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Cooking & Restaurant Management/What to propose to an investor of my restaurant?

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QUESTION: Hi Gregory,

My question is the following.  I own a small pizzeria and I have been in business for almost a year.  A good friend of mine is very interested in investing in a second location and would simply put the money while I manage things.  
I am still not sure what to propose but would the following make sense:  He puts the money to open the second location and I'd be in charge of running the operation.  As far as ownership, we'd go 50-50 and basically divide the profits.  In the case however  that business goes downhill, and loses money, his money would be at risk.  What could I offer him in this event? Perhaps I assume 50% of the risk.  So basically if his $20,000 investment fails, and we close down the restaurant, I pay him $10,000?  
What would you suggest?

ANSWER: The answer depends on what the investor wants as a return. Does his ROI simply include a small stipend after his principle is returned? Or is it continued profits over the life of the business? Lots of questions to ask here. As well as do you really need him? If you have a successful first business, you should be able to leverage that for the seed for the 2nd location.

Also, why are you giving him 50% based on such a small investment? I would offer something less than 50% so that I maintain control. He's just a money investor not an equity investor.

Lastly, without knowing how you have your business arranged, makes it hard to offer you any direction.

Lots of questions here with too few answers.

---------- FOLLOW-UP ----------

QUESTION: Thank you for your promp response Jeff!

HereŽs a little more info:  

My plan is to offer him 50% equity only in the second location  (I would still retain 100% ownership in my current pizzeria), I guess similar to that of franchising? This seems to be fair as he is putting in all the money.  Essentially, heŽd assume all the risk.  

As far as ROI, lets assume he wants to be co-owner and thus reap profits for the life of the business (again, only the second location), ie, an equity investor.

I have still not discussed any details with him, however, I do know he is very interested and eager to invest in my business and has said is very flexible. He is a family friend, has his own flower business and is much older than me, so perhaps he could also provide valuable advice.

With my current pizzeria I have managed to merely break-even in a year and dont any funds to open a second one on my own.

I want to be ready to propose him a fair deal.  What do you think?

Answer
1. I think you get the 1st profitable before you move onto the 2nd.
2. No one gets 50%. You retain 60% ownership - minimum. If you want to give him 50% of the profits that's one thing. But ownership and the decision-making that goes into multiple restaurants needs focus not a committee. This is your brand. He's buying into it and you.
3. I don't care if he's your brother, this is business and you need to present offers to him and negotiate until you have a deal. His advice is for his position not yours. It is never about the relationship. It's about the negotiation.
4. It's not about fair. It's about profits. What does the business need to be profitable...leadership, capital, equity, etc...

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Jeffrey Summers

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I am the Founder & Owner of Summers Hospitality Group. We have over 300 years of successful experience in operating and consulting with chain, franchise and independent restaurant & hotel operators around the world. Check us out on the web for more information at http://SummersHospitality.Group or call us toll free at 888-998-8744.

Experience

We have experience on any topic related to the restaurant & hospitality industry - from Menu R&D, Menu Engineering, Marketing Strategies, New Store Openings, P&L Analysis, Lease Negotiations, Staffing, Policies & Procedures, Building & Design, Site Location, Branding, PR & Promotions, Multi-Unit Development, and any other area effecting the operation of your business.

Organizations
The National Restaurant Association. The Society of Hospitality Management. The Gerson Lehrman Leisure & Lodging Council The Professional Business Coaches Alliance The International Council on Hotel, Restaurant and Institutional Education Several state restaurant & hotel associations.

Publications
My articles and opinion pieces have been featured on several industry websites, magazines, blogs and forums including: The Wall Street Journal, USA Today, RestaurantOwner.com, RestaurantEdge.com, FoodService.com, RestaurantReport.com, Restaurant Startup & Growth Magazine, Money Mgazine, American Express' Briefing Newsletter, Nation's Restaurant News, 22 State Restaurant Association Magazines, and much more.

Education/Credentials
I hold degrees in Economics, English, Culinary Arts and industry certifications in Hospitality Management and Restaurant & Catering Management.

Past/Present Clients
Here's a list of some of the brands we have worked with: Hardee's Super X Drug Stores Connie's Pizza Burger King Chili's Long John Silver's The Purple Sage Bistro Applebee's Shoney's T.G.I. Friday's Century 21 House of Realty La Dolce Vita Pastries & Catering Wal Mart 5 Seasons Sports Clubs Wendy's Bennigan's Riverside Publishing Godfather's Pizza Ovations Dining & Entertainment Romaine's Stew's Microbrewery & Eatery Xerox Food Service Double D's Sourdough Pizza and literally hundreds of other Independent Operations.

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