Raising Capital in the Restaurant Industry

Clients often come to us with a great restaurant, or business, concept, ready to form their company, but with only a small percentage of the money needed to bring their idea to fruition. The first of many questions is often, how do we get funding? The risk factor in restaurant start-ups is significant with default rates being among the highest in industries. This means getting funding, is a roadblock and often a risk for investors. There are a couple of different options:

1. Traditional borrowing/lending. Unless the founder has a history in the business, borrowing money from a traditional lending institution will be difficult. Lenders require historical income in order to determine their credit risk. The fact that restaurants traditionally have a high rate of default doesn’t help. If a lender does find the venture to be risk worthy, usually because the founder has successful history or previous experience, it will require security in the loan, therefore, personal guaranties will likely be the norm, extreme-collateralization in lease, inventory, furniture, fixtures, and equipment, and possibly a liquor license will be required. Clients should be careful in signing away the proverbial farm in order to get this type of lending.

2. SBA Guaranteed Loans. Lenders who are willing to loan to Founders may do so through a Small Business Administration guaranty on the loan. An SBA guaranty can reduce the overall credit risk on the lender and make the loan more palatable. There are significant qualifications and paperwork to obtain an SBA loan but this is a viable option.

3. Equity Investment. If the client is unable to borrow money, the next option will be to find an investor and sell equity in the company. In a traditional Michigan LLC, a founder can maintain control of a Manager Managed LLC by becoming the Managing Member, even if a majority of the ownership in the membership interests is owned by outside investors.   The Operating Agreement would have to be carefully drafted in such a way to ensure that the Managing Member is protected from ouster; but it can be done. Selling a security in the LLC will require a Subscription Agreement, carefully drafted by an attorney as well.

4. Founder’s Own Equity. Finally, the method in which most founders fund their concepts is through their own savings. To reduce the amount needed to fund the venture, consider leasing the equipment instead of buying, a lease with a “free rent” period, or even bringing on a partner. Each of these options has its own risks and rewards but when dreaming big, big risks sometimes mean big rewards.

This is not an all-inclusive list, and being creative with funding is encouraged, but the overall takeaway is to document the transaction and review all agreements with an attorney prior to signing.