Starting and running a successful restaurant is one of the most difficult challenges in business. Getting your dream funded may prove to be an even greater challenge, but don’t lose heart. A well thought through idea and strategic plan combined with solid business skills may well overcome the objection of limited restaurant experience.

Why do you want to do this?

Running a restaurant appears glamorous to many aspiring restaurateurs. If you can cook or love to entertain, you may be fueled by encouragement by friends or family. Possibly, you have a menu item that you just know the world at large would drive miles for. Maybe you’re tired of your day job and just want to be your own boss. But be honest with yourself. Do you have a solid plan, resourcefulness and the fortitude to overcome all the unexpected challenges ahead? This will be the first question a potential investor or lender will ask.

Why this question?

Every business opportunity has a potential upside balanced with risk. You’ve probably heard the statistics. The restaurant business has one of the highest failure rates. In fact, the April 2019 issue of FSR Magazine (Full Service Restaurant) www.fsrmagazine.com reports that 60% of restaurants don’t make it past the first year and 80% go out of business within five years. This fact clearly explains why savvy investors and lenders have traditionally shyed away from funding restaurants.

If the driving force within is still sending you a strong message to open that restaurant, then I encourage you to follow that dream!

Your ideal funding source:

There are many types of Investors or lenders all with different goals, requirements and expectations.

Angel Investors are usually high Net Worth individuals looking for interesting business opportunities that also offer a high level of return for the amount of perceived risk.

Venture Capital firms are looking for the next Starbucks www.starbucks.com where they can make a generous return, and then profit handsomely from an “Exit Strategy” when this empire is sold to an even larger empire. Are you the next Ray Kroc building a better McDonald’s www.mcdonalds.com?

Banks, Credit Unions and other lending institutions exist by earning interest on loans and investing customer deposits. Due to timing and other market conditions they are always looking for potentially strong entrepreneurs and new businesses in which to lend.

Seasoned restaurateurs are often looking to expand their own brands with new locations or to even franchise. If a successful restaurateur doesn’t have their own plan at the moment, you may be able to interest one in yours. Again, this will be determined by the potential of your opportunity, the strengths you bring to the table and your proposed location.

Crowdfunding www.crowdfunding.com and www.gofundme.com is an interesting phenomenon not to be overlooked. Believe it or not, there are many people out there willing to support someone else’s cause or opportunity. Its worth exploring even on a small level.

Finally, there are family and friends that may be eager to support you and your plan. Depending on their resources, you might find all the funding you need or at least part or all of a necessary down payment.

First steps / your business plan:

Your first mission is to get your strategy down on paper. Think of this exercise as a roadmap to your venture’s future success. After all, you’ve heard the old saying, “you can’t arrive at your destination if you don’t know where you’re going”! Its imperative to have a clearly thought out plan that does not overinflate your strengths and smarts, but also demonstrates how you will overcome the obstacles ahead that are guaranteed to come your way.

A realistic and well crafted business plan will be expected by potential investors, but it will also help focus your ideas and provide guidance as you move forward. As an aside, a checklist and timeline to opening will also serve you well as you proceed.

Potential lenders and investors will expect to see the following:

- A concise one page Executive Summary of the opportunity

- How much money you’re looking for, what you’ll spend it on, how and when you’ll pay the money back and the investor’s Return On Investment (R.O.I.) or the lender’s Principal and Interest

- Will you own the real estate or lease space from a landlord

- Your proposed form of Organization for the business (Limited Liability Company, Corporation, etc..)

- Market research that supports the opportunity

- 3 years minimum of Financial Projections (conservative and worst-case scenarios)

- A Marketing Plan (how you will get new and repeat customers and build a brand)

- Timeline forward to opening day

- Your relevant business and/ or restaurant experience and that of your team

Owning vs. Leasing:

Owning the property has several distinct advantages over leasing. The investor/ lender will have a security interest in the property making the investment more appealing, while lessening the risk to the investor. There are additional tax advantages through depreciation on the building besides the furniture and equipment and most importantly, you are not at the mercy of an indifferent landlord.

By owning the property you can control your destiny. I’ve seen several successful restaurants and other businesses lose their lease and be forced to move their location. Often, finding a new location may be miles from the old and possibly even in another community. After years of blood, sweat and tears building a loyal customer base, these once successful businesses struggled to regain their following in the new location, and some were even forced to close their doors. You may have to start all over again to rebuild your business if forced to move.

Aside from the pluses mentioned above, owning the property means you will need more money to fund your project in addition to you being required to contribute a larger down payment.

Let’s look at leasing and take a closer look at landlords. They are always looking out for their best interests. Things may be all well and good for your business in the first few years until the landlord decides he can make more money by tearing down your space and building condos. I’ve seen this happen.

When you sign a lease you are generally committed to that space for a minimum of three to five years. What happens if your business does not succeed? Will your lease agreement allow you to sublet the space? Are you willing to assume the risk that the sublessee will succeed? How many months can you sustain your lease obligations in order to find someone to sublet the space?

Assuming you are doing well, what happens when inevitable problems develop with the space. The roof leaks, the heat or air conditioning goes on the blink, the parking lot needs repaving, there is a strong septic odor, etc.. Will the landlord be willing to make necessary repairs that affect your business?

Also be careful for expensive escalation clauses in your rent payments once the first term of your lease has expired, in addition to “CAM” or common area maintenance charges that inflate the amount of monthly rent you will pay right from the start.

These are some of the risks that investors or lenders will take a close look at while evaluating your plan that may affect your chances of getting funding. For these reasons, careful due diligence is essential with lease agreements, and investors/ lenders will expect that you retain a competent attorney to look after yours and the lender’s best interests.

