Restaurant Investment Structure

Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define investment. Then we'll explore three types of restaurant investment structures and review the advantages and disadvantages of each.

Investing in Restaurants

Todd recently won a spot on Barbeque Tank, a showcase where an entrepreneur explains his or her business concept to prompt wealthy suitors to invest in it. When Todd arrives backstage, the show's producer explains the structure of the process. The producer states Todd will receive three potential investment offers. Investments represent an allocation of money with the expectation of repayment with interest. Todd has a few minutes to analyze each offer and to choose one or reject all three. The producer asks Todd if he's ready and Todd nervously replies, 'Absolutely!'

Offer 1

100% Investor Funded with Salaried Managing Partner

Todd, the prospective managing partner, walks on stage, explains his barbeque restaurant idea, then asks the group for a $1 million investment. One of the investors, Mark makes the following offer:

  • Loan: $1 million
  • Salary: managing partner receives a market rate salary based on location and sales
  • Repayment structure: investor receives all restaurant profits until the loan is repaid
  • Interest: investor requires 10% of profits for the life of the restaurant

Todd quickly ponders the advantages and disadvantages of Mark's offer.

Advantages and Disadvantages

  • Advantages:
    • partner receives salary regardless of profit
    • long-term interest payback period
    • interest repayment is variable; low profit equals a low interest payment
  • Disadvantages:
    • if restaurant becomes profitable, the partner does not share in the profit
    • high profits equal increased interest repayment
    • long-term interest payback period

Todd thanks Mark for his offer, then looks hopefully at Lori.

Offer 2

100% Investor Funded with 50%/50% Profit Split with Managing Partner

Lori states her offer provides Todd with fruit from his labor, meaning he's going to share in the profits. Let's explore the details:

  • Loan: $1 million
  • Salary: none
  • Repayment structure: investor and managing partner share in profits until the loan is repaid; then managing partner receives 100% of the profit
  • Interest: $10,000 for the next 10 years

Todd doesn't see any fruit on the tree from Lori's proposition, but analyzes the advantages and disadvantages anyway:

Advantages and Disadvantages

  • Advantages:
    • fixed interest payment and payback period
    • share in profits
  • Disadvantages:
    • managing partner does not receive a salary
    • profit split may not be sufficient for the managing partner to maintain a reasonable standard of living
    • interest payments start in year one and continue for 9 additional years

Todd acknowledges Lori's offer with a smile, then waits for Daymon's proposal.

Offer 3

Investor and Managing Partner Share Investment Costs

Daymon starts by telling Todd that all entrepreneurs should have some skin in the game to ensure they're working hard to make the business a success. Therefore, Daymon requires Todd to share in the investment costs. Let's take a look:

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