Restaurant investors get paid in payments, profits, or ownership. To a large extent, how the investor gets paid depends on what type of investment they made in the company at its onset, and what the contract stipulates. Paying investors should be included both in the investment contract and the business plan for any startup restaurant venture.
How are debt investors paid?
Some investment is really just investors fronting the money for a start-up capital loan, in lieu of or in addition to a standard business loan. This is called debt investing. For those that have debt investors, a monthly payment is made against the debt and the interest the debt is accruing.
This payment can either be a set dollar amount, like a $200 dollar monthly payment until the debt and interest are settled, or a percentage of the monthly profits. For example, a restaurant can promise to pay investors 75% of their profits monthly, until all the debt is paid in full.
In this instance, the percentage of the monthly profits paid out is divided equally among all investors. In some cases, this may not be a large enough payment to cover the accruing interest, and so the debt will grow before the premium begins to fall. Unpaid interest is then added to the debt principal, and rolls over to the next month.
The goal, when taking on debt investors, should be to raise the profit percentage, and to pay off debt as rapidly as possible. This not only maintains a good relationship between the restaurant founder and the investors, but also limits the amount of interest the founder pays against the debt, allowing for greater profits in the long term.
How are investors paid on shares?
When an investor gives a restaurant owner capital in exchange for investment shares, they actually own a portion of the company. Every investor owns a certain percentage, or a certain number of shares in the restaurant. The hope is that they will not only recoup their original investment over time, but turn a profit as their share in the business gains financial worth.
Typically, the owner or founders of a restaurant retain 60% ownership in exchange for both their financial investment in the business and their sweat investment. This is a controlling percentage in the company, and gives them the right to keep 60% of the profits long term.
The remaining 40% of the company is divided among investors, with each owning a percentage of the business in proportion to their investment. For example, if a restaurant accepted $400,000 dollars from investors, a $10,000 dollar investment would get the investor a 1% share in the restaurant, while an $80,000 dollar investment would get them an 8% share in the restaurant.
Investors are then paid a percentage of the restaurant’s total profits based on the number of shares they have. If an investor owns 3% of the restaurant, they likewise are entitled to a dividend of 3% of the restaurant’s profits.
If the restaurant fails, there is not loan to call in; the investor simply looses their percentage of the restaurant. They share in the business risk, just as they share in the business profits. This risk is especially high in the restaurant business, an area of business where most start-ups fail.
The owner can, eventually, buy out investors by paying them a certain dollar figure, equal to the cash value of the investors’ ownership percentage of the business’s total worth. This eliminates the investors claim against the restaurant, and allows the business owner to resume full control of the business and its assets.
How are standard investors paid on a high-risk venture?
In a restaurant’s early days, an investor can require payments in excess of their share dividends in order to recoup their initial investment, and begin profiting from the restaurant’s success more rapidly. This is especially common if they invest a very large sum of money, or if the restaurant venture is considered exceptionally high risk.
In these cases, the investors earn money in a manner that combines the debt investment structure and standard dividend payment structure. Typically, a restaurant owner may be required to pay 75%, or even 100%, of their business’s profits back to investors, until all the initial payment dollars are retuned in full. After the initial investments are paid in full, investors begin earning profits on a 1:1 ratio, based on the number of shares they hold in the restaurant.
This decreases the risk to investors, because they stand to gain their financial investment back in the restaurant’s early days. As with standard investments, however, the risk of failure is shared and, should the business fail before the initial investment was repaid in full, the finances would simply be lost. The restaurant owner would not be under any obligation to repay the outstanding investment.