Questions to Ask Before Investing in a Restaurant
For anyone asked to put money into someone else's restaurant: a friend's new concept, a chef's second location, a silent partner's stake. The questions follow the order the conversation usually takes: the operator, the numbers, the lease and the space, the terms of the deal, and how an investor gets out. Each has a note on what a solid answer sounds like, what should worry you, and when to take the answer to your own lawyer or accountant.
The questions
Each question, and why to ask it
The operator
Have you opened or run a restaurant before, and what happened to it?
Why ask it
Ask for names and dates, then look the places up and, if you can, eat at one. Someone who has run a kitchen or a floor for another owner made the expensive mistakes on that owner's money. A first-timer is not an automatic no, but then you need to hear who on the team has taken a restaurant through a slow winter.
How much of your own money is going into this?
Why ask it
You are listening for an amount that would hurt them to lose. An operator who puts in only time and asks investors for all the cash keeps the upside and carries little of the risk, and the terms should reflect that. If their share is described as sweat equity, ask how it was valued.
Who will be in the building running it day to day, and what happens if that person leaves?
Why ask it
Cooking, managing the floor and watching the money are three jobs, and one person rarely does all of them well. Get names, and ask whether any of them has a contract or a stake that gives them a reason to stay. Be wary if the whole plan rests on one talented person with nothing tying them to the place.
Why this concept, in this neighborhood, at these prices?
Why ask it
The answer should describe real people nearby and why they would come back on a weeknight, not the operator's love of the food. Ask which restaurants within a few blocks they count as competition, and visit those at the same hours before you decide.
What is most likely to make this fail, and what would you do about it?
Why ask it
Everyone raising money has the best case ready. The operator worth backing names the weak point without being pushed, whether that is parking, the cost of the kitchen or finding cooks, and has thought a step past it. 'Nothing, really' means they have not looked or will not say.
Why raise the money from people like me instead of borrowing it?
Why ask it
There are fair reasons: lenders can be wary of new restaurants, and a loan needs repaying from the first month. Ask whether they applied anywhere and what they were told, because a lender's objection is free research. Vagueness here sometimes means the numbers were shown to a professional and did not hold up.
Can I speak to someone who has invested with you before, or worked for you?
Why ask it
A past investor can say whether the reports arrived and whether bad news came early or late. A former sous chef or manager knows how the place ran when the owner was out. If neither can be offered, ask for a supplier: they know who pays on time.
What else are you running, and how many hours a week will this restaurant get from you?
Why ask it
This matters most for a second location or a chef with other projects. A new restaurant takes far more of an owner's attention than a settled one, and the original can slide while they are away. Ask who runs the first place once this one opens.
Is there anything I would find if I went looking: a closure, unpaid taxes, a lawsuit, a partner who left?
Why ask it
Ask it kindly, and then do go looking, since company and court records are open to the public in many places. A closed restaurant explained plainly is a better sign than a tidy story with a gap in it. What counts is whether you heard it from them first.
The numbers
How much are you raising in total, and what exactly will it pay for?
Why ask it
Get the list line by line: construction, equipment, deposits, licenses, opening inventory, hiring and training, and cash held back for the first months. If part of it will pay off old debts or the operator's earlier losses, you need to hear that now, because that part of your money builds nothing.
Is there a minimum you have to raise before any of my money is spent?
Why ask it
If they need a certain sum to open and collect only half, the half spent first is the half most likely to be lost. A careful operator holds investor money aside until the minimum is reached and returns it if it is not. Ask for that in writing.
What is the build-out budget, and who gave you the quotes?
Why ask it
Figures from a contractor who has walked the space are worth more than an estimate per square foot. Ask how much is set aside for surprises and what gets cut if costs run over. Kitchens, ventilation and old buildings are where these budgets tend to go wrong.
After the doors open, how many months of losses can the business absorb before it needs more cash?
Why ask it
A new restaurant often loses money while the room fills and the kitchen settles. You want a figure in months and the assumption behind it. If the plan shows a profit from the first week with nothing held in reserve, expect a call asking for more.
What sales are you expecting in an ordinary week, and how did you build that figure?
