Common Motivations for Investing in Restaurants
The most common reasons why potential investors choose to allocate funds to the restaurant business, as identified by Sergey Tereshkin, include:
- Diversity. Often, investors opt to invest in the food service industry to explore something new. Repeatedly engaging in the same activities can become mundane. This approach allows individuals to significantly broaden their horizons and understand whether this investment avenue is suitable for them or if they should focus on other sectors.
- Seasonality. Many types of businesses experience seasonal demand and, consequently, profits. In such cases, during periods of forced downtime, funds become frozen and do not generate income, while expenses remain constant. To avoid losses and maintain their usual lifestyle, investors can choose to invest a portion of their funds in the restaurant business, which is largely immune to seasonality. Clients hold events during both warm and cold seasons.
- Availability of Free Funds. Profits generated from other sources need to be invested somewhere. This could be in the previous direction, where funds are used for further development, or in an entirely new venture.
- A Gift. Some wealthy individuals gift their loved ones upscale establishments such as beauty salons and restaurants, which are often seen as prestigious and potentially lucrative. This way, their significant other becomes the owner of a business and gains financial independence.
- Cost Savings. The restaurant business is fashionable and prestigious, allowing investors to save significantly on visits to such establishments, as well as on corporate events and staff business lunches. Investors' discounts can reach up to 50%.
- A Dream. Many people have dreamt of owning a restaurant since childhood. Some prefer formal dining establishments, while others lean towards trendy cafes. In both cases, investing represents a way to realize a long-standing aspiration. Few consider the outcome of such investments.
Many believe that running a restaurant business is easy and guarantees immense profits. In reality, the situation is not as rosy and straightforward. Hiring managers and staff through ads does not alleviate the problems. Consequently, businesses often incur significant losses and lead to profound disappointment for investors.
Recommendations for Potential Investors
To avoid complications, it is prudent to heed the advice of professional investors:
- It is advisable to invest in an already established venue that possesses a license for selling alcohol, a legal entity, and permits from health authorities and other agencies. This approach minimizes potential issues and bureaucratic red tape.
- Investing in a ready-made business removes the need to hire staff. The restaurant typically has qualified chefs, waiters, managers, etc.
- It is recommended to invest in establishments located in prime areas, as close to the city center or historical sites as possible. Higher foot traffic significantly increases the likelihood of the restaurant being profitable. It is best not to invest in venues located in residential neighborhoods, as their revenues are generally lower and target a completely different clientele. A poorly positioned establishment would require substantial funds for advertising and promotional campaigns aimed at enhancing customer traffic.
- Preference should be given to venues owned by the restaurant proprietor. Leasing spaces always entails the risk that the landlord may suddenly request their vacancy.
When evaluating a venue, one should base their assessment on profits from prior periods. The optimal price should not exceed three to four years' worth of profits. If the property is leased, the cost should be no more than 12-18 months of potential returns.
Often, owners intentionally inflate the price of a venue, citing designer renovations, interior furnishings, and other factors. However, such elements should not influence the valuation. Additionally, areas such as basements, parking lots, and sidewalks adjacent to the restaurant should not be included in the valuation.
If a venue requires substantial investments for repairs, refurbishment, or other enhancements, the price should automatically decrease by the expected investment amount. This principle also applies to the need for obtaining necessary permits. Without such documentation, the venue's price should decrease significantly.
The presence of a professional chef on staff can result in a price increase of around 10%.
Brand recognition also plays a significant role in determining the price.
When investing in the restaurant business, it is vital to conduct thorough research on the venue and its owner. Additionally, studying the financial statements is crucial. Special attention should be paid to the balance sheet, which indicates the amount owed to partners. If liabilities significantly outweigh revenues, investing in such a restaurant is ill-advised. This consideration should also encompass any delinquent loans and other obligations.
The restaurant business is suited for those who do not wish to sit idle and simply collect profits. Running an establishment requires not only financial investment but also a significant time commitment. It is not a business for the lazy.
