considering investing $80,000 in a running profitable restaurant

[acer500ex]

A friend of mine has offered me a 20% share in his restaurant (we both live outside the US where the restaurant is located) for approximately $80,000. He started the restaurant about a year ago for about $160,000. The restaurant has been considerably profitable its current monthly profits are more than $10,000. Assuming the profits continue at $10,000 a month and because of my 20% share, I would receive 20% of $120,000 (assuming this is next years profit), which is $24,000. At this profit rate, I would get back my initial investment of $80,000 in about 3 years.

He is actually using some of the money to expand the restaurant, more delivery drivers, etc., so it is possible profits will increase. He needs to sell a share because he has been investing his profits in other projects.

I will be a "silent partner" so I will not be doing any work.

How does this deal sound?

[Freelancier]

I think you may not understand what 20% ownership entitles you to. The answer is: 20% of any dividends and 20% of the profits if it gets sold. It does not give you 20% of the profits each year unless every dime of profit is taken out of the business and put into the owners' wallets, and that rarely happens in a growing business. You also will have no control over whether ANY profits are taken out of the business each year, because you're a minority owner. Your job is to put up capital, advise when asked, and then be patient and hope you see your money again later.

That the person is your "friend" is nice, but friendships get tossed aside all the time when there are money issues. That he's supposedly making $10K per month in profits, but doesn't have $80K to put into the business for growth also bothers me.

So... you need to re-think the terms of your investment. If you want it to be a loan with a set payback period, do that and expect to get more of your money back. If you want to be an owner, you get the same payback as the other owners, which is where you get to own a business that hopefully someday will make you money.

[Ryan26]

Freelancier sad all..

Deal sounds sketchy to me as well.. Makes 10k+ but can't invest 80k.

Don't believe in friendships when talking about business and money. I had a friend who we worked together for couple of years and I know him from childhood.. One day he decided to close company but I told him that I'm taking it over for 100% than.. After 2 months he started to speak with our old clients to get them to his new company.. Sad for him, he still hasn't done anything.

[Harold Mansfield]

Tough business to get into, especially a partnership. I have a ton of restaurant/bar/club experience so I'd be comfortable investing in a good opportunity, but I'm not sure I'd do this one.
Do you have any experience in this type of business?

[Business Attorney]

Restaurants are almost always among the riskiest investments, even when the restaurant is already profitable. I have had friends with restaurants that were highly successful for a period of time and then tanked over a fairly short period of time.

On the other hand, there are two restaurants within a block of my office that have been serving Chicagoans since 1898 and 1927.

For most businesses, an investment at essentially 3 times current earnings would be a favorable deal. For restaurant, particularly one with only a one year operating history, that might not be the case.

In any event, you would need to do your due diligence to really get a solid grasp on the business and you should structure the arrangement to insure that there would be distributions from the profits.

[veritasvisions]

I work with a lot of restaurants, i know the owners really well, and consistently follow up with them, so I think i can give some incite onto what makes some succcessful and some not so successful even though i have never run one. Let me first talk to you about the most profitable and largest restaurants, then I'll talk to you about the least profitable ones that are losing a ton of business. One of my most successful restaurants does about 140k a month in gross revenue. His profit margin is at about 17%, which he told me, yes i have that close of a relationship with him. But his reputation is sooooooo good. He is consistently the number one restaurant on trip advisor in his area and has rave reviews on yelp as well. Even HE said that you don't get into the restaurant business to make money. My most successful restaurant owner owns 7 restaurants and does about 250k in revenue a week. The guy is freaking ruthless. Even I don't like him sometimes. But there are common denominators between the two men. He never told me his profit margin but from the first business owner i talked to, it took a crap ton of research and work to get his profits up to 17%. Normally a restaurants profits will be at about 6%-12% and that is if the owner is decent. I have a restaurant that is losing money every month, he absolutley sucks and I'll tell you why later in this post. Excuse my portuguese. If i were you, i would look at his merchant statements and see how much in gross revenue he is doing. In order to earn about 10k in net profit, he'd probably have to be doing 80-100k in business a month. Here are some things i think the successful ones do right and maybe this will help you assess your potential partner. I want to start off that i absolutley hate partners and would never have one so my opinion is a little biased.

