Running a Restaurant/Restaurant Partnership
QUESTION: Hello Rick: I was involved in opening my first restaurant with 2 other partners. Unfortunately, days before we were ready to open the partners (husband & wife) decided to cut me out and take over the business. I took them to court and have been winning but it is still going to take time. The whole concept, business plan, menu, you name it everything was done by me. Now after just 2 years the restaurant has closed and is up for sale. I am looking to buy it with the help of an investor. I had a meeting with the investor today. He has proposed a 30/70 split. The sales of the restaurant is between $375,000 to $400,000/ year. The rent is excellent just at $2300/month.
The restaurant is selling for $150,000. My investor will buy it and I will be responsible for running it. But my concern is that just a 30% stake in the business does not even give me enough money to pay my monthly expenses, which is minimum $5000. Should I ask for a salary and if so how can it be structured? Also, I made it clear to the investor that at some point I will want to buy him out. He said I can but at market price. How can this be structured? What I will be happy with is for my monthly bills to be paid off and I am working towards buying the investor at some point. Please advice on some deals that I can present to the investor to meet my goals. Thank you.
ANSWER: Dear Nik,
From what you stated, I would have an attorney involved with every step of this process!!!
Yes the rent numbers are fantastic!
The restaurant needs to make a profit with you taking a "managers" salary. $60,000 is not unreasonable.
Everything else, including the sales price hinges on the profit and loss statements and what you are going to get for $150,000.
If it is just the "name" and some used equipment, it probably is not worth it. (sounds to me like the name is worth zero!)
Consider starting your own place......it sounds like these owners did not do you any favors in the past.
---------- FOLLOW-UP ----------
QUESTION: Hi Rick: Thank you for your advice. I am negotiating with my investor and have asked him for a salary till I am able to buy him out. BUT, I think I might just have to let this one go or wait it out till my law suite against my partners is settled. BTW, I just had a major victory in court against them, where the court found that the Operating Agreement that they presented in court is a purported one. Because of this they have closed the restaurant and have put the business for sale.
I am considering starting my own place and as a matter of fact a profitable restaurant just came into market. The reason they have closed its doors is because of family feud. Many including me, are surprised that they closed. Its a well known place and everyone I have spoken to have all mentioned of how busy this place was. Following are some numbers that I got from the owner.
• 2011 Sales - $760,000
• Cost of goods sold - $237,000 (this to me is high and I am confident I can bring it down below 25%.)
• The restaurant has 50 seats with a full liquor license.
• Labor cost - The owners did not have a professional system to manage costs and have advised that I use my own experience and knowledge to gauge this.
• Operations costs approx. - $125,000 that includes –
• Current rent-- $5056.08 (the rent is in line at 8.3% against sales). The rent increases at 4% a year. That starts March 15.
• The lease is for another 3 years and 4 months with an option for a 5 year renewal. The taxes are 50% of any increase. This year that was $2500.
• The Repairs and Maintenance for 2011 was about $17,000 which includes all service contracts such as refrigeration, pest control, hood cleaning, as well as other inspections that need to be made. (This expense can be brought down).
• The Utilities for 2011 is just about $28,000 which includes gas and electric billed by ConEd and water and oil billed by the landlord. (This is high and can be brought down).
• Around $11,000 for insurance.
• Dishwasher leased from Ecolab, which runs about $200 a month.
Most of the kitchen staff are available including the main chef.
I am thinking to offer (seller/owner) to take a down payment of $75,000 for the purchase of the restaurant and the rest paid off in 3 to 5 years. She will receive an annual 5 to 8% interest on the amount due on a monthly bases. This way the initial investment is less and the rest can be paid off from the business itself. I think I can negotiate and get the restaurant at $150 to $175,000 with this kind of a financing deal (she is asking 200k for the business). The ideal situation would be to buy her out which will bring down the price of the business under $150,000. I will make sure to have the option to buy her out at anytime before the 5 years. What do you think?
It sounds like you have done your homework and have the needed acumen to run a sucsessful operation.
My only advise is to work with an attorney on all the steps to protect your interests.
I,m sure you are aware of the risks involved and the fact that the restaurant will consume your life for years to come.
Most people that write to me think it is a game or a hobby. Not so my friend......give it your all and make sure it is something you truly love to do.
Also, always try to negotiate to where you put in a little of your own money as you can.