Methods for
Raising Money for a Restaurant, Bar and/or Club
Acquisition – Part 2
In the first part article on this topic I discussed
how to raise money through raising your own money,
seller financing, third party financing including
SBA loans, small minority and woman-owned business
loans and bank loans. In this article I will discuss
the various ways investors can be helpful in
investing into your business and various fomulas
that I have seen used by owner/operators to raise
money for their busineses.
Investor Financing. A common source of raising money
for one’s business is from third party investors.
These are people, other than family members or close
friends, who know of your track record either as a
customer or reputation from others who have seen you
in operation or have read reviews about you. Since
this is high risk business I would only accept
investments from individuals who are financially
strong and can afford to lose their investment. Many
investors are driven to restaurant, bar and club
investments for ego gratification so they can brag
to their friends that they own a piece of hopefully
a well know business. Usually the investors
principal is returned to him over a number of years
from the cash flow of the business. After the
investor recovers his initial capital back then
profits are split on a pre negotiated formula
between the investor partners and the managing
partner. There are various economic structures for
investors coming into deals but in most cases they
limit their financial and overall liability exposure
by either becoming a limited partner in a limited
partnership, a shareholder in a corporation or a
member in a limited liability company. In these
entities usually the managing partner gets a salary
for running the business before there is any return
of original capital or profit to the partner.
Examples of Formulas to Use for Investors Investing
Money for Purchase of a Business.
Formula 1 – This is a situation where 100% of the
money needed for the purchase of the
business is provided by an investor(s) and the
managing partner does not make an investment but
receives a market rate salary for running the
business and the opportunity to share in the profits
in the future after the investor(s) get their
investment back. In this situation it is agreed that
the profits would be split 50% to the investor(s)
and 50% to the managing partner after the investor(s)
get back their original investment. In reviewing the
profit and loss statement and after the managing
partner of the business gets a market rate salary as
a working owner the remaining money is distributed
to the investor(s).
Please find below an example of Formula 1. At the
end of the fiscal year there was a profit of
$250,000 after the managing partner received a
salary of $60,0000 for running the business. In some
cases included with the salary for the managing
partner will be health insurance, a food allowance
plus a car allowance, etc. for business purposes.
The total investment made by the investor(s) was
$200,000 so after the first $200,000 was distributed
to the investors(s) there was remaining $50,000
which is split 50/50, or $25,000 of the profits
distributed to the managing partner and $25,000
distributed to the investor(s). So in this given
fiscal year the total compensation paid to the
managing partner was $85,000 ($60,000 salary +
$25,000 profit distribution = $85,000 total
compensation). In subsequent years since the
investor(s) investment has been paid back any future
profits would be split 50% to the managing partner
and 50% to the
investor(s). Let assume the next year’s profits were
$150,000. The distribution of these profits would be
$75,000 to the managing partner and $75,000 to the
investor(s) so the total compensation to the
managing partner would be $135,000 ($60,000 salary +
$75,000 profit distribution = $135,000 total
compensation). If there is an additional investment
required by the investor(s) again in the future the
same formula indicated above will apply.
The summary of the above is as follows:
First Operating Year Calculation
$250,000 profit
-200,000 return of investor(s) investment
$50,000 remaining profit
-25,000 to managing partner
-25,000 to investor(s)
0 remaining balance
Second Operating Year Calculation
$150,000 Profit
-75,000 to managing partner
-75,000 to investor(s)
0 remaining balance
Formula 2. This is a situation similar to Formula 1
above however the investor(s) receives a yearly
preferred return on their investment until their
investment is paid back in full before profits are
split between the managing partner and the
investor(s).
A preferred return is a pre-negotiated percentage
return on the investor(s) investment when the deal
is put together. Lets assume that the preferred
return is 10% of the investor(s) investment. Lets
assume that the investor(s) investment is $200,000
so the yearly preferred return to the investor(s)
would be $20,000 ($200,000 original investment x 10%
= $20,000 preferred return). If there was a $250,000
profit after the managing partner received his
salary of $60,000 the profit distribution would be
as follows: the original investor(s) investment of
$200,000 + $20,000 preferred return or $220,000
would go the investor(s) first so the remaining
profit to be distributed is $30,000 ($200,000
investor(s) investment + $20,000 preferred return =
$220,000 less $250,000 profit = $30,000 remaining
profit to be distributed). This remaining profit
would go 50% or $15,000 to the managing partner and
50% or $15,000 to the investor(s).
The summary of the above situation would be as
follows: the managing member would receive $75,000
($60,000 salary for running the business + $15,000
profit =$75,000) and the investor(s) would receive
$235,000 ($200,000 investment + $20,000 preferred
return + $15,000 profits = $235,000 investor(s)
return).
The summary of the above is as follows:
$250,000 profit
-20,000 preferred return to investor
-200,000 return of investor(s) original investment
$30,000 remaining profit to be distributed
-15,000 distributed to managing partner (50%)
-15,000 distributed to investor(s) (50%)
0 remaining balance
Formula 3. In this situation the managing partner
makes an investment into the business as well as the investor(s). In this situation the deal is
structured as follows:
1) there is a total investment of $300,000 and the
managing partner puts in $150,000 and the investor(s)
puts in $150,000,
2) the managing partner receives a $60,000 yearly
salary which is adjusted annually for cost of living
for running the business which comes out of the
business before profits are divided,
3) the agreed profit split after the partners
receive a ten percent preferred return on their
investment is 60% to the managing partner and 40% to
the investor(s).