1) They are always on top of things and always in their business. ALWAYS IN THEIR BUSINESS. READ THAT AGAIN. If you have an owner that is in and out all the time, that's a bad sign.
2) They have absolutely no feelings when it comes to not doing a job right, they dont lead with their hearts. They will fire bad employees quickly and with absolutely no emotion.
3) They have a extremely good reputations. Extremely good. Their food is top notch and their service is great.
4) They don't try to cut corners when it comes to buying high quality food. To have a good reputation and food, you have to buy the highest quality. However, they definetely bargain tremendously. I mean they are cheap asses. Seriously, i dont know what it is about really successful men but they will just try to bargain you down to the bone.
5) They hire and Pay well really great chefs. These are chefs that are extraordinary in the kitchen, are no drama, do not need to be managed much and work EXTREMELY HARD. Actually, the first restaurant owner hired 2 native born mexicans that are legal. He said that native born americans are extremely lazy and don't know how to work hard.
6) They have really great personalities and keep their guests entertained. This may sound stupid, but one of the main reasons they get a lot of repeat business is because the guests feel like they know and are friends with the owner.
7) They do not waste anything. They measure everything extremely precisely.
8) I just remembered that one of the reasons my clients profits are so high is because he personally serves people and his tips are astronomically high. He'll sell a $80 plate and get a $100 tip. So customer service is huge when it comes to profits.

Maybe that can help you assess whether you would have a potentially great partner. Now let me tell you what the most unsuccessful restaurant owners do

Here are things i noticed:

1) Most of the unsuccessful ones have other business ventures or, the worst, have a job. If your potential partner is too distracted, trust me, it will hurt his business. Unless he has astounding managers that care about his business as much as he does, which is possible but rare, i think you are running the risk of investing in someone that does not have a strong focus on your primary investment.
2) They try to buy the worst foods, meats, vegetables, in an effort to save money. This is the worst. The short term gain is not worth the long term loss in reputation.
3) The food is simply not that great and they are excessively wasteful.
4) They are not clean. I had a bad client, which is the type of client i prefer not to work with, who got shut down by the city because his cleanliness was not up to par.

Here are things you have to worry about consistently in my opinion.
1) Changes in city governance
2) Constantly being worried about food poisoning and getting sued.

I simply would not invest in a restaurant. it is not worth it in my opinion unless the owner is EXTREMELY STELLAR like the two successful business owners i mentioned above. But these guys would leterally die before they give up equity in their company and I am serious. So i would seriously question why he wants to give up equity in order to grow. I mean, if i had a successful restaurant and i wanted to grow, i would opt to get a loan rather then giving up equity. That would be awful in my opinion. If he is making the profits he says he is making, then he should be doing 80-100k a month which would qualify him for a merchant cash advance. Usually merchant cash advances will match your monthly revenue. And what they do is take out a percetage of your revenue from your merchant processing, around 10% for a period of time until the loan is paid off in full with points on top. Even though a loan like that would absolutely suck balls, it's still better then giving up 20% of your profits FOREVER. In my opinion ---> LOANS = GOOD AND I ENCOURAGE IT. EQUITY LOSS= NO WAY UNLESS there is some kind of strategic partnership like someone in the shark tank that could grow your business exponentially.

[Harold Mansfield]

I work with a lot of restaurants, i know the owners really well, and consistently follow up with them, so I think i can give some incite onto what makes some succcessful and some not so successful even though i have never run one. .

I always get nervous when someone starts a statement with this. :). I've worked for a lot of restaurant, bar and club owners who failed spectacularly because they thought knowing people and sitting on bar stools made them restaurateurs. The number is actually 6. When you watch 6 people fail because they had no idea what they were doing, didn't listen to those who did, and thought watching others was enough to be successful themselves, you get some great insights and specifics into how people fail.

