Why People Lose Their Life Savings in the Restaurant Business & How to Keep It From Happening to You
Would you be willing to put a large portion of your net worth into an investment that is highly illiquid and has a 50% or more chance of being worth zero, or less, at the end of five years?
You are probably saying,
ABSOLUTELY NOT, no rational person would. But thousands of individuals do it every year when they decide to open an independent restaurant and finance it totally with their own money.
It’s tragic that decent, hardworking, well-intentioned people squander their nest egg when their
restaurant dream turns into a financial nightmare (and it happens all the time).
If you want to open a restaurant, and many of our Profit Tip subscribers do, we have one rule that will help to
keep you from making a really dumb mistake and reduce the odds of
losing all your money in the restaurant business.
The answer is to
use OPM (
Other People’s Money). Yes, having investors does add an additional layer of work and you will have to share of portion of the equity,
BUT, it is one of the best ways to prove your concept and plans make some level of sense to someone
other than yourself. It will help to keep you from making a really dumb decision and a potentially catastrophic financial mistake.
Some of the richest people in America seriously limit their personal investments in their own startups. Highly successful and self-made billionaires Stephen Spielberg, Jeffrey Katzenberg and David Geffen founded
Dreamworks Pictures in 1994. They needed a
half billion dollars to get it started. They could have funded the entire amount themselves but instead convinced Microsoft co-founder,
Paul Allen to invest $400 million.
Why? It’s because rich people who know how to stay rich don’t put
too much of what they have at risk in any one investment, especially a risky startup, even if it’s their own. Take note:
“ALL” startups are high risk.
If you’re planning on opening a new restaurant, realize the odds, statistically anyway, are stacked against you. If your idea and plan really have merit, you should be able to find
one or more investors to finance the bulk of it. And here’s one more rule – don’t sell it to family members. That’s love money and doesn’t count. It’s important that you keep enjoying your holidays and family reunions.
If you look hard enough you’ll find there are lots of people with money who are always looking for
good deals to invest in. Notice we said
What to do (short list): Develop your concept, thoroughly research your market and competition to determine if there’s really a demand for what you intend to do. Then communicate your plan in a professional
business plan that includes
financial projections based on
objective, realistic assumptions.
If you can’t convince someone to invest in your restaurant dream, you probably shouldn’t do it. Don’t let what
you think is a good idea, turn your life and future into a financial nightmare.
We’ve heard it said that the world does not need another failed restaurant. (especially if it’s yours)