What to consider when investing in a restaurant
June 21, 2018 (Investorideas.com Newswire) Over 20% of restaurants in the UK closed down in 2017, fuelled by Brexit negotiations, a weaker currency and growth of takeaway apps. Investing in the restaurant business can still be very lucrative, but investors must treat with caution and we provide some important things to consider when investing in a restaurant.
Your starting price
There is a difference between investing in a new restaurant or one that has been trading for several years. For a more established restaurant, you need to assess how much you are investing and whether you are getting the appropriate stake in the business.
For instance, in a tough market, you may be able to pitch for a higher stake given the urgent need for cash flow. Similarly, whether the company is profitable or losing money puts you in a good bargaining position to potentially ask for higher equity in the business.
Any outstanding debt?
It is essential to do due diligence on the business and its financials. Understanding whether the company is cash positive or has a lot of debt can be the difference between getting involved or not. You need to ensure that the business is not relying heavily on your injection of cash and when it might become profitable.
Any quick wins?
Is there anything that you can bring to the table that will help the company's bottom line or productivity? This could involve bringing in new chefs, new staff, new menus, new suppliers or even looking at the commercial side of the property and saving money through lease restructuring.
When a business's rent comes up for review, it is a golden opportunity to negotiate better rates with landlords, freeing up much needed capital to help run a restaurant.
Level of competition
How competitive is the surrounding area for restaurants? Is there demand for your product or not enough? Understand your target audience whether it is families, high-end or couples will help you determine whether or not the business can stand the test of time.
Potential for growth
How do you intend to achieve a return on investment? Does the restaurant only have potential to be in one location or can you roll it out across the city and the country? Are there opportunities to increase revenue through doing more takeaways or selling branded products in supermarkets? A good investor is able to see the bigger picture and have an understanding of the market's appetite.
Do you have quality staff representing the company? This includes managers, chefs and waiters. Do you need staff who have prior experience and do you have a capable manager?
Product quality and availability
Do you have access to the ingredients you need to meet the demand? KFC have notoriously closed down stores in the last year due to running out of chicken. Whilst it can be exciting to grow a restaurant and bring new items to the menu, it is not commercially viable if it is expensive to source and there is a limited supply.
Daniel Tannenbaum is a marketing consultant who has worked with several loan and finance providers in the UK. He is a regular contributor to The Huffington Post, Business.com and TechRound.
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