Ok so here is the deal.  There is a guy that bought a small restaurant that wasn't well run but the recipes and presentation were great.  He moved it to a larger location in a more uppity part of town and in his first year made $1.1 million in revenue(says he learned a lot and made some mistakes along the way). It is a breakfast/brunch restaurant that closes at 2:00pm.  Their biggest hits are the pancakes and waffles, but have pretty much everything.

He did that one on his own.  He is opening another one in another close by suburb and this time 3 investors have jumped in with him.

I think this would be a good investment opportunity but I would like to remain a passive investor. The next one he wants to open is in a very popular college town an hour from me where I know there will be a lot of volume, but I know leasing is not cheap.  

I know restaurants can be hit and miss and I also don't know enough about the business to know if $1.1 in revenue for one year is really good, or just average?

Go blow that money in Vegas instead of losing it in a restaurant, odds are better in Vegas

John

Most restaurants fail within 3 years

Has the original location been open longer than that? 

Personally a restaurant is the last place I'd invest my own money

So it's a guy that is developing his own chain? Most guys don't franchise with only a few locations, and tend to maintain ownership of all units, to make sure the brand is built up under their care.

It's too early to jump in, unless you have several million and are bored in retirement, I wouldn't dump money into it.

If it were a national brand like First Watch, Sunny Street, maybe. Breakfast foods have high margins.

Who cares about revenue?  What was the profit?

Why does he want investors? If the first location is going gangbusters, he should be able to put together a business plan and get a loan and keep all that sweet green for himself. Why would he want to split up the profit?

Might be cheaper to buy your own IHOP or Waffle House.

Go into your kitchen and take one of your better quality dinner plates or a crystal glass and drop it on the floor.

If that irritates you, then don't invest in restaurant. 

1.1 mil in revenue doesn't tell me anything, what was the net profit margin after taking everything else out of the 1.1 million?

I'd see if you could take the books to a CPA and have them checked over, especially if it's a considerable chunk of your money.

Has he tried to get financing? If so, was he denied and why was he denied?

Remember, friends or business partners/investor, NEVER do both go together.

Many questions, and much missing information here.

In.

ETA: I don't know scoot about business, and never had the stones to even consider it, but having said that I think that OP would be well advised to listen to the advice given here, and make haste very slowly.

This.

He could turn 600 million in revenue. Doesn't mean jack shit. What was the net profit?

Why can't he put up some cash and borrow some for a second location? To me, that is a UUUUUUUUUUUUUUUUUUUUUGE red flag. I would have to disect the numbers to understand why and even then I might not feel comfortable with it.

If he did a million in revenue he should have put 100k on the bottom line at least, with 100k cash and some bank help, he shouldn't need 4 investors for a second location. He should be able to damn near build it out of cashflow unless he is in a super high cost area.

If the only info you have is gross revenue and the fact that he made mistakes but is learning, i'd run. There is a reason you don't know net profit and he isn't being upfront about it.

If you truly believe this is a good investment and you don't even know the net profit, then you shouldn't be investing. You will lose money. You will be taken advantage of. You will refer to this guy as "that lying cocksucker" within 4 years.

If i tell you that I have a pickup for sale for $14,000 would you say it's a good deal? No more details, quick, tell me if its a deal or not.

I've been fine investing with family and friends but a structure and expectations have to be in place to foster a positive ending.

And as far as 1.1 million being good. Who the hell knows. How many square feet is the place? Lease cost? Net profit? Return on cash invested?

From personal experience, FPNI.

Food and hospitality are the ultimate pyramid scheme.

I don't have any financials yet from him.  He said I should be expecting a call from him soon.  He is currently in the college town checking out locations.

I'm just looking for general 'look outs' on owning restaurants so I can at least ask the right questions when we meet.

As others said revenue means nothing. You could have a revenue of ten million and lose money. Profit is what matters.

I will echo what others said as to why does he need investors? I could see needing help getting the first one going but if it is so damn good that he wants to open another wouldn't he have the means to do so and why would he want to share ?  There may be some good business deals out there but they are few and far between. Most of the time if it is a solid money maker people want to keep it for themselves and when it is risky or unproven they want to use other people's money.

Restaurants have one of the highest failure rates of any business out there. No thanks.

My two cents, what works in one area might not a few blocks away, much less urban to suburbs, where closing at 2 pm won't fly. I would leave provisions to have a say in management in case you see something ridiculous.

Having thought about it since the thread opened, I wouldn't give the guy a dime.

Hang on to your money, OP.

He is calling me this afternoon to open dialogue. 

Here is the website: Clicky

New location to discuss will be Oxford, MS.  Home town of Ole Miss

Sounds like a great place to eat, but I still wouldn't bite.

I think the best thing to do with your money is find something else to do with your money.

The only way I would invest is if I had an active role.  Passive?  No way.  Do you think that businesses that handle a lot of cash like bars and restaurants  show all of that money in the financials?  I'd be skeptical.  A passive investor would be an easy sucker.

The best business is a business where you can steal from yourself.

Invest in the restaurant business? Is this money you just plain don't give a shit about & if it's lost you won't miss it in the least? If not you'd be better off doing almost anything else with it including buying a CD at 1.5% interest.

I just wrote a check for $25k for partial equity in a sushi place. The partner is running the show and I'm just cutting a check. It's not a lot of money but the cost numbers are staggering. Study them well.

As stated before, revenue is meaningless without understanding margin. I would not have written the check if we sold 100 plates but took 95 plates to break even.