Restaurants and bars can be great investments. But it isn’t always easy to cook up profits.
The allure of restaurants can be glamorous for investors. Packed seating and luxurious menus are just the start. Many dreams of filling their plates with lucrative returns too. However, the reality is much riskier.
Matthew Iovane understands this more than most. The son of a restaurateur, the New York-based entrepreneur, has spent most of his life investing in real estate. These ventures have extended into both the U.S. and Europe. As founder and CEO of a private firm in the UK, he has specialized in the food and drink industry. Most recently, he became a partner and investor at Bloc Collective, a beverage startup.
Sharing his knowledge and experience with others, Matthew Iovane cautions beginners before they go all-in. To help, the real estate professional lists four factors to consider when investing in a restaurant or bar.
Research the market
Don’t put in a dime until you’ve done your due diligence. While this is always great advice, it’s especially true in the hospitality industry. Look at demographic information, including incomes, education, and ethnic backgrounds of your potential customer base. Their needs and wants should influence the decisions of menu and pricing. Make sure you’ve vetted the operator as well. It’s even dicier to invest in someone who hasn’t opened and run a restaurant previously.
Determine your role
Ask yourself what type of investor you want to be. Although active, hands-on involvement can be rewarding. It may be unrealistic given other commitments. For this reason, most investors prefer a passive or advisory role. Decide what works best for you. Then, Matthew Iovane encourages investors to vocalize these expectations with partners and ensure they are on board too.
Review the business plan
Investing in a restaurant isn’t a hobby. The goal is to make money. Without a strong, actionable business plan, this is unlikely. Spending too much money opening a new space is one of the most common mistakes. Matthew Iovane warns against sinking funds in design, decor, and other aesthetics that aren’t functional. Keep fixed costs low. Also, limit long menus with expensive items. Even high-end restaurants speed up preparation and minimize food costs by incorporating the same ingredients into many different dishes.
Consider return and scale.
Always have an exit strategy. Single restaurant investments can be profitable, but the opportunity to sell a brand and scale is much more intriguing. This reduces the risk of your initial investment. Matthew Iovane advocates being much more engaged with this side of the business plan. Understanding expenses and cash flow is key to daily responsibility. These keep the doors open. However, strong branding and scaling unlock long-term potential.