8 Funding Sources For Your Restaurant

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QUESTION From: Lindsey in TX

“Hi, I am going through old posts, doing some research and saw you offer advice to a coffee shop owner almost a year ago. My husband and I are in the process of opening a coffee shop - bakery including the sale of adult beverages to go. We are in one of the fastest growing counties in the US. The area we are developing has 33,000 cars drive by a day. We will have the most emphasis on the drive-thru but also a small seating indoor and outdoor for approximately 20 people. We are looking for someone that may be interested in investing or venture capitalists. Do you have recommendations for seeking funding for our new business? My family has owned a bar and restaurant for over 40 years and we are ready to open on our spot but with a little different twist! Thank you for your time, look forward to hearing from you.”

HH ANSWER:

When you say your family has owned a bar and restaurant for over 40 years, the first thing an investment bank or VC is likely to ask you is- “Which members of the family have been running the restaurant for 40 years and are they the same members of the family that will be opening the next one?”.

Additionally, any seasoned investor will want to see a complete set of financials illustrating past success and a detailed global snapshot of the proposed business in order to assess viability and demonstrated fiscal responsibility that will include: the use / allocation of all funds, debt coverage ratio, break even and solid return.

I’ve worked with several people who had grown-up in family businesses and worked in them for years only to go off on their own (or with one or two other family members) believing they can replicate the team’s previous successes only to realize (and in some cases never realize) that they grossly under-estimated the value, commitment and efforts of the entire team.

(See the children’s book: Mike Mulligan & His Steam Shovel - it’s a book about a guy who digs some of the world’s greatest and most important tunnels and holes with ‘some others’...then sets out to go at it alone and ends up only being able to do one job because he gets stuck in the basement.)

I’m not saying you lack the support, commitment, experience or skills necessary to kill it in your next venture, but I am saying that 40 years of a successful family business is largely irrelevant when you’re talking about starting a different business that won’t be run by the same operating team. So, if that’s the hook for an investor, I’d focus more on friends & family as a source for start-up capital.

That being said, here are a few ideas on how to fund your new restaurant (the specifics and applicability will depend on whether you are leasing, purchasing or already own the real estate):

BOOTSTRAPPING

With your own loan(s), funds and/or funds of friends and family:

Mattress Money / Sale of Assets

HELOC (Home Equity Line Of Credit)

401k Withdrawal (+penalties and taxes for realized ‘income’)

LOC (Line Of Credit from existing business)

SBA 403/4B Loan

Committed pool of capital from Friends & Family

STRATEGIC LANDLORD ALLIANCE

(e.g., with TI and/or a Percentage Rent structure)

More than half of all deals I’ve worked on have included TI (tenant improvement dollars)from $50/psf to $1.5MM or more including full build-outs down to the china and glassware. How that is negotiated is crucial because you don’t want it simply ending up essentially being alone that is gradually paid back via increased rent payments. A Landlord’s willingness and flexibility to negotiate often depends on the unique qualities both parties bring to the table (i.e.,Tenant’s background, PR, concept, past success, etc... and/or on the Landlord side - it depends on whether or not the restaurant concept is an amenity to the building, fills a unique niche in their portfolio, acts as a driver for another investment, etc...

Also relevant is how many and what other projects the Landlord may have going on at the time, how leveraged they are with their own financing and how motivated their investors might be to claim a particular Tenant....or a tenant at all.

This free guide might be some help to you - but to give specific advice, one would need specific details about you, your location, the surrounding community and the Landlord(s):

BIG FAN / LOYAL GUEST INVESTMENT

Investment from / Partnership with Big Fan & Loyal Customer of existing establishment who’s been saying: “You should have your own place” or “Why don’t you open a place near....”

VC / PRIVATE EQUITY

From a firm who sees success in your existing model (in a variety of demographics / markets) and values the replication systems you have in place for possible expansion outside of your current market.

FRANCHISOR ASSISTANCE

Assistance from franchise company (some groups have unique loan programs based on your existing assets and future sales (Most groups don’t...but some may be amenable to such an arrangement if it’s structured in a clear & simple win-win fashion).

CROWDSOURSE FUNDING

From organizations like GoFundMe, Kickstarter, Patreon, etc...

In addition to crowdsourcing, there are a few people (with a cult-like following) who have been successful in what’s known as ‘Crowd Product Funding’ or CPF in which you’re basically pre-selling your product... and that can take countless forms (speak to your attorney to be sure it won’t cause problems down the road with the IRS or SEC) like a membership to a Dinner Club.

I’ve structured a few launches using pre-paid VIP Memberships to fans of an existing chef and operating partner.

(Think gift cards, no-cover access and exclusive benefits to “Founding Members” that range from complimentary apps & bevs to no banquet room charges, free delivery, free valet, etc..)

Your imagination may be the only limit on structures like these. But they do require a base of loyal guests who already know you and/or love what you’re already doing.

RESTAURANT COLLECTIVE

Although I have never structure a deal like this… Another potential way to find a restaurant might be in pooling the limited resources that exist between two or even three groups - All seeking to open a similar concept. Although they say “too many cooks spoil the soup.”, I am of the opinion that it might be very possible for an independent third-party (who is capable of vetting two or three parties individually and collectively) can successfully negotiate a partnership wherein a single unit could be developed with the express understanding that another unit would open after meeting certain financial benchmarks and be run independently or collectively. At that time the partnership could be dissolved and individual ownership could ensue.

EMPLOYEE INVESTORS

Then there’s always the co-op model where some restaurants have proved that every employee is a stakeholder and equity partner in the business.

Here are just a few articles that discuss the benefits:

https://www.shareable.net/struggling-san-francisco-restaurant-transforms-into-a-worker-owned-co-op-video/

https://www.eater.com/platform/amp/2018/5/21/17369640/co-op-restaurants

https://medium.com/fifty-by-fifty/employee-ownership-drives-success-at-newport-restaurant-group-bdd21a6f183b

Good luck! And let me know how do you decide to move forward.

Josh Sapienza