Financing Your First Restaurant Project

By Brice Jones, Founder, Jones Hospitality Group

Restaurants Are Historically Risky Investments. But like any operating business, great investment is built upon a unique concept, experienced team and minimal capital investment. Once armed with these, a would-be restaurateur must find a way to capitalize the project, which 9/10 times are through private investment from friends, family and interested equity investors.

In this chaotic marketplace, there is equity out there for finding investments for food and beverage projects, but it is much more scrutinized then it used be; now requiring more in the light of due diligence from those looking to invest.

Giving the Investor What They Want

No matter whom you’re looking to sell your idea to, whether it is a Wall Street tycoon, former successful restaurant operator or even friends and family, they will need to see the same materials to feel comfortable with investing. This is often High Returns (usually upwards towards 40% a year), Experienced Team (Management, Contractor, Architect, Consultants etc), an Outlined Concept with Sample Menus, Design and Décor sections, a Start Up Budget with built in contingencies and working capital, and most importantly: detailed Projections (Profit Loss, 10 Year Income Statement, Balance Sheet, Payroll) with Investment Returns. Once these parts are well developed, they can be implemented into a business plan or teaser to present to your investors in a professional manner.

The most crucial part of successfully raising investor equity is through structuring the terms of the investment.

Setting up Investment Structure

The most crucial part of successfully raising investor equity is through structuring the terms of the investment. This is often done by offering Shares in the business (equity), offering Bonds on the business (equity without voting rights), offering Notes on the business (debt that the owner has to pay down every year before taking out profits).

While offering Notes and Bonds are pretty straightforward, they hurt cash flow and at the end of the day do not offer investors the high returns they seek. These forms of raising capital paired with the risk of the food and beverage investments often are not the solution to raising capital. Equity partnerships (where investors are held to limited or no control of operating details or company decisions) are often the best way to structure the investment with there being two distinct tiers to the investment, divided around the Break Event Point (B.E Point). For investments structured arround the B.E Point, investors often recieve 70-100% of the distributable profit (profit after Net Profit and Cash Reserve) until the B.E Point is reached, and 30-60% of the profit after the B.E Point is accomplished. Often these investments are ongoing, but sometimes they are capped as 5, 7, or 10 year investments until the full distribution is allocated to the Managing Partnership.

While offering Notes and Bonds are pretty straightforward, they hurt cash flow and at the end of the day do not offer investors the high returns they seek.

Other Notes:

No more Key Money

• In this market, cash is king, and many investments are requiring less cash or key money up front by accepting debt in the form of preferred notes structured out of cash flow in the following years of operating. Key money deals are slowly deteriorating due to the amount of defaulting business curently out there.
• It is also important to remember that minimizing start up investment directly increases financial returns. Though on the flip side, one has to be careful on decreasing start up capital by taking on monthly expenses that hurt cash flow, because ultimately cash flow is what drives your investment return. The goal here is to find a happy medium.

Landlords can Help

• In this terrible commercial real estate market, there is the option of having landlords cover a percetage of the cost of renovation/build out. For landlords, there is value in this as the cost can actually be less then the cost of tenenating the property, as well as value in securing a successful tenant in a long-term lease.

Buy the Real Estate with the Bank’s Help

• Debt is a great instrument when collateralized appropriately, especially since this real estate market is undervalued. Real estate loans are often collateralized off of the real estate itself rather the owner’s home; creating minimal risk in buying commercial real estate. This also creates a huge value to investors in the ability to hedge their investment by adding multiple revenue streams and controlling restaurant occupancy expenses.

About Brice Jones

Brice Jones is the founder of Jones Hospitality Group, a financial services company for food and beverage operations. Jones Hospitality Group, LLC assists in raising start up capital, business plan development, structuring F&B investments, as well as operational consulting in the areas of payroll, inventory, and cost management. JHG is pioneering the idea of free-lance food and beverage development for would-be restaurateurs and entrepreneurs, creating real opportunities for experienced operators and investors alike. You can reach Brice via phone at 646.344.2619 or email at Bjones@JonesHospitalityGroup.com. Jones Hospitality Group can be found on the web at www.joneshospitalitygroup.com.

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