Why ask it
The honest version is arithmetic: seats, how often they fill at lunch and at dinner, the average spend per guest, the days open. Have them walk you through a Tuesday as well as a Saturday. A sales figure chosen because it makes the rest of the spreadsheet work falls apart on the Tuesday.
How will you fill the room in the first three months, and what does the budget allow for it?
Why ask it
Opening-week curiosity fades, and the sales forecast depends on what replaces it. A good answer is concrete and cheap: nearby offices and hotels to call on, a soft opening for the neighbors, a following the chef already has. 'Social media', with no person and no money attached to it, is a hope.
What are you assuming for food cost, labor and rent as shares of sales?
Why ask it
These three decide whether anything is left over. You do not need to know the right figures yourself: ask where each came from, then ask the owner of a similar restaurant, or an accountant with restaurant clients, whether they look realistic for that kind of place. A menu costed dish by dish from supplier prices beats a round number.
What weekly sales does the place need just to break even?
Why ask it
Set this beside the weekly sales they expect. The distance between the two is the room the restaurant has for a slow start. An operator who cannot give a break-even figure has a menu and a room, but not yet a plan.
When do you expect the restaurant to turn a profit, and when would I have my money back?
Why ask it
Get both as dates, with the reasoning, and write them down so you can hold them against the projections later. A payback date worth trusting already allows for a late opening and a slow first year. Treat a yearly return quoted with no dates behind it as a hope, and find out what has to go right for it to come true.
Can I see the projections, including a version where sales come in a third lower?
Why ask it
Any plan works in its best case. The lean version shows what happens to the cash, and to payments to investors, if sales fall well short or the opening slips by three months. If nobody has run it yet, it can be run before you sign, and it should come with a plan for a slow start: shorter hours, a smaller menu, the owner working the line, or more money from you.
If the restaurant is already open, can I see its profit and loss statements, tax returns and register reports?
Why ask it
For a second location, or a stake in a place that is already open, real history replaces most of the guesswork. The three should roughly agree with one another, and an accountant can tell you fairly quickly whether they do. Be careful when all you are offered is a summary the operator typed up.
What does the business owe right now, and to whom?
Why ask it
Bank loans, equipment leases, unpaid suppliers, back taxes and money from family all count. What matters to you is which of them are paid before investors are. A large debt you were told about is easier to live with than a small one you discover afterwards.
How much of the plan depends on selling alcohol, and where does the license stand?
Why ask it
Drinks can carry a large part of a restaurant's profit, and the rules, cost and waiting time for a license differ from place to place. Ask how it works there, whether the license has been granted or only applied for, and what the numbers look like if it arrives six months late.
What will you be paid, and is that taken before investors see a return?
Why ask it
A working owner should earn a fair wage for the job, so a salary is not a warning sign. Pin down the amount, who can raise it, and whether relatives are on the payroll. With no cap in the agreement, profit can leave as wages before any of it reaches you.
The lease and space
Is the lease signed, and can I read it?
Why ask it
If it is not signed, your money may be committed before the most important contract exists, so ask what happens to it if the negotiation falls through. If it is signed, read it or pay someone to. A bad lease can close a restaurant that is otherwise doing well.
How many years are left on the lease, and are there options to renew?
Why ask it
Compare the term with the time it should take to get your money back. A short lease with no renewal option lets the landlord raise the rent or reclaim the space just as the restaurant starts to pay. The details to get are who holds the option and how the rent is set when it is used.
What is the full monthly cost of the space, and how does it rise?
Why ask it
Base rent is only part of it. Ask about property taxes, insurance, shared maintenance and any percentage of sales the landlord takes, and get the yearly increases. Then check that this total, not the base rent, is the figure in the projections.
Who has signed a personal guarantee on the lease, and will I ever be asked to?
Why ask it
A personal guarantee can leave someone owing rent after the restaurant has closed. A silent investor would normally want no part of one, so have the agreement say you will not be asked. How far a guarantee reaches depends on the lease and on local law, which is a question for a lawyer where the restaurant is.
If the restaurant is sold, can the lease pass to the buyer?
