Opening a restaurant can require a lot of financing and involves substantial risk, which is why many restaurateurs bring investors on board. Not only is it a good way to mitigate risk, but if you partner with industry experts, you can tap into their wealth of industry knowledge and have them advise you before making any important decisions. The challenge is finding the right restaurant investors who can help bring your vision to life and elevate your business.
The Ins and Outs of Restaurant Investments
You might be wondering how investors get paid. Basically, there are two paths. First, equity investors will earn money from dividends once the restaurant is profitable. A portion of the profits will be divided among shareholders. Second, investors can earn money when they sell their shares.
Typically, an angel investor is aiming to receive a return of 20%-25% in their investment. Venture capitalists, who usually invest in projects early on, are looking for a higher return of around 40%. Since they are contributing during the development stage and taking on more risk, they are also expecting more compensation.
What to Look for in Restaurant Investors
First and foremost, you want an investor who doesn’t shy away from a challenge. Any business is bound to be met with certain challenges along the way, so you’ll want to find someone who isn’t afraid to roll up their sleeves and get their hands dirty. The ideal investor will be prepared for these challenges and will be ready to step in and lend a hand when necessary. Ultimately, you’ll want to find a partner who will be able to use their experience and connections to problem-solve and take your business to the next level.
How to Find Reliable Restaurant Investors
Once you’ve made the decision to bring one (or more) investors on board, the next step is to find interested parties, but where should your search begin?
1. Talk with your peers and colleagues.
If you’re already in the industry, then these would be other restaurant owners who have already traveled this path and found their own investors. Don’t be afraid to ask them who they work with, how they found them, who they recommend reaching out to, and whether they know anyone actively looking to invest. If you’re not in the industry, talk to your peers and colleagues, anyway! You never know if they or someone they know may be interested in your business venture.
2. Participate in an incubator.
Food and restaurant industry incubators can help connect you with investors and provide you with other valuable resources. These types of incubators are popping up in major cities throughout the U.S. like Branchfood, a food industry innovation hub in Boston, and The Hatchery, a nonprofit food and beverage incubator in Chicago. These can easily be found by running a quick search on Google.
3. Attend networking events.
Look for events and conferences, such as HITEC or FSTEC, where you can interact with other people in the network. These events present great opportunities to build relationships and connect directly to investors. You never know how one contact can lead to another and open up new opportunities.
4. Leverage Linkedin.
LinkedIn allows you to search according to a variety of factors and identify people with interest in your field. Just remember to make sure that your profile is complete and robust so that they can also learn more about you and who you are.
Pitching to Restaurant Investors
When it’s time to pitch your restaurant, it all comes down to preparation. Anyone can appreciate your passion, but they won’t be willing to make a restaurant investment unless you have a well-thought out business plan in place. Here is what you will need:
A business plan
This is an important document that clearly outlines your plan. Fortunately, you don’t need an MBA to put together a comprehensive business plan.
A pitch deck
A visual presentation will allow you to demonstrate why your restaurant is special, why they should invest, and how they can help. The presentation should be informative as well as engaging and exciting. Check out a few episodes of Shark Tank to get some inspiration and see which approach works and which falls flat.
You may be able to design a delicious menu, but can you handle the business side of running a restaurant? Investors will want to see that you can handle money well. Break down key figures including the overall worth of the business, who owns what percentage, profit margins on drinks and dishes, overhead costs, and your growth forecast.
Developing Your Restaurant Plan
Remember that investors will want to dig deep into the details of your business plan. In particular, they want to have a clear understanding of four main areas: vision, management, store economics, and social impact. You need to be able to clearly articulate the information about these areas before you begin seeking out capital.
Your vision begins with a unique concept. That doesn’t mean that you have to reinvent the wheel or food, but you do need to offer a new take that can act as the foundation for the brand. For example, Sweetgreen wasn’t the first fast-casual salad concept restaurant, but it was able to go beyond salad and develop a clear vision and unique customer journey.
In addition, investors will want to understand your long-term goals. Where do you want to be in 5-10 years? Do you want to go from one to four restaurant locations in the region? Is the ultimate goal to start a franchise? You may be able to iron out those details together, but it is something to consider.
It’s one thing to say that you will put a strong management team in place, and it’s another to actually take a hard look at your team’s strengths and weaknesses. Inevitably, there will be some knowledge gaps worth filling. Kitchen Fund is one growth equity investor that helps restaurants build better teams by identifying gaps, building a hiring plan, and recruiting talent who can help you with restaurant design, steps of service, menu creation, and much more. These types of insights can be valuable.
Another aspect of management is continuing to build a team. This starts with understanding your target customer, what types of marketing they engage with, how the menu might need to evolve over time, and recruiting talent that can support these efforts. Being able to answer these questions is part of developing a strong management plan.
Investing in a restaurant always involves a certain amount of risk, which is why investors will want to see future growth predictions and a business model that can be replicated. Perhaps the most important figure in store economics is the cash-on-cash return ratio. This is also known as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Typically, investors want an EBITDA of around 40%.
If a restaurant location requires $800,000 in funding to build, has an annual earning projection of $2 million, and is expecting 20% margins, the EBITDA would be $400,000 or 50% cash-on-cash return. Each business model will employ different numbers and variables, but as a rule of thumb, a 20% profit margin is ideal.
When it comes to store economics, it is also important to understand how many locations the market can support and whether the supply chain can support growth. These external factors can also impact the success of a restaurant.
Social impact is becoming increasingly important to the ongoing success and longevity of a restaurant business, which is why this emerging factor should be considered. In today’s atmosphere, consumers want to support ethical and sustainable businesses. This means having a genuine mission and vision that affects how guests, employees, and suppliers are treated. Taking into account your restaurant’s social impact is not only the right thing to do, but also a fundamental aspect of building a leading brand. Having a clear purpose is one way to attract parties interested in investing in a restaurant with a strong identity.
The Sustainable Restaurant Group (SRG) is one example of how a business can have a positive social impact. They have made a commitment to voluntarily exceed standards to transparency, accountability, and performance when it comes to social and environmental issues. This is true when it comes to all stakeholders and not just shareholders. SRG has built a sustainable supply chain in order to support ocean health, has banned single-use plastic products, and has implemented renewable energy sources at each location. Through these efforts, they are reducing their impact on the environment and building brand loyalty.
Final Takeaways on Restaurant Investors
As you search for people to invest in your restaurant, know that each investor will have different goals and expectations. You will run into people who don’t have a deadline for exiting the partnership while others will want out in a set number of years. At the same time, angel investors may be happy with a 3x return on their capital while venture capitalists won’t even come to the table without the potential for 10x or more on their investment. Understanding your target investor will heavily influence other brand strategies.
Starting a restaurant can be an expensive undertaking. Working with investors is a financing option worth exploring. If you decide that it’s the right avenue for you, the next step is to work on honing your vision and ironing out the details of your business plan. Once you have the numbers crunched, you can start reaching out to investors and finding people who share your vision and want to help. Bringing investors onboard is a great way to find added support and reduce some risk.
How do I find restaurant investors?
Start by talking with other restaurant owners who have worked with investors. Don’t be afraid to ask questions and mine them for information. You can also join a food incubator and use LinkedIn to find interested investors.
How do restaurant investors get paid?
Investors can get paid through earning a portion of the dividends or when they sell their shares of the restaurant
What is a fair percentage for an investor?
Angel investors will expect a 20-25% return while venture capitalists who take on more of the risk will be looking for around a 40% return.
What do restaurant investors look for in a restaurant concept?
They will want to see a clear outline for four main areas: vision, management, store economics, and social impact.