Partners or Investors – Which is the Best Way to Finance Your Restaurant?

Posted by Restaurant Secrets Inc

Partners and investors

Startup restaurants almost always require outside funding. (Unless your restaurant generates tremendous profit, growth often requires outside funding, too.) Partners and investors can not only provide money but also experience and skills your operation currently does not have; on the other hand, they can create problems your business will be unable to overcome. Let’s take a look at the pros and cons of raising capital by bringing in partners and investors.

Quick note: For the sake of this discussion we will define a partner as a person with an ownership stake in the restaurant and is also able to make or participate in business decisions (depending on the partnership agreement, of course.) Investors may or may not have decision rights; they may simply provide funds in exchange for an ownership stake or future return. To keep things simple, we’ll assume a partner will take on a key role in the company while an investor will not (other than providing funds, of course.)

So if you are looking for outside funding, do you want a partner or an investor? All other considerations being equal, the right answer depends on your goals and needs.

  • If you only want capital, an investor is probably the best choice. While you do give up an ownership stake, in most cases you will retain the majority of the “decision rights” for your restaurant.
  • If you need expertise or skills you do not have – in addition to capital – taking on a partner may be a better choice. (Taking on a partner may also be your only choice if you cannot find investors who are willing to take a hands-off approach.)

For example, seek an investor if you plan to: -

  • Purchase new equipment or open a new location
  • Develop and launch a new concept or service method (catering, etc)
  • Pay down high-cost debt (from a conventional lender)
  • Undertake a major marketing initiative

But seek a partner if you need to: -

  • Get access to capital, and
  • Offer additional expertise to customers (say, an experienced sommelier or pastry chef)
  • Bring specific functions in-house (certain types of food prep, or storage, etc)
  • Acquire capabilities and skills your company does not have (financial, marketing, management, etc)
  • Gain access to new customers or markets that partner can help you tap

Think of it this way: If you only need money, seeking an investor is almost always your best option. If you also could benefit from gaining skills and expertise your business currently does not have, taking on the right partner could not only provide funding but could also take your business to the next level.

But keep in mind taking on a partner may not be easy, at least at first. A partner will expect to share in decisions and responsibilities, and rightly so. If you find a partner whose skills complement your skills, or whose skills provide a balance to a few of your weaknesses, you may be happy to share in decisions and responsibilities. If you only agree to a partnership because you are desperate for funding, the arrangement is much less likely to be successful over the long term.

Since an investor tends to create less emotional stress for a restaurant owner, at least on a day-to-day operational level, let’s look at the pros and cons of investors first.

Investors: Pros and Cons

Many people can invest in or lend your startup money: Friends and family, individual investors, venture capitalists, angel investors, banks and other lenders, government agencies, even your suppliers or vendors. (Yes, a lender is in fact an investor.) Each has a vested interest for providing funding to your company: They want a return on their investment.

Pros

  • If the investment is in the form of a loan, interest that is paid is deductible as a standard business expense.
  • Most lenders do not expect to receive some form of managerial control over the business (unless you default on payments, of course).
  • Equity capital (money provided by an investor) is not a loan and does not have to be paid back if the business fails.

But on the other hand…

Cons

  • A loan is a financial obligation and must be repaid.
  • If you default on the loan, even on a temporary basis, you may be required to give up control of the day-to-day operations of the business.
  • Investors typically expect to receive some measure of control over the business in exchange for their investment. (The level of control is typically determined by the extent of the investment but is also based on the agreement you reach.)

How much control over the business does an investor expect to receive in return for their investment? The answer depends on the type of investor. Family and friends are typically “silent” investors; they hope to receive a financial return but often do not ask for a say in how the business operates. Venture capitalists are more likely to require a formal role in making decisions for the business; they want a return and will be eager to make sure they receive that return.

Partners: Pros and Cons

By definition a partner will take a more direct role in running the business, especially if he or she is an equal (or nearly equal) partner. A partner’s ability to provide funding, while important, is just one factor in determining whether they are the right choice for providing that funding. After all, the partner brings cash today… but may in effect join your company forever.

What should you look for in a partner? Find a person or persons with:

  • A good fit of skills, experience, and work ethic
  • Complementary work styles
  • Similar business philosophy, approach to solving problems, etc
  • Good communication skills
  • Respectful, courteous, and professional
  • Outstanding ethics

The above list is just a start; the bottom line is the right partner is someone you can see yourself working with as you grow the business. So what if you find the right partner?

Pros

  • In a general partnership, where two or more parties are co-owners, having multiple owners can make it easier to borrow additional funds because the combined credit rating is higher and the perceived risk (on the part of a lender) is lower.
  • Partners share duties, tasks, and responsibilities.
  • In a limited partnership, where a partner’s responsibilities are limited by their investment and the nature of your partnership agreement, you can raise capital while retaining the majority of decision-making rights. (Silent partners have no decision-making rights.)
  • Unlike a loan, the investment is only repaid when the company profits.

But on the other hand…

Cons

  • Partners are liable for debts and other claims, including the debts of other partners.
  • A partner can enter into legal agreements the other partner is required to uphold.
  • In a limited partnership you may bear the bulk of the responsibility for debts and other obligations.
  • And possibly most importantly, partners expect to have a voice and a say in how the business is run.

How do you decide whether finding partners or finding investors is right for your restaurant? In general terms, if you need funding but you do not need outside expertise or skills, seek investors or lenders – that way you are more likely to maintain day-to-day control over how the business is run.

If you need funding but also need specific skills (or just want someone else to help share the burden of running the business), then taking on a partner could provide the best of both worlds.

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