The restaurant business has a lot of charms for the outsider but as an investor, you need to look past them and take a close hard look at the reality of the situation. There is no denying that owning or having shares in a restaurant can be quite a profitable business, but just like any other business, the success of your investment depends on a number of factors. Therefore, if you are thinking about stepping into the restaurant business without sufficient prior experience, here are a few points that you should probably consider and evaluate beforehand.
Active vs. Passive Investing
As mentioned before, it is important for you to step out of the romanticized concept of the restaurant business and step into the shoes of a practical investor. If you have been approached with a plan for investing in an establishment instead of owning one, understand and decide whether you want to be an active investor or a passive one. Know that most of the investors in the hotel business are passive; which means that while they do have a say in the workings of the restaurant, they neither partake in the establishment’s day-to-day activities, nor are they expected to. The opinions of a passive investor are still taken into account by restaurateurs, but there is no guarantee that those opinions will be given value at the end of the day. An active investor is one who is intricately involved in the workings of the business and takes decisions for the restaurant on a regular basis. While that’s what most inexperienced investors might be looking forward to, most restaurateurs have no interest in an active investor.
The Investment Itself
Whether you are just a passive investor or the owner of the business, you need to review the business plan and make a very real estimate of whether or not you think it would be a profitable venture. A rule of thumb is to not invest in any place, which has a cash flow of less than one-third of the total investment. Also, you must take into account each and every small investment as the owner to make sure that none of the money is wasted on equipment you don’t need. While buying restaurant equipment, make sure that you invest in things that last, like the high quality Manitowoc Ice Machines in my own little diner where they have been in use for years without breaking down even once on me to date. It may seem like you are saving money by going for cheaper equipment in the beginning, but you will lose much more later in repairs and lack of service during a busy business day.
Occupancy Costs and Scalability
The rent, the insurance money, the maintenance costs and the taxes together should not exceed 10% of the total sales of the restaurant. It could be lower, but it shouldn’t be higher. An investment by nature is a thought for the future and that future won’t be very bright without the proper employees and a good amount of effort in establishing its brand name through chain expansion. Along with expanding the business, this will make sure that you have exit value when necessary.
There are, of course, other factors in the restaurant business such as the estimated rate of return on your investment and you cannot ignore any of them. Nevertheless, the most important thing is to never forget that it’s a business and not a romanticized dream like Hollywood movies have taught us over the years.