How to raise capital for a Restaurant Business

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My long time friend got laid off last month. He has been trying to get back on his feet but at the age of 45, it is difficult to find a good job. He is an excellent cook. I gave him the idea of starting a restaurant as he is really an awesome cook. It is truly his passion and his food is as tasty as it gets. At first, he didn't think he could pull it off but now he is at least considering it. Problem is, he doesn't have a lot of capital to cover the start up costs that will include leasing a place and decorating it etc.

Are there any Angel Investors or VC's that are open to supporting great chefs? Some quick google tells me investors are shy due to the high failure of new restaurants. That's why I don't want to encourage him any more without at least giving him some decent advice on how he can get help raising capital. 

Thanks in advance for responses.

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rent a truck and open a food truck.

rufflesinc said:   rent a truck and open a food truck.
  That was the first thing I offered. If he can't find an investor that's what he will do. Thanks my friend. 

The only thing worse than a home cook who is confident he can pull off running a commercial kitchen is a home cook that isnt confident he can pull off running a commercial kitchen.

Have your friend cook for everyone - if he's that good then people will invest, but restaurant businesses are also a dime a dozen and that ones that do stand out are delicious and/or good at marketing.

Take whatever money he has and learn a new skill..large restaurant chains are closing all the time and they have capital and systems in place. He'll make more money cooking for someone without the pressure of paying rent food and payroll before he makes any money. Do not let your friend do this... Btw.. I was in the same position in 2008 and burned through 150k opening and closing a restaurant and my brother has been in the restaurant business for over 30 years... I'm now back doing engineering and much less stress..

letsspendlotsofmoney said:   Take whatever money he has and learn a new skill..large restaurant chains are closing all the time and they have capital and systems in place. He'll make more money cooking for someone without the pressure of paying rent food and payroll before he makes any money. Do not let your friend do this... Btw.. I was in the same position in 2008 and burned through 150k opening and closing a restaurant and my brother has been in the restaurant business for over 30 years... I'm now back doing engineering and much less stress..
  Thanks for the insight. He is my childhood friend. I would hate to see him end up broke. If you don't mind, can you share some of the reasons why it didn't work out for you? Also what are the things he should be careful about in case he ends up opening a restaurant?
 

"Triple Peaks"

Is being a good cook all it takes? Even if one loves to cook, they're sure to get sick of it cooking all the time for people they don't even know. Besides, he can't be there being the only cook. He's got to employ others.

On the otherhand, my first job was at a restaurant. Taco Bell. Often I was "chef." I hated it, plus I was a horrible cook. The customers always came back, even though the food was crap.

ZenNUTS said:   "Triple Peaks"
They have a lot of those places in thailand

I researched this heavily a few years ago since someone asked me to invest. There was a delloite analysis into the restaurant business I found via Google that was eye opening. They dive into the financials of the restaurant business and how to optimize things on the business side. They talked about pricing, inventory management, food supply, seating, size of restaurant, etc. It was very informative, yet daunting. One fact that sticks to me, the best run franchises make a 8% profit margin, but individual ones are lucky to have a 0-4% margin. The only reason the franchises get that high is because of their supply chain management and experience in the field

Bottom line is I much rather invest in a great manager who's done this before rather than a chef. I think one is much harder to find than the other. Plus every chef thinks they're good, and most people outside of the culinary field aren't qualified to judge.

Do your research. I learned a ton looking into this, but I will never invest in this field.

burgerwars said:   
On the otherhand, my first job was at a restaurant. Taco Bell. Many times I was "chef." I hated it, plus I was a horrible cook. The customers always came back, even though the food was crap.

  heluva business model

Almost the worst bet in business. 19 failures out of 20. Playing chuck a lucks games in vegas have better odds.

AaG12 said:   I researched this heavily a few years ago since someone asked me to invest. There was a delloite analysis into the restaurant business I found via Google that was eye opening. They dive into the financials of the restaurant business and how to optimize things on the business side. They talked about pricing, inventory management, food supply, seating, size of restaurant, etc. It was very informative, yet daunting. One fact that sticks to me, the best run franchises make a 8% profit margin, but individual ones are lucky to have a 0-4% margin. The only reason the franchises get that high is because of their supply chain management and experience in the field

Bottom line is I much rather invest in a great manager who's done this before rather than a chef. I think one is much harder to find than the other. Plus every chef thinks they're good, and most people outside of the culinary field aren't qualified to judge.

Do your research. I learned a ton looking into this, but I will never invest in this field.

  Thanks for the insight. 

Newyorker1905 said:   My long time friend got laid off last month. He has been trying to get back on his feet but at the age of 45, it is difficult to find a good job.
 

Not sure why being 45 prevents one from getting a good job?

It's been a month. Tell him to keep looking and put away this pipe dream about opening a restaurant for now.

