Determining the right investment terms for a new restaurant is a balance between the restaurant managers retaining the amount of control and payout that they need to run the restaurant that they are envisioning, and the investors receiving a percentage of the restaurant that they think is fair for the amount of money that they are investing. Deciding on the membership interest amounts that achieve these goals can be tricky during the planning stages of the new venture, and the information below provides some considerations for determining these amounts.
Investing in an existing company is much easier to calculate than a brand new company, because the existing company has a determinable value. Thus the ownership that is purchased with a certain investment amount can be merely a matter of doing the math (i.e. if an existing restaurant is worth $2M and an investor puts in $500,000, the investor could receive 20% of the restaurant). Making an investment in a brand new restaurant is less straightforward, however, because it is difficult to put a value on something that does not exist. This is especially true because there are so many variables to a restaurant’s success, from location to price point to surrounding locations to service style.
Therefore, in order to determine the amount of interest in a new restaurant that an investor will receive, the managers should consider:
- How much of the restaurant ownership they want to retain for themselves (generally at least a majority, usually 60-70%);
- How much of the restaurant ownership they want to sell to investors and if any equity will be set aside for service providers;
- Approximately how many investors will be involved;
- Where the investor is located, and whether or not they meet the definition of an Accredited Investor for purposes of federal and state securities compliance;
- The amount of investment money that the managers are seeking and a clear business plan detailing exactly why this exact amount of funds is needed (often described in detail within a private placement memorandum); and
- What requests or demands, if any, the managers have already received from investors regarding ownership amounts.
Given the unique quality of most new restaurants, it is impossible to create a formula that says that if there are a certain number of investors and investment money, there is a specific amount of ownership that must be given. However, considering these factors and speaking with an attorney to discuss your options can help a new restaurant owner decide what to offer to investors for their early confidence in the new endeavor. The attorneys at Bend Law Group can help with these discussions and the related ownership documents and SEC filings. If you would like to talk more about raising investment money for a restaurant or have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.