Please find below an example of the above. The
profits of the business are $150,000 after the
managing partner receives his yearly salary of
$60,000. The $150,000 yearly profit would be split
as follows: preferred return to partners of $15,000
each ($150,000 investment x 10% = $15,000 preferred
return) then remaining profits would be split 60% to
the managing partner and 40% to the investor(s).
The summary of the above is as follows:
$150,000 profit
-15,000 preferred return to managing partner
-15,000 preferred return to investor(s)
$120,000 remaining profit
-$72,000 distributed to managing member (60% profit)
-$48,000 distributed to investor(s) (40% profit
)
0 remaining balance
Other Formulas. There can be many other variations
of the above formulas depending on the priorities of
the parties involved. Please find below some common
variations for profit distribution. In a situation
where the managing partner puts no money up and the investor(s) wants to give the managing partner an
extra incentive to increase profits a formula can be
set up as follows: after the managing partner gets
his salary he also gets a performance bonus which
can be set up in a number of ways. One common method
is to have part of the bonus tied to increased sales
versus budgeted sales and a larger part of the bonus
is tied to increased profits versus budgeted
profits. Lets assume that the bonus formula is that
the managing partner receives 5% of increased sales
versus budgeted sales and receives 10% of increased
profit versus budgeted profit. For example if the
budgeted
sales were $1 million and the actual sales were $1.1
million and the budgeted profit was $150,000 and the
actual profit was $200,000 the yearly incentive
bonus to the managing partner is as follows: a. he
gets a $5,000 sales bonus ($100,000 increased sales
versus budgeted sales x 5% = $5,000) and b. he gets
a $5,000 profit bonus ($50,000 increased profit
versus budgeted profit x 10% = $5,000). In the above
example we will assume that after the managing
partner receives a yearly $60,000 salary adjusted
yearly for inflation and receives a performance
bonus, if applicable, then the investor(s) gets
their original investment back and then profits are
split 50/50 between the managing partner and the
investor(s). Further we will assume that the
investor(s) invested $250,000 and that the profits
of the business are $200,000.
The summary of the above is as follows:
$200,000 yearly profit
-10,000 performance bonus paid to managing partner
($5,000
sales bonus + $5,000 profit bonus)
-190,000 profit paid to investor(s)
0 remaining balance
In the second year of operation the profits are
$250,000 and the managing partners performance bonus
is $15,000 and the summary is be as follows:
$250,000 yearly profit
-15,000 performance bonus paid to managing partner
-60,000 profit to investor(s) to get 100% of their
original
investment back (the investors
investment is
$250,000
and they have
previously received $190,000 back of
their
original investment so their remaining
investment
is $60,000.)
$175,000 profit to be split
-87,500 50% paid to managing partner
-87,500 50% paid to investor(s)
0 remaining balance
In the above example the managing partner would have
received in addition to his $60,000 yearly salary he
would receive a $15,000 performance bonus plus 50%
of the remaining profits or $87,500 so his total
compensation would be $162,500 ($60,000 salary +
$15,000 performance bonus + $87,500 profit split =
$162,500). The investor(s) would receive $147,500
made up of $60,000 which is the remaining return of
their original capital plus 50% of the remaining
profits or $87,500 ($60,000, the remaining return of
their original capital + $87,500 profit split =
$147,500).
These methods are just a few of the many formulas
that can be used to raise money for a new investment
opportunity. If you would like to discuss additional
creative methods for financing your new business
opportunity please contact us.
Nate Valentine -
Tipsy Pig and more!
Nate Valentine has Unstoppable Talent.
Nate Valentine is a lifelong resident of the Bay
Area and an integral part of San Francisco's
thriving social scene. After a wildly successful and
educational 5-year stint as one of the youngest
Directors in the history of Charles Schwab, he had a
moment of truth when he realized that he ultimately
couldn't see himself as an old man in a suit working
the daily grind. His grandfather advised him “Find
happiness and the rest will take care of itself.”
Thus as an experimental side project, he and four
partners founded Vintage415, a cultural marketing
company that has since managed to add its own
unique, down-to-earth imprint on local nightlife.
What began in 2002 as a way to host high-profile
events around the city and have some fun has evolved
into a flourishing entrepreneurial adventure.
Responsible for launching some of San Francisco's
favorite hangouts -- Mamacita, Double Dutch, Umami,
Taverna Aventine ,The Ambassador , and The Tipsy
Pig—he and his partners have been pioneers in the
movement toward a new style of nightlife that
emphasizes fun in relaxed and unpretentious social
settings.
Nate’s philosophies have added to his success. He
believes that in the work place everyone should be
treated equally in a family like atmosphere. He and
his partners will take shifts working side by side
with their employees. He also believes in offering
great products at reasonable prices while supporting
the concept of sustainability.
Restaurant Realty Company sold The Tipsy Pig
location on Chesnut Street to Nate as well as a new
site on Polk Street that will open later this year.
We wish Nate continued success on his future
endeavors.
