Finding Investors and Fundraising For Restaurant Owners
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
After choosing an entity type for your restaurant, the next step many restaurateurs ask themselves is where they can find investors and how the deal terms will be structured. Of course, every financing is different, but we see common financing patterns.
The three most common restaurant financing structures we see are:
- Preferred Investor Structure: the investors get paid back first with some hurdle or interest rate. Once the investors receive their money, the owners start getting distributions.
- Partnership Flip Structure: after a specific date, the percentage of ownership switches between the investors and the managing group. For example, the restaurant will pay investors seventy-five percent of profits and the management group twenty-five percent until the investors are paid back. After the restaurant pays the investors back, the profit share flips, so investors get twenty-five percent of profits, and the management group gets seventy-five percent.
- Shared: There is one class of units, and everybody owns a certain percentage of the company from the start. The restaurant distributes profits yearly pro rata, meaning everybody gets a share of the profit whether or not the restaurant has returned investor capital.
We also see that certain investors want investor approval rights, usually called protective provisions. Often, these are negative veto rights, which means the investors might have to sign off on things that significantly impact the investment’s economics, such as budget, incurring debt, etc. Restaurants can negotiate these provisions on a case-by-case basis, and the protective provisions will vary depending on the investor and the restaurant owner. Protective provisions can have significant implications. If a restaurant owner is unfamiliar with these provisions, they should speak with an attorney familiar with these types of deals.
There are also deals where the restaurant group has free authority to manage the company within the bounds of the law, and the investors don’t have specific approval or veto rights.
If you are a restauranteur seeking investors, a good first step is determining who your core lead investors will be. The lead investor is the person or people who will write the largest checks or invest in the restaurant over the long term. These people will likely have a preference you will have to consider when pitching your deal to get the remaining investors on board.
Restauranteurs can implement specific strategies, so you don’t have to figure everything out on day one. Working with an experienced group like Cara Stone, will help you figuring out how the deal might turn out in a very systematic format before you incur a lot of expenses writing up documents that people might reject. Every deal is unique, and having a team familiar with restaurant deal structure will enable you to get the best deal for your restaurant group.
This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.
After choosing an entity type for your restaurant, the next step many restaurateurs ask themselves is where they can find investors and how the deal terms will be structured. Of course, every financing is different, but we see common financing patterns.
The three most common restaurant financing structures we see are:
- Preferred Investor Structure: the investors get paid back first with some hurdle or interest rate. Once the investors receive their money, the owners start getting distributions.
- Partnership Flip Structure: after a specific date, the percentage of ownership switches between the investors and the managing group. For example, the restaurant will pay investors seventy-five percent of profits and the management group twenty-five percent until the investors are paid back. After the restaurant pays the investors back, the profit share flips, so investors get twenty-five percent of profits, and the management group gets seventy-five percent.
- Shared: There is one class of units, and everybody owns a certain percentage of the company from the start. The restaurant distributes profits yearly pro rata, meaning everybody gets a share of the profit whether or not the restaurant has returned investor capital.
We also see that certain investors want investor approval rights, usually called protective provisions. Often, these are negative veto rights, which means the investors might have to sign off on things that significantly impact the investment’s economics, such as budget, incurring debt, etc. Restaurants can negotiate these provisions on a case-by-case basis, and the protective provisions will vary depending on the investor and the restaurant owner. Protective provisions can have significant implications. If a restaurant owner is unfamiliar with these provisions, they should speak with an attorney familiar with these types of deals.
There are also deals where the restaurant group has free authority to manage the company within the bounds of the law, and the investors don’t have specific approval or veto rights.
If you are a restauranteur seeking investors, a good first step is determining who your core lead investors will be. The lead investor is the person or people who will write the largest checks or invest in the restaurant over the long term. These people will likely have a preference you will have to consider when pitching your deal to get the remaining investors on board.
Restauranteurs can implement specific strategies, so you don’t have to figure everything out on day one. Working with an experienced group like Cara Stone, will help you figuring out how the deal might turn out in a very systematic format before you incur a lot of expenses writing up documents that people might reject. Every deal is unique, and having a team familiar with restaurant deal structure will enable you to get the best deal for your restaurant group.
