I have a friend who wants me to back him in buying a restaurant. He has been to one of the best Chef's schools, has good restaurant management experience, has a good work ethic, is good with people, and is trustworthy. He does not have much cash or credit. He hasn't had his own business in the past. The restaurant is in a great location in a small town. It is performing poorly because the owner operators are under capitalized, don't know the business, and are burned out. The space itself needs updating. The landlord will let them out of their lease if I sign with him. $1400/mo. Buying the owners out is low 5 figures. Updating the space is a question. The landlord won't do any tenant improvements and he won't give me a purchase option on buying the building. He will give a right of first refusal on buying it. I'm willing to do some improvements, but see this as an area of risk. My partner only wants to do a short lease (1-2 years) to see how it goes and I think I agree, especially since I may be guaranteeing the lease. So how much TI to do? The more we do, the better for the business, but the more risk if the endeavor fails. Also, how should we structure the equity split with me investing all the cash and guaranteeing the lease? I would not be involved in operations. My partner would give full time and attention to the business. What other considerations? I have a lot of small business experience, but none with restaurants.

@Jon Klaus -not that I normally like to resurrect dead threads, but I'm just wondering how your restaurant experience is going? I've been in and out of the restaurant/bar biz for years and have seen many come, some go and some stay and succeed. I've also seen a phenomenon where people who make a bunch of money in some unrelated biz get the wild idea that it would be cool and fun to open a restaurant/bar and make a bunch of money while having a blast. 99.9% of the time, they seem to end up going down in flames! Yet, some do make it here and there. Just to chime in on a few of the thoughts here, I like non-franchised places, although I've seen some make good money by owning franchises as well. Yet, I've seen it more where people buy a franchise and work their ass off for maybe $100k a year in profit or less, not a bad living but not that great when you consider not only the hours you're there but the fact that you're basically on call 24/7 and those calls do come! My older brother has done very well for himself owning several non-franchised places and still could have the option of franchising them to other people as well, which is where the really big money could come in. My other thoughts are that the restaurant/bar biz is definitely a tough one but if you can master it, you can succeed over and over again. As some have mentioned, your two main concerns are food cost and labor cost, those are your two overwhelming variables, keep them in line and serve a good product and you're likely to succeed. That having been said, its much easier said than done. Theft is always another big concern, especially on the bar end of the biz, there are many very talented bartenders that are also very talented thieves! The old trick of selling 4 drinks and only ringing in 2 of them is probably the most common technique. Thus, you just put say $20 of the customer's cash in the drawer, yet the register thinks it should only have $10. You keep a running count in your head of how much your drawer is over through the shift and at some point, remove and pocket that money when no one's looking and your drawer comes out even when they count it and no one's the wiser. Yes, you can fight this by monitoring liquor cost closely and they even sell high-tech metering systems and camera systems now, but again its much easier said than done. The biggest obstacle there is simply the time factor, when you're already rather burnt out from a crazy busy weekend or whatever and you've got a bunch of other work to do to keep the place running right, who's going to take several hours out to sit and watch some usually grainy silent video of a bartender serving drink after drink or measuring how much booze is left in each one of 100+ bottles of liquor? One trend that is making theft harder is that more and more customers now use charge cards to pay, I really don't know how an employee could steal from someone paying with a card, but a lot still pay with cash, more than enough to make it hurt if you have some clever thieves in the mix. Of course, there's also always the occasional prime rib or whatever else that might disappear out the back door as well. I remember at one of the places I ran, the chef REALLY wanted to order some saffron for a special, which was at the time like $70 for a small tin! You only needed a pinch, so luckily we only needed to order a tin or two at a time, but I still remember pulling my hair out each week as I'd check on the saffron supply and sure enough, one tin did disappear at one point, causing me to lock the extra supply in the safe! Anyway, just wondering how your venture is going so far?

UPDATE-I was having trouble sleeping tonight and saw this thread again, so I checked out your reviews on urbanspoon, trip advisor, etc. NEARLY ALL EXCELLENT REVIEWS! Great job, I know how hard it is to please everyone, all of the time! In fact its funny, but on one of them it looks like there's only one bad review (and its pretty bad!) but it looks like it was when you first opened AND they just happen to recommend some other restaurant in town! Hmmmmmm, I wonder if that one just might be from the owner or staff of the other place, fearing the competition-that stuff does happen! Well, keep up the good work, it sounds like you're off to a great start!

