Restaurant Investing Article

Here's an interesting article from the NY times with some insights on restaurant investment/equity structures.

Stay Out of the Kitchen, but Follow the Numbers
By ALEXANDRA PEERSWHEN

Stephen Loffredo opened Zoë, a restaurant in SoHo in 1992, his backer was his father-in-law. Earlier this year, when Mr. Loffredo was looking to open another Manhattan restaurant, Jovia, on the Upper East Side, he took a different route. In a structure that echoed the Broadway-angel model of backing musicals, he offered 34 units of the restaurant at $50,000 apiece. Christian Pompa, a real estate developer who was a prep-school classmate of Mr. Loffredo's wife, Thalia, bought three. "I like to eat, I like to drink and it's right near my house," Mr. Pompa said. Still, he added, his greatest hope is that in the current roaring restaurant market, Jovia will be so busy that "there's no room for me." The restaurant business is booming - both in New York City and, to a degree, nationwide. On average, more than five new restaurants a week open in the city, according to the Zagat Survey; that is the fastest pace since 2000. In October, national restaurant and bar sales reached an estimated $34.6 billion, up 7 percent from 2004, according to the Census Bureau.Eager to get in the game, and inspired by the high-profile success of chefs who, after achieving stardom in one city, open additional restaurants in other places across the country, more people are seeing restaurants as attractive investments. At the same time, the growth in the number of new restaurants, along with banks' traditional reluctance to finance them, has increased the number of restaurateurs looking for capital - and for ways to let beginners buy in. But chefs, owners and investors warn that the restaurant business, already considered high-risk, may be more volatile than ever. The cost of starting a restaurant varies widely, from perhaps $100,000 for a tiny bakery in a college town to upward of $8 million for a 200-seat dining room - with a superstar chef, architect and interior designer - in a large city. What are the odds of success? While an old saw holds that 9 of 10 restaurants fail, a study by Michigan State and Cornell Universities in 1991 and one by Ohio State in 2003 show that about 60 percent of all restaurants closed by their third year. Moreover, the spate of new dining spots is setting off bidding wars for chefs, sommeliers and even contractors and public relations firms, owners say, and is creating higher expectations for diners who dart among restaurants, eager to try the next new thing. "The customer who used to say, 'Satisfy me,' now says, 'Knock my socks off,' " said Barry Wine, a restaurant consultant who was the chef and owner of the Quilted Giraffe in Manhattan.That is the lofty goal of one investor, David Robkin. He is a backer of the Philadelphia restaurateur Stephen Starr, who plans to open two multimillion-dollar restaurants in the Chelsea Market this winter: Buddakan and Morimoto, which will feature Nobu's former executive chef, Masaharu Morimoto.Mr. Robkin was an accountant in Philadelphia when he started investing in restaurants, inspired by the sight of a line of customers around the block at the Buddakan bar and restaurant that Mr. Starr opened in that city in 1996. After a series of successful openings - and two flops - he now manages an investor group backing Mr. Starr that, he says, earns "venture capital returns," typically 20 percent or more a year. Many restaurant investors come from the corporate or financial world - and they often expect similar business methods. But there is a big disconnect between the corporate world and the kitchen, chefs warn. The turnover is much higher, for example, and staff members are often under the age of 30, said Stephan Fortier, who opened Loft, a restaurant and lounge on the Upper West Side, backed by an investor he met at a Crunch Gym. "But if you know what you are doing, you can make some serious money," he said, especially in multiple restaurants, because of economies of scale. Trust in one's partners is crucial, he said. In the last dozen years, Dr. Andrew Feldman, chief of sports medicine at St. Vincent's Hospital in Manhattan, has invested $100,000 apiece in businesses like the Blue Water Grill and It's a Wrap in Manhattan and Best Cellars, a wine store chain. All but one of his choices, a bakery, have made money - some, lots of money, he said.But he did not always earn his expected share of profits. Over the years, "the lesson I've learned is to be more involved in the day-to-day operations," he said. Chefs say investor money never comes without strings. "You never know the nightmare investors until they've invested," said Geoffrey Zakarian, a chef who made his reputation with the 44 restaurant in the Royalton Hotel in Midtown in the early 1990's and has since opened Town in Midtown and, this week, Country on Madison Avenue at East 29th Street. For one opening a few years ago, he said, there were daily e-mail messages at all hours from an investor, reading "Why didn't you comp my friend?" "I don't like that waitress," or "I want the best table at 8." "People like to say, 'I'm the owner; do you know who I am?' " Mr. Zakarian said.
The easiest way for investors to enter the restaurant game is to be a friend of a restaurateur and to become a regular customer. Sirio Maccioni, owner of Osterio del Circo and of Le Cirque, which is moving to a new Manhattan site, is among those who have culled backers from their customer bases. Potential investors can also meet chefs and restaurateurs at various food events, like those listed on Web sites like StarChefs.com or held at the James Beard House, a haven for food lovers in Manhattan. Classes in operating a restaurant and raising financing are held at sites including the French Culinary Institute and through the Myriad Restaurant Group, parent of restaurants like TriBeCa Grill and Nobu. But investors should not expect smooth sailing: the tension between a chef and a backer is often literally built into the deal. Investors have a shorter-term horizon than owners do. Backers of a hot restaurant, for example, may want most of their money out after about six months - just as it's cooling. "Deals fail when they're structured at cross-purposes," said Ira Drukier, who owns, among other properties, the Chambers and the Maritime, two hotels in Manhattan, and has stakes in their restaurants. He builds his deals so that the chef gets a financial incentive when the investors are paid back - and he stipulates a minimum 12 to 15 percent annual return, with payments made monthly. For the individual investor, pitfalls can extend beyond the financial risk. "Whether someone slips and falls, gets speared by a swordfish or the business just goes bankrupt," the investor can be liable, said Mark Albaum, a New York accountant who has had a couple of clients who were burned in the restaurant business. In general, building a restaurant investment as an equity stake, or as a limited liability partnership, shields the investor. But there is no protection if the investor has signed, or has the power to sign, any business checks or tax returns. MOST of all, owners and experienced backers say, investors should stay out of the kitchen - no telling the chef how to season the soup - and do the math. A restaurant's income projections should jibe with its expected average check size, average length of a meal and number of seats. There should be a cushion of six months' worth of expenses, and measures in place to raise extra capital if needed. "Right now, everybody wants to get into the restaurant business," Mr. Zakarian, the chef, said. "But people who think it's fun and sexy lose their shirt very quickly," he warned. Then again, "It is fun and sexy."