He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.

meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  the OP doesn't say anywhere that the previous job was as a cook or in a restaurant

meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 
solarUS said:   
Newyorker1905 said:   My long time friend got laid off last month. He has been trying to get back on his feet but at the age of 45, it is difficult to find a good job.
Not sure why being 45 prevents one from getting a good job?

It's been a month. Tell him to keep looking and put away this pipe dream about opening a restaurant for now.

  
He is looking for another job. He was making a decent salary but he is ready to take less but so far not much luck. He will keep looking of course. 

Don't do it. You admit he has little to no experience in the industry. There is a huge jump in cooking for a dinner party and learning all the safety codes and scaling things up to feed the masses. Before he even thinks about it he should go find a cooking job in an established restaurant and get some experience.

Newyorker1905 said:   
meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 

Not sure exactly what his role in IT was, but unemployment rate in IT must be under 1% right now. And comp increases have been high over the last few years.
PM me if you want - I'd be happy to give more specific info if I know where he is located and in what specific area of IT he is looking.

Newyorker1905 said:   
meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 

  
Then he has absolutely no business starting a restaurant. You gave him a silly idea.

meade18 said:   
Newyorker1905 said:   
meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 

  
Then he has absolutely no business starting a restaurant. You gave him a silly idea.

  Hi meade1

After reading all these comments, I feel like I did. That's why I love fatwallet. It brings a different perspective to you.

BostonOne said:   
Newyorker1905 said:   
meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 

Not sure exactly what his role in IT was, but unemployment rate in IT must be under 1% right now. And comp increases have been high over the last few years.
PM me if you want - I'd be happy to give more specific info if I know where he is located and in what specific area of IT he is looking.

Hi BostonOne

He is a network security guy. He is working with some recruiters already. Thanks for your offer. I will let him know if he is interested. If yes, I will provide his email address to you. 

Depending on the market, he could look for personal/Home Chef opportunities. It takes time to build a reputation and a solid list of clientele but if he's as good as you say then it's an option.

Newyorker1905 said:   
meade18 said:   He's an excellent cook? Why did he get laid off then? Was the restaurant he was cooking for going under, by chance? And you suggest he get into the restaurant business? The logic here is mind blowing.
  
He is an IT guy. He never worked as a cook. Hence he is trying to research the idea. 
solarUS said:   
Newyorker1905 said:   My long time friend got laid off last month. He has been trying to get back on his feet but at the age of 45, it is difficult to find a good job.
Not sure why being 45 prevents one from getting a good job?

It's been a month. Tell him to keep looking and put away this pipe dream about opening a restaurant for now.

  
He is looking for another job. He was making a decent salary but he is ready to take less but so far not much luck. He will keep looking of course. 


 Even a pay cut to get back into IT will be way more than he'll  make in a restaurant and near ZERO risk. Remind him to keep up with current technologies and skills, he's 45 and still has 20 years of working before retirement. 

Throwing some probabilities of success.

Restaurant failure rate in first year is 70%. So only 30% make it first year.
For reference point. Failure rate of a tech startup having an IPO, 97%. Only 3% make it to an IPO.

Newyorker1905 said:   
letsspendlotsofmoney said:   Take whatever money he has and learn a new skill..large restaurant chains are closing all the time and they have capital and systems in place. He'll make more money cooking for someone without the pressure of paying rent food and payroll before he makes any money. Do not let your friend do this... Btw.. I was in the same position in 2008 and burned through 150k opening and closing a restaurant and my brother has been in the restaurant business for over 30 years... I'm now back doing engineering and much less stress..
  Thanks for the insight. He is my childhood friend. I would hate to see him end up broke. If you don't mind, can you share some of the reasons why it didn't work out for you? Also what are the things he should be careful about in case he ends up opening a restaurant?

  Reasons for failure... Timing and location.. 2009-2010 was brutal on the best restaurants. We had awesome BBQ food but our area in Michigan was in a near depression. Location of a small town in a large building with $5k rent and heating a 7000sqft building was crippling. 

A franchise like Los Pollos Hermanos from Braking Bad would be a better opportunity. If you know someone in the drug cartel that needs to launder money would make your chances of succeeding much better.

I am in the financing business for small business. I recommend if he has good credit go to lending club, etc and try to get some capital. On the equipment side, equipment leasing/financing is basically the only way to go, but expect 20%+ rates due to it being one of the highest failure rate industries. If you want help DM me but I only know of 2 or 3 places that will finance a start up restaurant for equipment. I have been in this industry for 20 years unless of course he wants to put together business plan etc and go to bank and try to get an sba loan which will be the best bet.

javaman2003 said:   
For reference point. Failure rate of a tech startup having an IPO, 97%. Only 3% make it to an IPO.

  but they don't have to IPO to make money right? They can sell to another company?

letsspendlotsofmoney said:   Take whatever money he has and learn a new skill..large restaurant chains are closing all the time and they have capital and systems in place. He'll make more money cooking for someone without the pressure of paying rent food and payroll before he makes any money. Do not let your friend do this... Btw.. I was in the same position in 2008 and burned through 150k opening and closing a restaurant and my brother has been in the restaurant business for over 30 years... I'm now back doing engineering and much less stress..
 Fits your handle name created two years before the business venture.

javaman2003 said:   Throwing some probabilities of success.

