Your Questions About Investing In Restaurants

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David asks…

Can you buy a local store/restaurant?

Is it true that you can actually buy and manage a local store/restaurant like a local McDonalds or Subway or even a nearby Wal-Mart store? Because I heard there’s a lot of people that get rich from investing in local restaurants and stores like these. But do they actually own the restaurants or how do they “invest” in them? I’m new to economics so I really don’t know how investments work.

Justin answers:

With something like a McDonalds or Subway you are not buying the store. You are franchising the company name. That means if you do not run it the way Subway tells you too they can revoke your franchise. There will be a very long contract that tells you exactly what their requirements are for you to be allowed to use that well known name. That gets you a name and supplier for most of the things you need to run business, and they will limit where you are allowed to build so that they are not allowing you to take business from someone else that paid to use the name. Some of the contracts have performance requirements as well. That means Subway could also pull your franchise license if you are not moving enough merchandise.

In most instances, you have to know where you are going to build the store or lease the space for it before they will sign the final contracts. Basically you get most of the profits, but you are at their whim based on the contract for exactly how it looks and what you are allowed to serve. If you have a Subway franchise you can not serve hamburgers at the store… Unless Subway corporate decided to add them to the menu.

The other option is to buy a restaurant building and just get a state license to run it. Lots of hoops to jump through, and you will not get the benefit of the Corporation doing much of the advertising for you. You will have to name it something you make up that does not infringe on trademarks, so you will also not have a name everyone already knows. The bonus is that as long as you are within state laws you can serve anything you want. Every penny that does not go to running the place is yours. You can buy supplies from anyone that will sale them to you.

Some big names are wholly corporate owned and do not offer franchises. I do not think you can own a WalMart. I believe the corporation owns all the stores.

Good luck getting into a business that works for you. Please do a lot of research since almost all start up businesses fail in the first few years. And even if they are a success, they often take years before they actually start making money. If you do not handle things correctly it is much easier to bankrupt yourself and your whole family than it is to be a success.

Paul asks…

How do I turn a sole proprietorship into a partnership legally?

My friend has invited me to invest in his restaurant business. I have to put in 100k so I want to make sure I am legally half owner. How will I go about doing this and do you have any tips?
He claims the business is worth 300k. I have staff and will be adding a bar inside the restaurant. The location is great next to a busy intersection. They haven’t done any advertising.

Justin answers:

You draft a Partnership Deed and put signatures. This Partnership Deed would contain the agreement between both of you, effective date of partnership, duration of partnership, nature and style of business, duties of both partners, amounts invested, profit/loss sharing ratio and others.This Partnership Deed must be autneticated legally i.e. Attestation by Notary Public etc.

Ken asks…

What is the difference between a communist government and a democracy?

OK, strange question from an american who grew up during the cold war. We were told communism was really bad and taught to hate and fear it. Alot of our money was spent and alot of american lives lost fighting the spread of it. But I have been living in China for the last year and now I don’t get it. These people live the same lives we do, have the same dreams and the same problems. You can say they have no human rights, but they seem to do whatever they to. In fact, they are getting more rights everyday, and we in the usa seem to be getting less. Their government controls information they get and tells them lies? How about ours? We vote for representation in government and they don’t? Do you really think your vote counts when the electoral college actually decides this? They have families, cars, homes, electric bills, they go to clubs and eat at restaurants, pay taxes, invest in their future. They get married, divorced, have lovers etc. Is it about religous freedom?Where is ours now?
I’m not trying to say the usa is bad, but alot of people in the say this. I only want to know what it is we were fighting against ? These people are the same as us, nothing I see about china to fear. In fact, they are alot happier with their lives and system than we are. I’m still an American, but now my eyes are open to the real world situation. been lied to for so long we actually believe we’re better than everyone else, but I can tell you fellow americans, we’re not

Justin answers:

I live in a communist country-China and for all practical purposes it is not very different from the US…I enjoy the same rights as you do…perhaps even more. We do not suffer censorship as much as you might think…though Hong Kong Press tends to say otherwise. Human rights are kind of a joke here as we look at the ‘rights’ of Americans and wonder who should point the finger at whom. The voting system is complex but there is a majority vote here. Yes, we have cars, apartments, TV, DVDs, lovers, but divorce is uncommon. We worship as we like, there are two churches in my city (both Protestant)…I am Buddhist…We eat at McDonalds, KFC, Pizza Hut or Taco Bell and drive Buicks, Lexus or Hondas. I am a white American and between the US and China….I enjoy life better here.

Steven asks…

What does a business proposal look like?