The time / income conondrum:

Starting a new restaurant is all-consuming and a hands-on business. At least for the first year or two (and possibly more), you will need to be on-site far more hours than your current occupation requires. During this time of getting the business on its feet, how will you support yourself if you leave your primary income source to start this restaurant? Do you have a supportive spouse or other partner prepared to make the sacrifices necessary to help you succeed?

Debt vs Equity:

You have two choices. You can borrow and repay the money (debt) or consider giving someone an ownership stake (equity) in your business. There are pluses and minuses to both.

Although you may get a loan, banks are not expert restaurateurs and generally won’t help you run your business. By contrast, if you have a strong concept in mind and a great location secured, finding an investor/partner could be a real benefit if your potential partner has extensive experience in the business and/or has additional strengths that would increase your chances of success.

Loans:

Nothing in life comes without a price and lenders are not in the business of losing money. To borrow, you need assets and lenders will require security. Usually this means signing both a personal guarantee that you will pay back the money if the business does not succeed, as well as a lien on your house or other valuable asset. Know that it may take many years of successful operation and positive cash flow performance before a lender will agree to release the lien on your home or personal property.

Depending on where you live, there may be many competing banks or lending institutions. Possibly there are large regional banks near you with offices in many states, in addition to small local banks that support and are supported by the local community. Opportunity is where you look for it and you won’t know which type of institution offers you the greatest chance of approval due to timing, market conditions and/ or other factors in the bank’s best interest, so it's only smart to apply to several banks, credit unions or financial institutions.

Lenders work by committee. In order to get the loan you first have to convince a loan officer of your sound idea, experience, commitment and chances of success. The lender will then need to take your plan to committee for approval which commonly takes many weeks. You should realistically plan on at least two months or more from submission of your business plan to a loan closing date. You may spend many weeks waiting for an answer only to be turned down, so its imperative to have a “Plan B.

If you are approved for the loan, you will have to provide the lender periodic reports on your progress, cash flow and financial position. Last, lenders will expect you to contribute a minimum of 20% of the loan in the form of a down payment as your “skin in the game”. If you’re not willing to invest your own money in this venture, why should the lender?

On the plus side, you may be able to negotiate an interest only loan to keep your payments low for the first year before paying down principal, and you won’t have to share profits with the lender or give up any degree of control or decision making. Also by applying to several lenders, depending on the strength of your plan, you may be in a position to negotiate best terms to your advantage if several lenders show interest in funding your venture.

Equity:

Right off the bat, wouldn’t it be great to share the risk with an experienced partner and not have to pay back the money? If you get along well with this partner and have complimentary strengths, you will seemingly be able to achieve more much faster and increase your chances of making a go of the place.

Will you still move forward if your investor partner has no restaurant experience? Ask yourself if they will be a silent partner or have the right to weigh in on major decisions?

On the flip side, challenges here include anything from minor disagreements on how the business should be run to overbearing partners, major conflicts of interest, lack of equal time spent in the business and other frustrations. Will your potential partner also expect you to contribute a similar or equal amount of money in addition to your concept and location? How will you decide how much your partner’s investment stake is worth and how will you determine the ownership percentages?

Know that Partnerships have similarly high failure rates as do new restaurants for the above reasons and more.

Refining your pitch:

Its called an “Elevator Pitch” for a reason. You have just a few short minutes to compel a potential investor/ lender to take a closer look at your idea. How well can you describe your opportunity and what’s in it for the funder in two minutes?

Take plenty of time reading and re-reading your business plan focusing on the greatest strengths of your concept and idea, and then practice delivering your pitch over and over to anyone who will listen. Only then will you be prepared to approach potential investors or lenders.

Networking:

Everything comes down to networking. To find your money, you will need to open many doors and talk to many people. After all, you never know who you know that might also know someone looking for your opportunity.

The internet is a marvelous resource that may provide the key to launch your venture. Start by searching for restaurant investors or restaurant investment groups.

The “Service Corps of Retired Executives or SCORE” www.score.org is a volunteer organization of retired and former successful business people in many communities. These professionals and business mentors will help refine your business plan, strategize your opportunity, point out areas of weakness and even provide other network contacts all for free. That’s right, SCORE is comprised of dedicated volunteers who are looking for nothing other than to help. Fortunately, if there is not a SCORE location near you, the virtual world allows you to work with them remotely.

Many metropolitan areas or areas of wealth have Angel Investor Groups. These individuals often pool their funds to share the risk and return of a potential opportunity, while business community incubators exist in progressive areas looking to create jobs and grow the local economy.

Finally, if you’re going to be in the restaurant business you should join both the National Restaurant Association www.restaurant.org as well as your State Restaurant Association. These organizations provide invaluable knowledge, resources and lobbying activity in order to benefit the restaurant and hospitality industry as a whole. They are also a great place to meet other restaurateurs through industry shows and other events.

Follow your dreams:

The restaurant industry is a leading contributor to the healthy economy of our nation and is both a passion and calling for many of us. If you truly believe in your idea, work hard, find others with complementary strengths and follow your dream, you can succeed in this business.

Be prepared to make endless phone calls and often lengthy discussions of your opportunity. Although many of these discussions may be discouraging, know that this process only makes you stronger for your next pitch.

Here’s to finding funding and creating your restaurant future!

For more information on starting and running successful restaurants, you can subscribe to the Restaurant RockStars Podcast for free at this link: https://restaurantrockstars.com/podcasts/

Roger Beaudoin is a 21 year veteran restaurateur who founded and operated four high-volume restaurants. He is CEO of www.restaurantrockstars.com, host of the Restaurant RockStars Podcast, a personal restaurant Coach, industry speaker and author of “Rock Your Restaurant.. a Game Changing Guide to Restaurant Finances to Maximize Your Profit”.