Restaurant failure rate in first year is 70%. So only 30% make it first year.
For reference point. Failure rate of a tech startup having an IPO, 97%. Only 3% make it to an IPO.

Not having an IPO is not necessarily a failure. I've had multiple companies get purchased and those exits have been very lucrative.
Also, private profitable companies can be very successful. No need for IPO if you don't need the money.

javaman2003 said:   Throwing some probabilities of success.

Restaurant failure rate in first year is 70%. So only 30% make it first year.
For reference point. Failure rate of a tech startup having an IPO, 97%. Only 3% make it to an IPO.

  They have different timeframes. Also, a company like Instagram that was sold to Facebook for $1 billion would be considered a failure according to your comparison.

javaman2003 said:   Throwing some probabilities of success.

Restaurant failure rate in first year is 70%. So only 30% make it first year.
For reference point. Failure rate of a tech startup having an IPO, 97%. Only 3% make it to an IPO.
 

  You should compare Restaurants IPO's with Tech IPO's

"...According to Dun & Bradstreet reports, "Businesses with fewer than 20 employees have only a 37% chance of surviving four years (of business) and only a 9% chance of surviving 10 years." Restaurants only have a 20% chance of surviving 2 years. Of these failed business, only 10% of them close involuntarily due to bankruptcy and the remaining 90% close because the business was not successful, did not provide the level of income desired or was too much work for their efforts. The old adage, "People don't plan to fail, they fail to plan" certainly holds true when it comes to small business success. The failure rate for new businesses seems to be around 70% to 80% in the first year and only about half of those who survive the first year will remain in business the next five years..."

http://www.moyak.com/papers/small-business-statistics.html

I get the impression working in a restaurant is a better deal than owning one.


fire!
Disclaimer
TravelerMSY said:   I get the impression working in a restaurant is a better deal than owning one.
  but there are clearly many restaurants that have been around longer than a few years. The trick is illegal immigrants and lots of unreported cash. Just don't get greedy and be this guy. I ate at his restaurant once before the fire, it was ok.
=14pxAlmost exactly one year after five young Mexican immigrants — three of them  teenagers — died in a Novi residential basement fire, the man who hired them, drove them to work and gave them a place to sleep pleaded guilty to a crime that could send him to prison for 10 years: harboring illegal immigrants.
http://www.freep.com/story/news/local/michigan/oakland/2017/02/0... 

TravelerMSY said:   I get the impression working in a restaurant is a better deal than owning one.

When I worked at one I got the same impression. If the business fails there's no responsibility. If a fire or earthquake destroys the place, no responsibility. If you were a good employee, it should be easy to find a job at another restaurant.

Another problem with fast food restaurants are robberies. I was held up several times in the 1 1/2 years I worked at Taco Bell. It was a company owned store. Not fun having a gun pointed at you. Just give them whatever cash there is. No need to be shot over several hundred dollars.

try unusual way to get money
lendingclub.com
prosper.com
kickstarter.com

Skipping 30 Messages...
I am one the morons who lost money in the restaurant business. I invested in a limited partnership due to family commitments (I could have easily not invested but I am sticking to my story). The concept was great - an upscale restaurant which was projecting about half of comparables up the street. The founders were professional restaurateurs and also owned a Michelin star restaurant.

1. Most of what everyone has written here is true. Investing in a Restaurant business is basically pissing money away.
2. The limited partnership vehicle is the preferred method of several new restaurants mainly to blunt risk on the part of the principals.
3. The principals made money from consulting fees etc - all this was specified but left a bad taste in my Mouth when the investment turned south.
4. Even if a restaurant is making money there are several periodic expenses like makeovers, etc that can be potentially ruinous to the investment. In my case I did not participate in further fundraising exercises so I was diluted over time but in the end everyone lost everything so dilution didn't matter.
5. I used to receive monthly reports and so could see the slow motion train wreck a year or so before it happened.
6. The whole operation was surprisingly professional- the offer prospectus laid out risks very clearly and I received annual K-1's on time. The monthly and quarterly reports were detailed and clear.
7. Investment was open to accredited investors only.

The restaurant failed due to mostly the usual reasons plus - 4 months were heavy losers every year since it was in a wealthy but touristy town, disputes with the landlord (with whom they had a profit sharing agreement)and increases in labor costs due to the wage inflation in the state they were based in.



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