Thanks for asking, Robert. It's going well. Revenues are above our expectations, but so are expenses. Cost of labor was near 40% of sales for the first few months, but we've got it down closer to 30% now. Our biggest challenge has been our small size--just 50 seats. Most lunches and weekend dinners we lose business when we are full. We've worked on quicker table turns and takeout, but we just need more space. I'm close to taking a small space that just came available behind us, but customers won't be able to pass through inside. Employees will. We are looking at doing sandwiches there. No Subway close by. I've also been talking to the owner of space next door. Too early to say much about that, but the space is bigger than ours, so we could get to 125+ seats if we can get it. We are closed Sundays. Need a little balance for my chef/partner/manager. We have a nice buzz around town. We've been in a honeymoon period, but after 5 months, I think it's over. A good location, word of mouth, and Facebook have been our best marketing. I could have paid cash for a rental with what I've put in, but I'm having fun and learning a ton. The place is called Buttermilk's in Canton TX, if you want to check us out on the review sites. I'd be happy to host a BP meetup there if we get a few people in the area. An hour east of Dallas, near Tyler, Athens, Longviw, and Terrell.

I've reached agreement with the sellers and the landlord. Looks like I've got a new adventure coming....

Jon, I worked in a couple of restaurants in high school. Small restaurants, with the owners actively involved. One is closed and one is still open. Surprisingly, the one who had the better food is closed.. I guess this speaks to how important effective management is. If you ever have a chance to stop in Brenham Texas, there is a restaurant there called "Must Be Heaven". Its in old downtown, old building, very rustic. They serve mostly sandwiches/soups but have other menu items as well; delicious pies. I think it's a winner and similar to what you are envisioning. When my parents lived in Brenham, we would always eat there when we visited; and it was typically packed. The old charm of the building, the truly smiling face that takes your order and the fresh food made with loving hands is well worth the few extra dollars that you may pay. They have a website that you can check out too.

John, I am a bit honored you asked for my opinion. So I hope my view is helpful. First off, my overall view is, if it isn't franchise I wouldn't be involved. So let me qualify. My passion isn't for the creation of a menu/brand. Mine is people and marketing than extent. In addition to managing my mom bought a small sandwich franchise (blimpie) and it was hard for us. As was stated running a "business" is not the same as being a good manager or chef. As far as equipment and remodel, regular cleaning and maintenance will pay dividends. Think of why insurance companies will pay for your bi annual cleanings. As they say an ounce of prevention is worth a pound of cure. In the currant restaurant they over estimated the ac unit. To the tune of a bout 7k the normal. But I have no temperature problems at all. (Unless equipment malfunction) so my employees are happier, the equipment doesn't work as hard, and my clients motive too. So in the long run, that will pay for itself. (Not to mention health inspection violation avoidance.) I find it hard to write all the little tips and tricks I'd recommend, if you want more maybe we can schedule a phone call? Send me a message and we will set it up. Thanks again for reaching out to me. I see your posts and references to your contribution all over BP. I hope this gives a little back to you.

Buy a restaurant?

Tom Goans

Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes

13y

I have many years of consulting in the hospitality industries, including restaurant and bar. My former girlfriend's father founded a high-profile steak restaurant in Amarillo, Texas. I have dear friends who own restaurants.

After the founder died, the family continued to operate the Big Texan. Even though the sales numbers where in the multiple of millions, at time the business could not meet payroll or pay the vendors when the invoices became due.

An industry study reported that 80 percent of the employees will steal from you.

Ask any lender, the failure rate is astronomical.

My 2 cents, run from this idea of getting in the restaurant business. Being a trained chef is not business training. The girlfriend I previously mentioned is a university graduate with a degree in hospitality management. However, she had no ability to manage the business. Her family fired her and so have 4 other companies.

I have been hired by restaurant and bar managers and owners to create methods to help them manage inventory and track theft. My methods are so good, that one owner was having employees arrested during a lunch or dinner run.

I am telling you, this is an extremely tough business that makes others seem like child’s play.

Of most important, consider the worse. What happens should there be challenges for your friend? What happens to your friendship should the plans not work out? I suggest you keep your friend as a friend. Eat at his restaurant. Just do NOT loan him money or go into partnership. 20 years later, the family of my former girlfriend still hold animosity towards her for failing in her leadership of the family restaurant. This is family, what about your friendship?

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Jon Klaus

OP

Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes

13y

Tom, thanks for the input. On the other hand, I have a client in my IT business who we've done work for over several years. He hit on a restaurant concept that caught on in Dallas. When he got to. 8 locations, he was offered $75mm cash from a big operator. He said no, and now has 20 locations that do @ $5mm per store, per year. So I've seen success as well as failure.

What I'm looking at is nothing like this, just backing a guy. I believe in with money I can afford to lose.

Buy a restaurant?

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