The restaurant industry is in expansion territory, according to the National Restaurant Association’s latest statistics. In November, the Restaurant Performance Indicator (RPI), which tracks the health of the U.S. restaurant industry, stood at its highest since July 2023. Restaurant operators also have a positive outlook on the months ahead, according to the association’s Expectation Index.
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This all cooks up good news for investors with a restaurant appetite.
“In addition, the higher-interest-rate environment has increased (restaurants’) costs to service their debt, making operators prefer more than ever to raise outside equity from investors instead of borrowing if possible,” says Greg Wank, food and beverage practice leader at Anchin, Block & Anchin in New York.
This coupled with the Federal Reserve’s rate hikes mean “investors may see more opportunities and can possibly demand a better valuation on their investment,” he says.
So the time may be ripe for investing in a restaurant — but not without doing your homework first. Here’s what to consider before financially diving into the restaurant industry:
— Think long and broad.
— Choose the right structure.
— It’s all about people, people and people.
— Consider the customer base and local market.
— Review the financials.
— Consider a restaurant’s scalability.
Think Long and Broad
The first thing to know about investing in a restaurant of any size is that it’s a long game.
“You should plan with the understanding that this investment is unlikely to pay off for at least two years — typically longer,” says Jonathan Kleeman, a hospitality operations specialist who has opened three restaurants in London.
You also need to take a broader view when evaluating a restaurant as a business, he says. For example, does the restaurant have a rental or lease agreement, or a longer-term property investment?
“Increasingly, I advise people to think about restaurant ventures as part of a larger investment package,” he says. “This could mean acquiring a property, improving it and increasing its value over time — essentially retaining a stake in the property — rather than simply handing over rent to a landlord.”
He also adds that landlords “can rarely be trusted,” citing increasing rents as profits rise or even demanding a share of said profits.
If the restaurant is renting its location, “ensure the agreement includes provisions where the landlord is responsible for maintaining parts of the property,” he says. Otherwise, the landlord may try to push this responsibility off on the restaurant itself.
Choose the Right Structure
There are many different investment structures a restaurant investor can use. The one you choose can have a significant impact on your liability and tax bill.
“On the tax side, how you want to structure depends on how much other income you have and if the investment is likely to be profitable right away,” says Crystal Stranger, senior tax director and CEO of Optic Tax.
It typically takes a couple years for a restaurant to become profitable. So she says using either an S-corporation or partnership makes the most sense taxwise as this allows the losses to pass through to the partner.
“On the liability side, if you invest directly in a restaurant that is a partnership, then you have unlimited liability,” Stranger says. “Say something crazy happens, like a chef cuts themselves and dies. Then you can be fully liable and their heirs could go after your home and other assets.”
This is why LLCs, which limit the investor’s personal liability, are so common in the industry.
It’s All About People, People and People
Location is key in real estate, and important for restaurants, but there are other ingredients that are equally, if not more, essential to food-industry success. For example, the people — and not just the customers.
“A restaurant is only as strong as the people behind it,” says Joseph Camberato, CEO of National Business Capital, which helps companies find financing. Unhappy and unreliable employees are an all-too-common fault in the restaurant industry.
“On the other hand, happy staff — those who enjoy their work and feel valued — will take pride in what they do,” Kleeman says. “A happy, motivated team will pour their heart and soul into the business and help it thrive.”
They’re also less likely to quit, which can greatly reduce the costs of employee turnover.
To ensure your investment has the people behind it to thrive, Camberato says to spend time with everyone from the owners to the staff.
“At the end of the day, you’re not just investing in a concept, you’re investing in the people who will bring it to life,” he says. “If they’re not the right team, it doesn’t matter how great the idea or location is.”
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Consider the Customer Base and Local Market
Of course, the restaurant staff aren’t the only people who matter. The customer base is also key, especially post-pandemic.
Restaurants that rely on office workers as their customers may face reduced traffic now that hybrid work has become increasingly common, Wank says. “It has forced many to reduce their headcounts and their menus while looking for new revenue streams with a heavy focus on catering and on breakfast which are usually at higher margins,” he says.
If you plan to invest in such a restaurant, be sure to factor in this new norm when evaluating revenue and customer traffic projections, he says.
You should also review the broader local market where the restaurant operates. “If the area is already saturated with similarities, the restaurant you’re backing needs to offer something different, a niche or unique hook, that gives it an edge,” Camberato says. “Without that, it risks getting lost in the crowd, and that’s a problem for your investment.”
Review the Financials
A new restaurant doesn’t have past performance to review in the way of records or tax returns. Instead, would-be investors must use some logic to test the numbers about the reasonableness of the projections. See if the business plan is well written and if the narrative makes sense with local projections.
“If the books are messy or incomplete, that’s a red flag,” Camberato says. It could become “a headache for you if you need to access future capital to grow the business.”
While messy books can be fixed, it takes additional time and money. “A solid financial foundation makes growth a lot more realistic,” he says.
You should also review how much money it takes to occupy and maintain a space, including rent, insurance, common area maintenance and taxes. The industry standard says this should be no more than 8% of sales. Although, it may be higher than 10% in New York City, where occupancy costs “are all over the place with some areas down and others up,” Wank says.
Consider a Restaurant’s Scalability
Institutional investors who are more interested in the exit value should consider how a corporation is hiring the right talent to scale a restaurant or chain and how it’s investing in the brand, instead of focusing on the cash flow.
Then look for restaurant operators with prior experience.
“The best investment opportunity is with an operator who has already successfully launched one or two locations and now wants to build a brand, because the risk is not as high,” Wank says. “I’d much rather invest in an owner-operator who has failed once in the past and is now showing they’ve learned lessons from that experience and are now operating successfully.”
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6 Facts to Know Before Investing in a Restaurant originally appeared on usnews.com
Update 01/17/25: This story was previously published at an earlier date and has been updated with new information.