Why ask it
Much of what a buyer pays for is the right to stay in that spot. If the landlord can refuse a transfer or reset the rent, then a sale, and your exit with it, depends on the landlord. Have them show you the clause that covers it.
What was in this space before, and how did it end?
Why ask it
A former restaurant can save money on the kitchen and the ventilation. It can also be a warning when two or three have failed at the same address. Ask the neighbors as well as the operator, and ask what this plan does that the last tenant did not.
What is the landlord contributing to the build-out, and who owns the improvements afterwards?
Why ask it
Some landlords give free months or money toward construction, so find out what was offered and what was asked in return. Under many leases whatever is fixed to the building stays with it, which would make a large part of what your money builds something the business cannot sell. Read what this lease says about it.
Do you, or anyone close to you, own the building or any company the restaurant will pay?
Why ask it
An operator who owns the property is not a problem in itself, and may make for a stable landlord. It does mean rent is a way for money to leave the restaurant before profit is counted. The same goes for a relative's supply firm or a management company, so ask for those arrangements in writing at a market rate.
Which permits and inspections are done, and which are still to come?
Why ask it
Health, building, fire and signage approvals are usually separate, and what is required depends on the city. Rent is often due while they are pending. Ask for the list with dates, and who on the team has taken a restaurant through the process in that city before.
Is the restaurant insured against a fire, a flood or a long closure, and what would the policy pay?
Why ask it
A kitchen fire can shut a restaurant for months, and what your money built is inside it. The points to hear are whether the cover would pay to rebuild, whether it replaces lost income while the doors are closed, and whether serving alcohol needs separate cover where the restaurant is. A lease often sets a minimum, and that minimum is there for the landlord, not the investors.
The deal
Am I buying a share of the business or lending it money?
Why ask it
These are different deals. A loan has a rate, a schedule and an end. A share has none of those and pays only if there is profit or a sale. Some offers mix the two, so have the operator say which this is in one sentence, then check that the document says the same.
Which company am I investing in, and what does it own?
Why ask it
With a second location especially, ask whether your money buys part of the whole group or only the new site. Then ask where the name, the recipes and the lease sit. If the brand belongs to a separate company owned by the chef, the restaurant you part-own may be paying to use it.
What percentage do I get for this amount, and how did you value the business?
Why ask it
Divide your money by your percentage and you have the value being put on a restaurant that may not exist yet. Ask what the operator's own share cost them in cash. No figure is the correct one, but you should hear reasoning, not a number picked to keep them in control.
How do investors get paid, and do we get our money back before profits are split?
Why ask it
Deals differ. In some, investors receive most of the cash until their money is returned and the split then shifts toward the operator. In others everyone shares from the first dollar. Ask for a worked example in real figures for a good year and a thin one.
Who decides when profits are paid out and when they stay in the business?
Why ask it
A restaurant can be profitable for years and pay out nothing if the operator alone chooses to keep the cash for repairs, a reserve or the next location. Look for a rule in the agreement, such as a payout each quarter of whatever sits above a set reserve. 'When we can' is not a rule.
How will my share be taxed, and could I owe tax on profit that was never paid to me?
Why ask it
In some structures and some countries an owner is taxed on their part of the profit whether or not any cash arrives. Whether that applies depends on how the company is set up and where you live, so put this to your own accountant too. If it does apply, ask whether the agreement requires a payout large enough to cover the bill.
Can I ever lose more than the amount I put in?
Why ask it
The answer you want is no, in writing. It depends on the type of company, on anything you sign besides the investment itself, and on local law, so ask a lawyer how it works there. Take particular care with any request to co-sign a loan, a lease or a supplier account.
If the restaurant needs more money later, do I have to put more in, and what happens to my share if I don't?
Why ask it
There are three usual arrangements: you must contribute, you may contribute, or new money comes in and your percentage shrinks. Find out which this is, and whether you get the first chance to invest on the new terms. Set your own limit now, because the request tends to arrive when the place is struggling and a no feels like causing the closure.
What do you expect from me besides the money?
