David Steele, co-founder and executive chairman of San Francisco's Flower + Water Hospitality Group, jokes that his role is to create restaurants, not invest in them.
“A lot of people assume that because I have a background in finance that I'm rich and want to get into the restaurant industry,” said Steele, who is also a managing partner at One Wealth Advisors, an independent advisory firm. “I'm working on it,” he says. . “What a lot of people don't realize is that I'm a restaurateur, not a restaurateur.”
Although many financial experts advise against investing in one-off concepts, Steele says such arrangements can be successful.
Here's what you should consider before making the financial plunge into the restaurant industry.
“It's important to differentiate,” Steele said. That's because most individual restaurant investors are lifestyle investors who like the social prestige of owning a restaurant.
“The restaurant industry has become very romanticized,” he says. “And it attracts people who aren't strategic thinkers, people who have an abstract relationship with money. If you eliminate the glorified players who aren't real business people, the restaurant industry becomes more competitive than other industries. I don't think it's too risky.”
The National Restaurant Association estimates that before the pandemic, on average, about 60,000 restaurants opened each year and 50,000 closed annually. According to the association, there are 1 million food service restaurants in the U.S., a highly competitive industry, but the average pretax profit margin is only 3% to 5%.
“We believe that if you hire local investors who are passionate about your concept, they will become ambassadors,” Steele says. The group's Flour + Water restaurant had 11 investors, and the opening of three other restaurants (Trick Dog, Penny Roma and Flour) had about 25 investors. +Water pasta shop. “But I'm one of those weird people. A lot of people don't want a lot of investors because they think anyone can do it.” [difficult]. But I say ruin it, allow these people to open your business. ”
The symbiotic relationship between those with capital and those with ideas and operational skills creates a delicate balance.
For Steele, all of his passive investors are from the Bay Area and can eat at his establishments on a regular basis. No one is a partner. Instead, he shares a bulleted monthly income statement so investors can “take the temperature” even if most don't. He also hosts twice-yearly investor meetings to discuss menu evolution and renovations and listen to suggestions. This led him to add pasta to Penny Roma's menu and decline loud classic rock music.
“I was stubborn,” Steele says, but admits the investors were right.
Investing in such illiquid assets begins with setting appropriate expectations about the duration of the relationship. Steele says he always tells investors that he will consider their ideas, but he won't rely on them. “Very few restaurateurs are looking for active investors. In fact, I don't know of any,” Steele says. “I have known restaurateurs who have misled investors into thinking they would take an active role because they were unable to get funding from others because they were not aggressive enough in their search for talent. ”
New restaurants don't have a past history that needs to be verified through records or tax returns. Instead, would-be investors need to use some logic to test the numbers on the “reasonableness” of their predictions, Steele said. Make sure your business plan is well written and has a coherent story that aligns with local expectations.
So if the restaurant says it needs an investment of $1.2 million, the projected cash flow should be $400,000.
Find out how much it will cost to occupy and maintain your space, including rent, insurance, common area maintenance, and taxes. Industry standards state that this should not exceed 8% of sales. However, in New York City, it could be more than 10%, with occupancy costs “going down in some areas and up in others,” said Anchin, Brock & Anchin, food and beverage operations leader in New York. , says Greg Wank. .
When Mr. Steele needs an investor, he is willing to sell based on cash flow projections and the percentage of the business that will generate a return of 20% or more over a 10-year period.
For example, Flour + Water required less capital than his other restaurants, giving investors only 23% of the business, compared to 40% for Central Kitchen and Trick Dog, Steele said. say. “It's not the number of investors that matters, but the expected cash flow and the capital needed to open,” he says.
It's also important to consider how the Federal Reserve's interest rate hikes have affected investor views. Because interest rates are much higher, the risk-adjusted returns investors seek may be slightly higher today than in years past, Wank says.
Rather than focusing on cash flow, institutional investors interested in exit value should look at how companies hire the right people to expand their restaurants and chains, and how they invest in brands. You need to consider what you are doing.
Next, look for a restaurateur with experience. “The best investment opportunities are operators who have already successfully launched one or two locations and now want to build a brand, because the risk is not too high,” Wank says. Masu. “I would rather invest in owner-managers who have failed once in the past and have shown that they have learned the lessons from that experience and are now running a successful business.”
