Many a chef dreams of opening his or her own restaurant and sharing their unique food vision with the world. However, to many, this dream seems unattainable and difficult for one key reason: financing. Opening a restaurant can be extremely expensive, and few chefs have sufficient funds in their bank accounts to make it happen alone.
So how does a chef go from restaurant daydreams to real-life restaurateur? Typically, the solution comes by way of outside investments. From bank loans to private investors, these are the funds that can help a restaurant come to fruition. Here, we’ll discuss the basics of how the process works.
Why seek out investors? The costs associated with opening a restaurant can be intimidating: according to a recent poll of over 700 restaurant owners via Restaurantowner.com, the average price of starting a restaurant is $494,888. Of course, as an average, this means that there are plenty of restaurants which fall under that financial mark, as well as many that stretch well above half a million dollars to get started. This sort of investment is simply impossible for many chefs or entrepreneurs without some help.
This is where investors enter the equation. By seeking out investments, the chef or would-be restaurateur is able to raise money to make their restaurant a reality. Often, a restaurant is funded by not just one investor but many, including bank loans and private investors.
For investors, their contribution will be paid back with interest, so that while they contributed the money, they don’t really have to do any of the hard work of opening the restaurant to see a return.
Seeking investments for your restaurant: what you need to do. Because the restaurant industry is volatile and many a new restaurant doesn’t survive, it’s important to make your project appealing to investors. You need to do your homework to help prove that your concept is killer, will be a success, and is a great investment.
Here are some ways you’ll want to get your ducks in a row to make your idea appealing to investors.
- Decide what type of restaurant you want to open. You’re going to have to virtually build your restaurant before you open it physically. This starts with choosing a theme for your restaurant. Is it going to be a rustic farm-to-table affair with communal tables and local cuisine? Or a funky fried chicken joint with bright colors and loud music? The options are endless, but to seek out investments, you’ll have to crystallize your vision of what you want to sell and who you envision as your customer base, so that you can clearly convey it to others.
- Decide where you’d like your restaurant to be. Where will you open the restaurant? Will it be in a busy downtown corridor, or in a quiet residential neighborhood? In a trendy but up and coming area? While having an exact location would be ideal, this is not always possible before securing financing, so start by deciding on the area in which you’d like to open your business.
- Create a business plan. Now it’s time to make a business plan. In the case of opening a restaurant, your business plan is a strategic plan of how you envision your future eatery shaping up. This includes what you plan to do to open the restaurant, how you will market and promote it, and how and when you plan to do it. Writing a business plan is helpful for potential investors to “see” your vision; at the same time, this will also be helpful to you as potential restaurateur to solidify your vision and goals. There are plenty of templates and guides online to help you create a business plan.
- Calculate your financial needs. This can be part of your business plan, but it’s such an important step that it bears specific mention. You need to figure out exactly how much money you are going to need from investors. This means figuring out what your costs to open a restaurant will be, including rent and deposits, build-out, equipment, employee salaries, and any other costs that you will incur in the process of opening your restaurant.
- Apply for a loan at the bank. Often, the bank will be your first step for seeking an investment. It’s a good idea to go to a bank you already have a relationship with. At the bank, you’ll be guided through a lot of paperwork and questions, and you will have to supply your business plan and personal or business tax returns. This process can take a little while, so it’s important to get working on the previous steps early.
- Court private investors. You can also seek out private investors for your restaurant. There are people who specialize in restaurant investments; often, this type of investor can bring more than money to the relationship, such as restaurant expertise and business acumen. They will usually know what to look for in a good restaurant investment.
- Crowd-sourced investing. Another type of investing is through crowd-sourcing, via websites such as GoFundMe.com or Kickstarter.com. This is a great way to obtain investments from friends and family within a structured setting. It is suggested that if you do obtain investments from friends or family, you have clearly drawn paperwork which details the terms of the investment and pay-back. You don’t want your restaurant to be the thing that breaks up your friend or family relationships!
Possible roadblocks: these are some common roadblocks you may encounter, and how to persevere.
- A similar restaurant opening in your chosen area. You want to open a Southern fried chicken restaurant in a hip and trendy neighborhood. Problem: a Southern fusion food restaurant just opened, and is getting rave reviews for their fried chicken. Do you have to trash your plans? Not necessarily. However, you do need to re-evaluate if your restaurant is still unique and competitive. If you think both eateries can survive in close proximity, be sure to make this clear in your business plan. If you don’t think your restaurant will work closely to a similar restaurant, you will either need to choose a new location or alter your restaurant plan.
- Getting turned down for a loan. Banks have various reasons for turning down loans. It might not feel great, but it’s not personal; they have just decided it is not a safe investment for their establishment. Don’t despair; try to make this experience useful. Ask the bank why you were denied, and take this as an opportunity to strengthen your business plan. You can try again at a different bank.
- Investors backing out. You thought you had a sure-fire investor, but at the last minute, they backed out. This isn’t encouraging, but it is part of the process of raising money. The good news is that if your business interested one investor, chances are it will attract others who will follow through. Always be optimistic, but don’t count on an investment until the paperwork is signed.
- The waiting. Honestly, when going through the process of financing a restaurant, the waiting is absolutely the hardest part. It’s difficult, but hold on to your dreams and remember why you want to open your restaurant. It’s that passion that will keep you going.
Conclusion: Securing financing for a new restaurant is certainly not for the feint of heart. It involves a lot of paperwork, a lot of planning, tons of research, and a lot of selling yourself. It may seem discouraging at times, but once you have secured your financing and see the wonderful day when your restaurant’s doors open to the public, it’s all worth it in the long run.
Have you ever secured financing for a restaurant project?