What is the best way to write a business proposal. I’m trying to get people to invest in my restaurant? I have a couple of people inter-rested, but I have to write a proposal. I $100,000 of equipment to put up for collateral. I just need $30,000 to help & push my restaurant. It has 50,60,& 70 memorabilia. It has been put in Texas Highway magazine ones this year.

Justin answers:

It’s called a Business plan. Look up PaloAltosoftware.

This is a brief description of major documents you need to complete.
A.Your Restaurant
b.Your Company details-? Are you, ? Long have you been in business?
C.What your selling
d. Your Market
e.The business your in
f. Your Management Team
g.Star up funding
h.Profit and loss table-graphs are very nice
i. Projected Plan
j. Analysis Table
k.Explain Break and even Analysis
l.Finacial Plan
Wish you success, drop by my website and let me know when you do.
Glad to help, Adaruth

John asks…

I’m looking to invest in a restaurant for 5% share, what are the procedures in doing so?

I’m one of the chef/bartender in the restaurant so I’ve decided to invest some of my money while I’m at it. The restaurant is not open yet but the owner has began the constrution

Does anyone know what paperwork or procedures are require? Do I need a lawyer or accountant to draft up any paperwork?

I know it’s the best interest for us to have everything done on paper by professionals but I would like to avoid as much paperwork as possible. Anyone know the shortcut into doing that?

Thanks in advance

Justin answers:

The owner should provide you with some basic information about how he or she is structuring the ownership of the restaurant. Generally, if this is in the United States, the owner will be forming a partnership, limited liability company, an S corporation or a C corporation. These all have different implications for tax and liability purposes. I’ll summarize them briefly here:

Partnership — When a partnership makes profits, you immediately pay taxes on it (you’ll file a K-1). In addition you face personal liability for obligations of the company (i.e., creditors of the partnership can sue you if the partnership fails to pay). Members of partnerships are called partners. Each partner has the authority to bind the partnership.

LLC — Similar to a partnership for taxes but there is limited liability (meaning creditors of the LLC should not be able to sue you). Proper LLCs have a written operating agreement that afford a fair amount of flexibility in structure. Members of LLCs are called members. LLCs are typically run by managers who are the ones that can bind the LLC.

S Corporation — Similar to a partnership for taxes but there is limited liability. Members of S corps are shareholders or stockholders. S corps need not have a written operating agreement — they rely on the traditional US structure of board of directors and executives.

C Corporation — A C corporation is a separate person for tax persons meaning you do not pay taxes as the C corp earns money but as a disadvantage when the C corp dividends funds to you you pay a dividend tax (thats why many small business owners don’t want C corp — thats two level of taxes). C Corps need not have a written operating agreement — they rely on the traditional Board of Directors governing scheme.

If your owner says that he has a partnership, ask it to be modified to be a limited partnership at least (as the silent partner you’d be the limited partner and he’d be general partner — you’d have limited rights but limited liability). It doesn’t make any sense to be a 5% owner and have general liability. Formula for disaster.

If your owner says that he has an LLC, ask for a copy of the operating agreement. The operating agreement should specify what rights a member has and what rights of distribution a member has. For you, whats key is (a) what happens when you want to sell or get rid of your membership interest — typically you want a buyout if you have the leverage or otherwise lets say you quit the restaurant — do you still want the 5% or you want to be bought out at FMV and (b) when are distributions made and who decides. You see, since you only own 5% if its decision by a majority, in an LLC you can face the difficult situation that you are paying taxes on the money the LLC earns but unless the LLC distributes that money, you aren’t getting it (it stays in the LLC — you have the right to it if the company is dissolved but otherwise the manager decides what to do with it).

If the owner says he has an S corp you need to focus on the same 2 issues above but since its an S corp you don’t need an operating agreement. Instead you’ll want a shareholders agreement where all the shareholders agree what to do if someone leaves and when dividends are distributed. Again, the key things to focus on are (a) what happens when someone leaves and (b) who decides how often money gets pulled out of the S corp.

If the owner is running it as a C corp you don’t face as much tax liability problems in the sense that you won’t be taxed on money you aren’t seeing but overall for the restaurant as a whole its less efficient. Of course, like above, as a 5% owner, unless you have a separate written document you probably won’t have any control of when or if dividends will be declared.

Bottom line, I’d recommend you get a lawyer but if you don’t, focus on what are you expecting out of this investment? Current income — then make sure you understand who decides how and when distributions are made out of profits. Proceeds on sale — then make sure you understand what happens upon a change in control. And remember, as a 5% owner, unless you ask for them, you’ll have no real rights — you’ll just be along for the ride. Just make sure you don’t get taken for one.

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