Why ask it
Some operators hope for introductions, a signature on a loan or a job for a relative, and some want a backer who never mentions the menu. Hear which before you invest, and say plainly what you are willing to do. If you pictured having a say in the food or the decor, better to learn now that you will not.
Which decisions need the investors' agreement?
Why ask it
A silent partner does not pick the menu or the staff, and should not want to. The reasonable list is short: selling the business, taking on large debt, bringing in new owners, changing the operator's pay, opening another site with this company's money. With a say in none of those, you are relying on goodwill alone.
What reports will I get, how often, and may I look at the books?
Why ask it
A monthly or quarterly profit and loss statement, year-end financial statements and the right to inspect the records on request are ordinary things to ask for. It also helps to know who keeps the books and whether anyone outside the business checks them. Reports that have to be chased in a good year stop arriving in a bad one.
Who else is investing, and is everyone on the same terms?
Why ask it
Other investors can be a comfort or a complication. Find out whether anyone paid a lower price, is repaid ahead of you, or holds a vote you do not. An experienced restaurant person among them is a good sign, and worth a phone call.
Are there investor perks, such as dining credit or a held table, and how are they counted?
Why ask it
Free dinners are pleasant, and they are not a return. If perks are part of the pitch, check that they are in the agreement and do not reduce what you are paid, and ask how they are treated for tax where you live. An offer that leans on the perks may be light on profit.
If you open another location, do I get to invest, and could a similar restaurant of yours compete with this one?
Why ask it
The risk is that this restaurant shows the idea works and the rewards land in a new company you own none of. A right to invest in later sites and a limit on the operator opening the same concept nearby are both fair to ask for. Whether such a limit can be enforced depends on where you are.
Is everything we have discussed in a written agreement, and who drafted it?
Why ask it
If the operator's lawyer wrote it, it was written for the operator, so have your own read it before you pay. Check that each promise from these conversations appears in it: the payout order, the reports, the cap on pay, the exit. A friend who resists paper 'because we trust each other' has it backwards, since the paper is what keeps the friendship out of any dispute.
Getting out
How do I get my money out, and what is the earliest that could happen?
Why ask it
A stake in a private restaurant has no market to sell it on, so unless the agreement provides a way out there may not be one. Listen for something specific: a buyback after a set number of years, repayment from profits, a planned sale. If the true answer is 'when we sell, if we sell', invest only money you can leave there indefinitely.
Can I sell or give my stake to someone else?
Why ask it
Many agreements limit this, often by giving the operator or the other owners the first chance to buy, and that is reasonable. A flat ban is not, and neither is a rule that lets them choose the price. Ask as well what happens to the stake if you die, so your family is not left to work it out.
If you wanted to buy me out, or I wanted to be bought out, how would the price be set?
Why ask it
A formula agreed now saves an argument later, when one side wants a high number and the other a low one. A multiple of profit and an independent valuation are two common methods. Have the formula run on the projected third year so you can see what it produces.
What do I receive if the restaurant is sold?
Why ask it
The order is the thing to pin down: who is paid first from a sale, and where investors' original money sits. Check whether the operator can sell without your agreement, and whether a sale to a relative or to their own new company is treated differently. A worked example at a modest sale price tells you more than the clause does.
If it closes, who gets paid from whatever is left?
Why ask it
Little usually remains, and people the business owes money to generally come before its owners. Ask how the order runs where the company is registered, and where a loan from you would sit compared with a share. Used kitchen equipment tends to sell for far less than it cost, so plan on a closure returning nothing.
What happens if you die, fall ill or decide you no longer want to do this?
Why ask it
In a chef-led place the operator is the asset. Three things to hear: whether there is insurance on them that pays the business, who would step in, and whether investors could appoint a manager or force a sale. Their share needs an answer too, if they leave to open somewhere else.
At what point would you close, and who makes that decision?
Why ask it
Operators tend to keep going past the sensible point, on their own savings and then on anyone else's. Agree a trigger in advance, such as a number of months below break-even or the reserve falling under a set figure, at which everyone sits down. Whoever holds this decision also decides how much of the remaining cash is spent trying.
If we disagree badly, how is it settled?
