Turning a restaurant idea into a fully functional operation or growing a successful business can take many months (or years) of hard work, and a tremendous amount of working capital financing. There’s a common idea that building a successful restaurant is all about sweat equity and personal sacrifice, as if the only option is maxing out your retirement savings and credit cards to finance the business. But tapping your personal resources might not generate enough money to build out a restaurant space or expansion idea and get started; plus you would be risking your own financial future. Investment capital is generally a better bet—if you know how to get it.
Where Working Capital Financing Might Come From
Restaurateurs and restaurant owners have several avenues for securing capital financing, and your business attorney can provide specific guidance about which are open to you. Vast sums of capital are needed to launch a new restaurant; these are the most common areas where that money comes from and when it makes sense to leverage them.
Friends and family. Friends and family members are a natural funding source for restaurateurs. Aspiring restaurant owners can dazzle their target audience with a few delicious meals as proof of concept. Personal loans can get sticky when the terms aren’t clearly defined; protect these relationships by creating a promissory note outlining the details.
Crowdfunding. Using Kickstarter or another crowdfunding platform might help a restaurant raise the final $25,000 or $50,000 it needs to open its doors, but this strategy probably isn’t going to generate enough capital for an entire restaurant launch. It’s also a lot of work for restaurant owners who have to manage distributing and accounting for any rewards offered by the campaign. A chef-owner who wants to focus on perfecting their menu can’t afford to get bogged down with crowdfunding. But again, it’s a strategy to consider when a restaurant needs just a small amount of capital and has a large network of supporters it can tap.
Bank financing. When friends/family loans and crowdfunding aren’t options, or only cover a portion of startup costs, entrepreneurs might look to bank financing next. The challenge of securing capital financing through a bank loan is that restaurants often don’t have adequate hard assets for collateral. The bank may be able to collateralize fixtures, furniture and equipment (FF&E), but these assets don’t have much value—especially after the restaurant has been open for a while and its FF&E have depreciated. A restaurant’s liquor license may also be valuable collateral to a bank depending on the laws in that jurisdiction, among other considerations. (Questions around collateralizing and transferring liquor licenses involve regulatory issues and should always be discussed with your business attorneys.)
Sometimes a business owner feels so strongly about their restaurant concept that they’re willing to put up their own property as collateral for a bank loan. Naturally it’s a big risk to give up stocks or take out a second mortgage on your home in order to secure capital financing, but it’s something to consider and discuss with your advisors.
Loans backed by the Small Business Administration are another possible source of financing for restaurants. The SBA may be more willing to make a loan that’s not secured by hard assets than a private lender would be.
Landlord financing. In certain circumstances, underwriting a restaurant’s capital expenses is an attractive opportunity for its landlord. With so many businesses being forced to close by the pandemic, there are currently a great deal of empty commercial spaces and buildings being rehabbed by entrepreneurial investors. Getting a well-known restaurateur to lease some space is a better bet than leasing a space to an unknown entity. If the landlord is sufficiently eager to get that restaurant into its building, they may advance the money for the buildout and startup costs. That can work out great for the restaurant owner, who gets the money they need to get to their grand opening. And for the landlord, a successful restaurant will bring in profits for many years to come. But if the business fails and defaults on the loan, the landlord now owns a functional restaurant that it can turn around and lease out again at a premium.
Private placements. Private placements were hugely popular pre-pandemic. While the landscape has changed somewhat, there are still private investors eager to put their money into the next big restaurant. These kinds of deals can be a good way to raise large amounts of business capital. A limited number of investors (say, around 25) are approached with a private placement offering to buy equity shares of the restaurant. If the business and its owners have a proven track record of success, some investors will likely be willing to buy in.
It’s essential to work closely with your business attorney on private placements because these deals involve securities and are therefore highly regulated. How strict the requirements are depends on whether investors are accredited or non-accredited. Accredited investors are high net-worth individuals who meet certain SEC criteria and are allowed to make private and/or risky investments.
Jurisdictional considerations are also important for private placements. If its investors are spread across multiple states, the restaurant (or their business attorney) has to navigate the securities laws of multiple states. Still, private placements can be created efficiently and they often prove to be a very successful capital financing tool for restaurants.
Joint ventures. A joint venture allows two or more parties to combine their resources to work toward a common goal. A restaurateur brings a great concept and a track record of success to the deal, while one or more high net-worth investors contribute the capital financing. Investors might sign on because they’re fans of the chef and love supporting the restaurant business or simply because this particular restaurant seems like a good investment. In any case, a joint venture must be negotiated and structured very carefully. Your operating agreement should be clear about who does the day-to-day work, how profits are shared, the length of the venture and other details.
Joint ventures can be an attractive financing option for many reasons, including the fact that they don’t involve bank financing. We’ve seen that be important for restaurant clients who need more money but already have a bank loan that prohibits junior liens (i.e., second mortgages). We’ve structured these joint ventures in a way that allowed those clients to get a loan, pay it back over several years at a nice interest rate and not run afoul of any regulatory banking issues.
Approaching investors to form a joint venture is something an experienced business consultant can help with while your business attorneys will advise you and structure the deal. Sassoon Cymrot Law, LLC has an extensive network of industry connections to share with clients including business consultants who have relationships with high net-worth restaurant investors.
Sassoon Cymrot Law, LLC’s attorneys use our decades of experience and our connections to get clients the best possible deals, allowing them to focus on what they really care about: opening a great restaurant. We’ve helped countless restaurant clients secure the capital financing deals they needed to open their doors and keep them open. Contact us today.