Talking to people who own restaurants doesn't give you any real insight into what it takes day to day to actually run a restaurant, any more than knowing and talking to web designers teaches you how to run a web design business.

I've worked in and managed joints of all sizes in 3 different states. From bootstrap endeavors to people with millions invested. Vegas being the toughest market that eats bars and restaurants for sport. Usually what happens is you make adjustments once you are open to lean into the curve and do what works best in your market and for your target demographic.

Success in restaurants usually comes down to a few very simple things. Product, Service, Location, Management, Staff and Marketing. All of that other stuff could check every box and you can still fail. Some of it is just generalizations and operations that every chef or kitchen manager knows.

The #1 place where most restaurants fail is marketing, and lack of operating capitol.
#2 is bad management, and usually that's the owner with no experience trying to be a restaurant (or kitchen or bar) manager, or hiring a friend or relative with no management experience in the business.
#3 is bad product ( quality shortcuts), poor logistics, and bad service.

Sometimes it's the smallest thing that the owner is insistent on doing regardless of what the market expects (like serving beer in cans because they think it's cute), that can repeatedly lose you sales and return customers.

The bottom line is you have to find your own path based on what works for your business. But if you don't have the 6 things I mentioned, doesn't matter how driven or ruthless you are. It's a fickle business with hundreds of ways to fail. You could have a successful dive, or a failing bistro. Good management is key.

[acer500ex]

Thanks for the replies guys.

The restaurant is actually not in the USA, its in a country with a booming economy where costs of business are lower.

He is buying out the co-owner of the place who has been restricting expansion a bit.

Without getting into all the details, some of the reasons you guys think it is a bit shady are valid but because I know all the details they do not necessarily hold true in this case.

Like some of you said he doesn't want to sell 20% of profits, but doesn't have many options because loans are not an option for us.

Basically in the country where we are in cost of business are lower, you can open a restaurant for about $150,000 and as long as it is in a good location and you come up with good food, you can get that back in a year (profit). Of course like any business there are risks, some being that they could change "city governance" or that competitors could open up or the country could go into a recession.

Thanks again for your comments. Really helpful. It seems that 3 times earnings is a fair valuation for a restaurant give or take.

[Harold Mansfield]

Thanks for the replies guys.

The restaurant is actually not in the USA.

Then I'll be the first to say that maybe some of my general statements about capable management are true, but I would never propose that I know what it takes to run a successful restaurant or any business in another country. Especially not even knowing what country it is. And it doesn't sound as if you've asked for any management advice, we just went off on a tangent.

As far as the financial risk, you seem to already know them. Our advice based on how it's done in the U.S. probably won't apply much. If you've evaluated the deal and think it's fair as a business interest, that's what matters.

Sounds like you're weighing the same risk as anyone else would with the exception that you're in the unique position here to be the only one who knows the area, economy, and business culture, so honestly, you're the only one who can answer your own questions since we have no idea if you're talking about Argentina or Zimbabwe.

[billbenson]

My guess is its something like Barbados

[acer500ex]

Not Barbados.

Think wealthy stable countries in the middle east like Kuwait, Bahrain, UAE, Saudi Arabia, and Oman.

Doing business in these countries as a foreigner comes with its own challenges but the profits can be easier to make.

[billbenson]

That was my second guess

[mrinc]

I think any investment in a "high-risk" business like restaurants, lounges and clubs should be approached with caution in general, but it looks like you've got a nice conservative plan. Who is your equipment financing through? I ask because my best friend's family owns a restaurant in North Carolina and they've found that by simply shopping around for better financing for high depreciation equipment (everything in a restaurant kitchen) they really added to their bottom line. The company they use for their equipment financing apparently saved them about 14k annually and the interest was far less than they were paying before. But its making those minor adjustments, IMHO that really drives ROI. You may want to look into something like this as well.