Why ask it
Look for the steps in the agreement: a conversation, then a mediator, then whatever formal route applies where the company is based, and who pays for each. Between friends, having a process at all matters more than its details. It gives both of you something to follow other than a falling-out.
If I lost all of this money, where would that leave the two of us?
Why ask it
For anyone investing with a friend or relative, this is the one to say out loud. Reassurance that it cannot happen is the wrong answer. The right one comes from an operator who has plainly thought about it and still wants your money on those terms. If the loss would change your life or end the friendship, put in less.
How to question a restaurant operator before you invest
Practical guidance for the conversation itself
Before you meet
Ask for the paper first
Request the business plan, the projections, the lease and the draft investment agreement by email before you sit down. They answer much of The numbers and The lease and space on their own, which leaves the meeting for the questions you need to hear answered in person. An operator who has none of them yet is asking too early.
Eat there, or eat their food
For a second location, go to the first on a quiet weeknight and pay for your meal. For a new concept, ask for a tasting or a pop-up night. You are not there as a critic. You are seeing whether the room, the prices and the crowd match what the plan says.
Decide your number at home
Settle the most you would put in, and whether you would add more later, before anyone is sitting across the table from you. The useful test is whether losing all of it would change how you live. If it would, the amount is too high whatever the answers turn out to be.
Line up your own advisers
Find an accountant and a lawyer who work with small businesses where the restaurant will operate, and tell the operator early that both will read the documents. It costs money, and it sets the tone: this is an investment, not a favor.
In the conversation
Start with the person, end with the exit
The list runs in the order that tends to work: the operator's history, then the numbers, the lease and the space, the deal and the way out. Asking about the exit first sounds like distrust. Asked last, after an hour of serious questions, it sounds like care.
Ask where each figure came from
You do not have to be able to judge a food cost percentage. Ask how it was worked out and by whom. 'From the supplier quotes for this menu' and 'that is the industry standard' are very different answers, and you can hear the difference with no restaurant experience at all.
Watch how the hard questions land
An operator who takes the awkward ones about salary, debts and past closures without bristling is showing you how bad news will be delivered later. Defensiveness in a meeting where they want your money will not ease once they have it.
Write down what was promised
Keep notes of each commitment: the payout order, the reports, the cap on pay. Send a short summary afterwards and ask them to confirm it. That email becomes the checklist your lawyer holds against the agreement.
Checking what you were told
Match the lease to the projections
Take the rent, the extras and the yearly increases from the lease itself and compare them with the rent line in the spreadsheet. Do the same with the term: if the plan repays investors over seven years and the lease runs for five with no option, one of the two has to change.
Rebuild the sales figure yourself
Multiply the seats by a cautious guess at how many times each one fills in a day, then by the spend per guest and the days open. Then stand outside a comparable restaurant on a weeknight and count who goes in. If your rough number lands far below theirs, ask them to show you what you are missing.
Work the payout on a thin year
Ask for the distribution rules to be applied to a year with a small profit, not only the projected one. Seeing in dollars what would reach you, what the operator would take as pay and what stays in the business shows how the deal behaves when things are only fine.
Make the calls
Phone the references, a supplier and, for a restaurant that is already open, the landlord if the operator agrees. Put the same plain question to each: would you do business with this person again? A pause before the answer tells you something too.
Reasons to walk away
Numbers you are not allowed to see
Projections with no assumptions behind them, or an open restaurant whose tax returns stay private, leave you investing in a description. Confidentiality is a fair reason to ask you to sign a non-disclosure agreement first. It is not a reason to hold the figures back once you have.
A deadline that only applies to you
Leases and contractors do impose real dates, and an honest operator will show you them. 'I need to know by Friday' with nothing behind it is pressure, and money committed in a hurry is money that was not checked.
No money of their own in it
An operator who risks nothing but time can walk away from a failing restaurant more easily than you can. If they have no savings to put in, look for some other weight on their side, such as their name on the lease guarantee or a salary deferred until investors are repaid.
A handshake between friends
The closer you are, the more the terms need to be on paper, because a misunderstanding will cost you the friendship as well as the money. If asking for a written agreement is met with hurt feelings, lend nothing you would not give away.