Restaurant Investing Question
Had a friend approach me with an opportunity to invest in a restaurant but I'm conflicted about the terms
High level terms:
- GP Equity 12% of total equity
- LP Equity: 78% of total equity
- The GP gets 10% of Cash flow until LPs achieve a 1.4x equity multiple (return of principal + 40%).
- Afterwards, the GP (12% of equity) gets 70% of cash flow and the LP (78% of equity) gets 30% of cash flow.
Is this normal for the restaurant JV? A 70% promote after a 1.4x equity multiple seems extremely high to me. Especially considering there is no IRR requirement - restaurant owner still gets to keep 70% of the equity even if it takes 4 years to get to a 1.4x return.
Also, the operator owns one other restaurant. This is not a national chain or an operator with 10+ restaurants or something
Bump
how would you want to structure it OP?
I don't think there is a "normal" way to structure restaurant investments. The reason the promote seems high is because restaurant investing is high risk and medium return--he can't offer you, ya know, 3 or 5x or 20% IRR because it's not gonna happen. At best, the restaurant will kill it for a few years, returning you your capital with some additional return before the concept dies out.
Risk-adjusted, investing in restaurants is a pretty crappy investment. That's not to say there aren't true winners--in my neighborhood, there are two ownership groups with all of the truly successful restaurants. One of those groups leased at one of my (now-former) company's retail units and that concept failed, despite them crushing it on their 3 or 4 prior concepts. And these are the true pros.
The only way I'd invest in a restaurant is if it were a really cool club concept that gained me access to the inner sanctum of popularity.
Good points, thank you
This isn't an answer, but rather a question just to clarify my understanding of a structure like this.
Say the LP makes an equity investment of $1 million, and cash flow every year is $777,778. Does this mean that the LP gets $700 000 yearly, meaning they earn back their 1.4x equity multiple in 2 years?
Correct. But after that, they’d only get 30% of the 777k. Meanwhile, the group that contributed 10% of the equity would get the remaining 70% of the 777k
Ah I see, thank you so much for the clarification!
I am not familiar with restaurant GP/LP structures, but why not have a multi-tiered promote and/or an increasing equity multiple hurdle based on the life of the investment?
An example for the multiple would be 1.4x for the first 36 months, 1.6x for months 37-48, 1.8x for months 49-60, and 2.0x for months 60+. So if the LP hits 1.4x in year 2, then the operator would then be into their promote, but if it takes 4 years to hit 1.4x, then the operator doesn't earn their promote until they get to the higher multiple threshold. This would decrease the LP's risk if the performance of the restaurant takes time to take off, but keeps incentives in-line.
For the multi-tiered structure you could make it that the operator gets 40% after 1.3x, then 70% after 1.6x.
Another way to fund the LP capital piece is a portion is mezz-style debt that gets paid prior to the equity (earning x% no matter what) and the other piece of capital is based on the the multiples.
This is pretty interesting - I am curious to see where it all shakes out if you go through with it.
All of those things would be great changes for the LPs. But this is just an offering memo I received, so it’s a yes or no situation. Without any of the protections you mentioned, it’s a “no” for me.
What about the exit?
Same, 70/30 split
I’d get a lot of clarity around that as it’s very hard to sell a portion of a restaurant if you want to exit and they don’t, especially if they don’t have the cash to buy you out. I’ve had 2 small restaurants and had a 50/50 split with a partner in one of them and wanted out. Had to buy them out because selling less than 100% of stuff like this is challenging to say the least.
Also, I wouldn’t be into that 70/30 at exit. Should be more balanced IMO. When you’re thinking of the exit it’ll probably be something like 2-4x levered CF. Keep in mind you may be in some of those line items (truck and auto and whatever else), those are add backs. Your broker will take ~10%. These are some things to think about.
This seems like such an interesting opportunity. Have you ever invested in stuff like this before? Can you elaborate on the restaurant's concept a bit more? I think it's a good idea to put the #s alongside the concept of how something is supposed to look.
GP = 12% and LP = 78%. I'd want to know who is skimming that extra 10% off the top.
Yeah typo, supposed to be 88%
What kind of restaurant is it and how much are you putting in?
Give us some juice
Just be careful. I've owned a restaurant (building, parking lot, physical assets like kitchen equipment - not the business) for close to 20 yrs. In that time, the business has turned over 4 times and is now vacant (prior to covid). This is in a growing are in southwest FL between Sarasota and Naples. It's just a tough business. It's been an Italian restaurant, American, etc. Last owner had an active dinner show with good entertainment to draw people. It's just a hard business. There are some owners who have built empires and own many themes and niches. There are others who have won the chain / franchise game (Darden, OSI, etc. ) . The independent operator of a single "store" has a really tough time.
Does the restaurant include the real estate? Often that's more valuable than the business. Have a buddy who owns a BBQ place (5 locations in NC). The stores do OK but the RE is worth several mil. He owns it separately from the restaurant business and leases it to his restaurants. He can sell the business and keep the RE as those are juicy leases. Currently his business cashflows the leases so he doesn't feel any pain.
Just know what you're getting in to really well before you pull the trigger.
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