Investing in a restaurant. What ROI on £10k??

[cash_is_king]

hey guys,
So a friend of a friend is setting up a restaurant. And she is interested in investment.
Just wondering what would be reasonable to ask for a 10k investment? And should I ask for monthly, quarterly or yearly return? I have no experience in this. Anyone info/advice appreciated.
Thanks

 

[Mr D]

A bit more info could help.

 

[cash_is_king]

Hey Colin.
What other info should I include?
Cheers

 

[Jonathan Black]

If your investment is purely because you want to get a return on your money, then you would need to ask for a % of equity that would cover your investment in a reasonable time - a few years maybe..

To work that out you would need to know what the expected profit is going to be. Does she have any financial forecasts?

 

[Mitch3473]

Has your friend of a friend any experience in this sector, ie running a business as opposed to likes cooking etc etc

 

[Jonathan Black]

Yes, should have mentioned that restaurants are notoriously not very profitable, so if your friends friend doesn't have any experience in the sector, that would be a red flag.

 

[wevet]

Restaurants have the highest business failure rate. If your mate is short of £10k I would suggest they are under capitalized and your £10k should be lent almost at Wonga rates to reflect the risk!

 

[Mr D]

Base return you want on the risk to the capital you may not see any of it again.
Or it may be part of something wildly successful and can get 30 grand plus for it.

A loan to the business is different than purchasing a percentage of the business.
You do need to be aware that a business can go under and you get little or nothing. The first few years is said to be the highest risk.

 

[Alan]

Wonga rates to reflect the risk!

My thoughts exactly - Wonga is lending at just under 300% and I would have thought that would be fair, giving you are risking all £10k with a reasonable probability of losing the lot.

 

[Mitch3473]

My thoughts exactly - Wonga is lending at just under 300% and I would have thought that would be fair, giving you are risking all £10k with a reasonable probability of losing the lot.

Just about fits in with the 60% failure rate.

 

[cash_is_king]

Hey guys.
Thanks for the replies, very helpful.
To put you in the picture, she already has 3 successful food stalls around London. She has a good rep amongst the foodies and regularly sells out pop ups and food events. So it's natural progression to open a restaurant.
I would be interested in putting in 10k for a share of the business and my gut says she will make a success of it.
Ideally I'd like a % of the business and an interest payment 6 monthly or yearly.
But what would be reasonable to ask??

Cheers

 

[Mr D]

Be reasonable to ask for a percentage or an interest payment. Both seems over the top.
Is this a loan or is this buying a share of the business?

 

[Alan]

Well you can ask what you want. But don't start too low as it is difficult, but not impossible, to up your bid.

 

[cash_is_king]

Thanks guys. I'd prefer a share in the business as I think it could be the start of something great.
So how would I calculate the % to ask for??
Thanks

 

[Alan]

If she sold the business today what would she get for it? ( if you read this forum - you will know that is an impossible calculation, as it depends with small business what a buyer will pay).

I'm no expert on valuation - I just read what @Clinton writes.

You will need to look at her accounts, assets, liabilities etc. And ensure you deduct a living wage for her from any profits. Then when you have a number is will give you an idea, but it will be up to you.

Divide £10k into what you value the business at less some comfort factor.

Lets say you value the at £20k. And you assign a risk of 33% of it going bust / you missed something in due diligence , so maybe a risk adjusted value of say £13,000.

So your £10k / £13k = is 76% of the business

Lets say you value the at £200k. And you assign a risk of 33% of it going bust / you missed something in due diligence , so maybe a risk adjusted value of say £130,000.

So your £10k / £130k = is 7.6% of the business

I'm sure this is not the right way of doing it - but it one way of doing it.

 

[cash_is_king]

Thanks for the help Alan

 

[MikeJ]

To put you in the picture, she already has 3 successful food stalls around London. She has a good rep amongst the foodies and regularly sells out pop ups and food events. So it's natural progression to open a restaurant.

I suggest you print that on the paper hankies you'll be using to wipe away your tears in a couple of years time.

 

[Noah]

I suggest you print that on the paper hankies you'll be using to wipe away your tears in a couple of years time.

That's a little acerbic, but I am inclined to agree with scepticism about the "natural progression"; it may be natural, but that does not make it any more likely to succeed, and actually the implied hubris increases the risk of failure.

In summary : don't expect success at food stalls and events to be directly applicable to running a restaurant business.

I speak from experience.