What You Should Know Before Investing in a Restaurant

restaurant

Reserved seating at the best table whenever you feel like it, a glamorous opening, and delicious meals on the house—yes, investing in a restaurant sounds like a dazzling venture. Restaurants and bars can provide lucrative return on investment for savvy investors, but when you look beyond the initial allure, these investments can be extremely risky. Lack of research, a highly competitive market, and thin profit margins can combine in a spectacular failure of investment. If you’ve been approached by a restaurant owner looking for money to expand, or you’d like to use your money to begin an entirely new restaurant, here are the essential factors you need to know before going all in.

Doing Your Research

Unless you’ve personally grown up in the restaurant industry or have detailed business knowledge on the ins and outs of running an eatery, don’t invest in someone who hasn’t opened and run a restaurant successfully before. Without firsthand experience, the restaurant is more often than not going to fail, sooner rather than later. Make sure you’re investing in an establishment with an operator that understands the business, and can do everything from finagling deals with the landlord to cooking up the main dish in the kitchen.

Volume-Driven Vs. Rate-Driven

Take a look at the customers who frequent the establishment, and find out their reasons for attending. Is it the quality food, or the low prices? Perhaps it’s a unique concept that turns dining into an experience, rather than just a meal. Understanding why customers frequent the restaurant in question will help you categorize it into one of two distinctions; a volume-driven restaurant which offers a higher bulk of product at low prices, and a rate-driven concept, which capitalizes on quality and individuality of products by offering them at higher prices.

The Restaurant Demographic

The restaurant industry will always be booming—people need to eat, and very often they don’t want to have to prepare it for themselves. Americans spend half of their food budget on eating out, and despite the major competition, the industry continues to grow; every time an establishment locks its doors for the final time, a new niche eatery is opening up right down the street. In order to hold your own against the competition, you’ll need to have a handle on your demographic and to determine your customers’ wants and needs.  Looking at your demographic means researching incomes, ethnic backgrounds, and education levels. All of these factors go into creating the ideal menu with the ideal prices.

Never-ending Expenses

There’s no end to the list of expenses that come along with a restaurant venture. Beyond securing the right venue (at the right price), somehow finagling the limited liquor licenses online still available in your chosen area, handling restaurant marketing and advertising costs, and working with the right food vendors, the money is consistently flowing. Need to hear more? Consider damages and repairs from unruly customers, spoiled and wasted food, and insurance costs to protect the business and your personal assets from legal liabilities. When you’re assessing a restaurant for investment purposes, take into account gross profits, food costs at present, the condition of the equipment in the restaurant, and how much you’ll need to spend on redecorating or repairs should you deem it necessary. This might not be the most enticing advice, but take it to heart: Only invest what you’re actually able to lose, because successful restaurant ventures are few and far between.

Running a restaurant is one of the most stressful endeavors an individual can pursue, whether you’re the owner or private online investor. According to recent reports, at least 60 percent of restaurants, bars and bakeries will fail within their first three years, making investments in this sector extremely risky business. There’s no singular way to ensure a booming restaurant business, as popularity can ebb and flow. There’s no denying that a successful restaurant can definitely bring profits to wise investors, but be prepared to navigate a plethora of pitfalls that stand in your way.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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