You’re not interested in owning a restaurant yourself, but you wouldn’t mind investing in someone else’s vision if you felt passionate enough about it. You’re cautious with your money though, so you’re still undecided. What are the benefits of investing in a restaurant?
Investing in a restaurant can be quite a lucrative venture for the following reasons:
- Franchises and chains provide great opportunities for growth
- People always need to eat, so restaurants will remain
- The economy should hold steady over the next several years
In this article, we’ll talk further about the above reasons to invest in a restaurant. We’ll also share some useful advice to keep in mind before you pour any money into a restaurant. This will ensure your cashflow goes into a lasting venture.
Let’s get started!
3 Great Reasons to Invest in a Restaurant
Franchises and Chains Provide Opportunities for Growth
Once you decide that you want to invest in a restaurant, the question becomes which one? This is a decision that only you can make, but we’d recommend a chain or franchise restaurant especially.
These establishments have proven that they have the longevity to get past the first few bumpy years of restaurant ownership. The restaurant has become successful enough that not only can the owner afford to open one new location, but several.
Chains and franchises are harder to knock down than single-location restaurants due to sheer numbers. That doesn’t mean a chain or franchise can’t fail, but it feels like a more secure investment.
Even more important is that franchise restaurants are big businesses. Franchise website All USA Franchises states that major franchises might rake in $200,000 to $250,000 per year, although it depends on the type of food. The same article notes that fast food establishments will only bring in $82,000 once you take out expenses.
The franchise you invest in, to make a profit of around $200k per year, must be a superstar restaurant. It needs great locations, a steady clientele, and high sales. Otherwise, once you take out the cash for expenses, the earnings could be less than $100k.
For more information also read this article: Franchise VS. Chain
People Always Need to Eat, So Restaurants Will Remain
The pandemic of the early 2020s irreversibly changed life as we know it and tanked a handful of industries. Although restaurants had no choice but to change as the pandemic caused long-term lockdowns and restrictions on business operations, the industry survived.
Was it worse for wear? Certainly. When people were forced to cook at home because they couldn’t dine out at their favorite restaurants, some began to realize they enjoyed cooking. Others though longed for the day that restaurants would finally reopen.
The old saying of what doesn’t kill you makes you stronger certainly applies to the restaurant industry. Maybe your favorite little restaurant didn’t survive the pandemic, but restaurants as a whole aren’t going anywhere.
Restaurant growth might be slow, but this restaurant predictions article for 2021 and 2022 as published by Finances Online suggests that takeout orders are going to continue booming. This extra revenue can make up for any sluggish growth from the restaurant you’re investing in.
If you’ve held off on investing in Bitcoin and other new technology because you worry about longevity, that makes you a smart investor. Restaurants though have proven their stability and longevity, even through global disasters like pandemics.
The Economy Should Hold Steady Over the Next Several Years
The pandemic also rocked the economy, especially in the United States. Although conditions worsened to such a degree that our country was on the verge of an economic recession, vaccines for the pandemic came about at just the right time to prevent the economy from becoming that bleak.
According to the U.S. Bureau of Labor Statistics or BLS, in 2022, “slower GDP growth” will “become the ‘new normal.’” The country won’t be in a recession, but economic growth won’t boom like it once did.
That doesn’t mean that growth will come to a screeching halt either. Between 2012 and 2022, the BLS suggests that GDP growth will occur at a decent but steady rate (2.6 percent). The country would earn $17.6 trillion by 2022 if economic growth held steady at that predicted rate.
It’s worth noting that this BLS piece was published in 2013, years and years before the pandemic, but we assume the predictions have been updated since then for accuracy.
Post-pandemic times are a good period to make investments, especially in the restaurant industry. It looks like our country will have a relatively stable economy for the next several years without massive shakeups like those experienced just a few years prior.
Your investment should maintain its worth without major fluctuations, which can increase confidence in your investment.
What to Know Before Investing in a Restaurant
You’ve decided to invest in a restaurant after all. Before you sit down and sign any paperwork or transfer a single dollar to the restaurant, make sure you read this section. It’s full of information that will help you make an informed financial decision.
Be Clear on Your Rate of Return
When you meet with a restaurant or franchise owner, at some point, you two are going to sit down and go over hard numbers. One matter that you must discuss is what your rate of return is going to be for investing in the restaurant.
Part of calculating your rate of return involves the restaurant owner knowing what their projected cashflow will be. For a calculation over 10 years, the rate of return should be at least 20 percent. If it isn’t, then the restaurant is not profitable enough for you to invest in. You shouldn’t proceed with this deal.
Understand the Restaurant’s Occupancy Costs
Another metric that can indicate whether a restaurant is a good investment is the occupancy cost. As the name suggests, occupancy costs encompass everything to do with renting or owning a building. Besides the rent or mortgage, these costs also include amortization, deprecation, building insurance, personal property taxes, and real estate taxes.
According to The Indispensable Restaurant Leasing Guidebook by We Sell Restaurants, a restaurant’s occupancy costs should be no more than 10 percent of the restaurant’s total sales. If they’re higher than that, this again tells you that the investment is one that you’re better off not proceeding with.
Look at Cashflow Projections
We touched on cashflow projections before, but they can’t just be a broad concept that you discuss with the restaurant owner. You need to see their projections for revenue.
Cashflow projections are supposed to use tax returns and other financial records to indicate how much a restaurant will grow financially over the short and long term. New restaurants don’t have this history yet, so it’s hard to make accurate projections.
Restaurants with several years of experience under their belt will have a far better idea of how much money they’ll earn in an average year.
In lieu of cashflow projections, you can always ask to review the restaurant’s business plan. This won’t tell you how much money the restaurant could earn, but it does paint the financial picture in other ways.
Through the business plan, you can glean what the restaurant is currently spending money on, including what active vendor partnerships they have. You can also determine where the restaurant plans on going in the future and what its goals are for growth year after year.
If a restaurant is focusing more of its money on design and décor or on making opening day a really big deal, you as an investor should be wary. These restaurants don’t have a solid financial plan and will likely blow money as soon as they earn it.
Determine What Kind of Investor You Want to Be
Some investors are more passive, in that they give a restaurant money but aren’t really involved with decision-making. Active investors have a larger stake in the restaurant. Maybe they suggest menu items or décor or other crucial choices that must be made about the restaurant.
It’s your decision which type of investor is more your style. It’s easy to get swept up in the romanticization of restaurants and become an active investor, but you must keep a level head. Failing to make sound financial decisions could lead to the closure of a restaurant that you really care about!
Investing in a restaurant can be a sound business decision provided you choose a restaurant with established roots, a history of growth, and a good cashflow projection. Since restaurants remain popular and the industry has proven it can survive hard times, now might be the perfect moment for investing!
Find out much more here: WHAT TYPE OF RESTAURANT BUSINESS IS MOST PROFITABLE?