The Secrets to Funding Your Restaurant

To an aspiring restaurateur, the challenges of funding a business can seem overwhelming. Young restaurants have a notoriously high failure r
Serious Eats
November 12, 2010

To an aspiring restaurateur, the challenges of funding a business can seem overwhelming. Young restaurants have a notoriously high failure rate, and no investor wants to put money against the odds. But for every thriving restaurant out there, there was a moment when the forces behind it struggled for funding.

 

Whether you're an accomplished chef, a seasoned manager or part of a third-generation family restaurant, it's important to remember one thing: a restaurant is first and foremost a business. Dedication, culinary skill and passion may catch an investor's eye, but that startup check won't be written until you've demonstrated that you can run a viable business.

 

To find out the secrets to securing funding, Serious Eats talked with a couple of our favorite restaurant owners to get their advice. 

 

Get Educated

Education, formal or otherwise, is a strong first step. Chef Ken Oringer, who's opened six acclaimed Boston restaurants in addition to his flagship Clio, earned a degree in business management before he set foot in the kitchen as a chef. "You open a restaurant with your head," he says, "not your heart. It doesn't matter if you're the best chef in the world if you don't have a viable business on your hands."

 

Chef Donald Link of New Orleans earned "most of a finance degree" before opening Herbsaint and Cochon. Even without a full formal education, Oringer recommends at the very least taking a few business courses at a local college. "If you don't have a basic sense of law and contracts and accounting," he said, "you'll be paying someone $200 an hour to run those areas for you. Better to learn it yourself."

 

Do Your Homework

It's critical to crunch the numbers and do the legwork on your project before looking for money. "You've got to take into account rent, labor, food, equipment and all of that as a percentage of total sales," said Chef Link. "Restaurant margins are extremely small. If you don't apply a little common sense, looking at projected sales, profit, and costs, you're in trouble." 

 

Spend the time to accurately gage the funds you need. That doesn't just mean a few back-of-the-napkin scribbles about average checks and covers. Until you've thought about how many hamburgers you need to sell at lunch to break even, whether or not you'll close over holidays, how many rolls you'll pile in a bread basket, and how many napkins each customer will use, you haven't adequately thought it through.

 

Says Oringer: "You need a menu breakdown, a pro forma, earning forecasts, interest calcuations. If you're looking at a $2 million restaurant and you're dealing with 15 percent interest, that adds an enormous amount you'll have to pay back. You need to think all these things through before you get in a room with investors." Demonstrating profitability with this sort of rigor will give investors confidence that they want to take a risk on you—and give you the confidence to present yourself well. 

 

Think Long-Term and Prepare For the Worst

While in the early stages of designing your restaurant, you may find it hard to think past the first year, but it's critical to think further down the road.

 

"Sign the longest lease you can," says Link. "The last thing you want is for your restaurant to take off, have to resign the lease, and find that the landlord has tripled the rent." Oringer agrees on the importance of long-term planning, particularly with regard to the restaurant concept. "You have to make sure your idea has legs," he says. "You don't want to leap on the latest trend. You've got to consider—will the concept still be able to make money ten years from now?" Thinking ahead is essential for a fully formed business strategy.

 

Even before you get to that point, a good business plan should factor in the worst case scenario. Do you have enough funding to ensure that the restaurant can stay open even without a single customer walking through the front door for the first three months? The first six months?

 

Spread the Risk

Unless you've got a tidy chunk of change tucked away, funding a restaurant is the quickest way short of an Atlantic City bender to send yourself spiraling into debt. Even the considerable upfront costs you'll project and account for are likely to balloon out of control faster than you anticipate. So the more widely you spread the risk, the less likely you are to bury yourself in debt you can't get out of.  

 

"When I opened Herbsaint," said Link of his highly regarded New Orleans restaurant, "there were four of us—myself, my father-in-law, and two others." Each partner made a contribution, and together, they took out a loan to finance the restaurant. "Over time, my father-in-law and I bought the others out, but in the beginning, it just made sense to go in on it together."

 

Choose Your Partners Wisely

That said, not every partner is a good partner. "It's like a marriage," said Link. "If you're going to put everything in your life on the line for a restaurant, you'd better trust the people in it with you." 

 

Link has first-hand experience of what bad partnerships can do. He made the mistake of joining as a third partner in a Northern California restaurant, where he was eventually pressured to invest five times more money than was agreed upon. Link walked out. "I learned one important thing at that restaurant: Choose your partners wisely," he told us.  "Know how everyone's going to contribute. Make sure that you share the same goals and visions. Make sure everything's cut and dry."

 

Outside Investment is Good… But Autonomy is Often the Goal

Of course outside investment, when you can secure it, can be critical to getting a restaurant off the ground. But keep in mind that when you're the one devoting your life to launching the restaurant, you'll ultimately want to retain control, and eventually, total autonomy. "At this point," says Oringer of opening his later restaurants, "we pay back our investors within a year to fifteen months. It means that, early in the life of the restaurant, we're making all the money ourselves." "When we opened Cochon," Link said of his second New Orleans restaurant, "we didn't want outside investment. It was worth the initial risk to keep the restaurant all in our hands.

 

"At this point, we've bought the building, too. When you spend 10 years pouring your heart and soul and entire life into a restaurant, you want it to be yours at the end." 

 

Establish A Good Track Record

"It's worth it to bite the bullet and not make much money at first," says Oringer, "in order to pay back investors as quickly as possible. Since we've done that in the past, investors now trust that we'll get their money back to them."

 

He adds, "given the state of the economy, our investors now see us as a safer alternative to the stock market." Now that's the sort of confidence you want to instill. 
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