restaurant in your city or town. The excitement and sense of FOMO you’ll generate from this temporary restaurant could attract investors to you.
At the very least, you’ll know your audience and strengthen your business case.
Tips for Maintaining Investor Relationships
Getting an investor is one thing, and keeping them is another. The following tips will help you strengthen your investor relationships so they last longer.
Communicate Regularly
Regular communication between a restaurant owner and investor is a must. You might connect weekly or more frequently, depending on how bustling your restaurant is. Communication is a two-way street, so encourage your investor to reach out to you with any news and updates.
Share Information
Clueing in your investor on the information flow within your restaurant will help them make financially smart decisions that can benefit your restaurant and safeguard their investment. The information you share must be timely so it’s useful to the investor.
Prioritize Transparency
A good professional relationship is built on and maintained through honesty. Be forthcoming about business downturns just as you are when on the upswing. Your investor will find out about dry periods eventually, so being transparent from the beginning will prevent rocky confrontations later.
Make Time for Meetings
Even if your investor has a strong association with your restaurant, you should still set aside time for the two of you (or other investors and stakeholders) to meet and discuss the latest news with your restaurant. You can hold your meeting over Zoom, on the phone using conference software, or in person.
Send Reports
Shareholder reports are produced monthly, bimonthly, or quarterly to clue in investors on the financial side of your restaurant business. These are more than a formality but guidance for the investor to help them plan for the next quarter.
Bottom Line
Investors provide the funds to make your restaurant dreams come true. However, they expect something out of the deal, typically a cut of the profits and/or some form of business control when managing your restaurant.
The standard cut for a restaurant investor is 20 to 40 percent, but the rate could be higher or lower depending on how much money your establishment earns and the level of investment you receive.
Always talk over the profit percentage rate before signing any contracts to ensure it’s mutually beneficial.
