Doug Roth provides insight on restaurant financing in FSR Magazine
Playground Hospitality founder, Doug Roth, was recently featured in Full Service Restaurant (FSR) magazine: "The Essential Guide to Financing Your Restaurant"
“There are no guarantees in the restaurant world, which is a high-risk industry with tremendous attrition that makes people hesitant to invest,” says Doug Roth, CEO and founder of Playground Hospitality, a Chicago-based restaurant consultancy that provides concept, branding, and culinary development services.
The third Roth generation in the restaurant business and a former partner in Chicago’s heralded Levy Restaurants, Roth holds experience as both a restaurant owner and investor, experience that has enlightened him to the intricacies of restaurant financing. While he knows stories of talented but unproven chefs grabbing capital to open their first restaurants as well as energized entrepreneurs coaxing investments with little more than a compelling idea—a play often leaning on vanity or emotion more than bare-knuckles financial analysis—Roth says more investors, from angels to banks and even family and friends, desire one thing: proof.
“Concept development, operational expertise, and leadership,” Roth says. “Any savvy investor wants these three elements in place.”
For many upstarts, however, those elements remain elusive, typically a product of time, experience, and opportunity more than inability.
“Getting capital generally gets easier over time, but finding that break in the beginning is often the hardest part,” says Andrew Miller, creative director of Out to Lunch Hospitality, a new collective slated to open its first restaurant, Good Fortune, in Chicago’s Logan Square neighborhood in the coming months.
In the rush to make their restaurant dreams come true, some industry entrepreneurs bet on themselves, signing home equity loans or maxing out credit cards. Many others rely on a mix of traditional and newfangled financing options to launch their first restaurant or expand their portfolios. Whatever the route, one thing is certain: capturing restaurant financing is rarely a smooth ride.
Restaurant financing traditions
For many restaurant entrepreneurs, friends and family remain the starting point, often serving as a patchwork source of funding—$5,000 here and $10,000 there—to turn dreams into reality. Securing loans from personal supporters or trading fractional ownership in the business for capital, friends and family are generally those most likely to downplay one’s lack of experience; the most flexible, if not forgiving, collectors; and the eatery’s most enthusiastic ambassadors.
There are, of course, sensitivities about going to friends and family. Money can alter relationships, and the burden of delivering a financial return to loved ones can prove daunting and stressful.
“If the restaurant works, then you’re all on top of the world together. If not, then it can seriously damage relationships,” says Roth, who turned down an investment from his father in the 1980s to open Bistro 110, a Chicago mainstay for nearly 25 years. “I wanted to keep him my father.”
Beyond friends and family, many restaurant entrepreneurs seek private investment from individuals, consortiums, or even private-equity firms. Such investments might range from $25,000 to $500,000, though entrepreneurs, particularly those without high-level pedigree, should expect to be vetted and prepared to release equity stake in the business.
“Investors will want to know the concept, its point of differentiation, and why they should invest,” says Roth, who suggests discovering leads by googling “angel investors” in a particular market, inquiring through a chef’s group or state restaurant association, or researching the financial backers of other local restaurant openings.
Other investors, specifically high–net worth individuals entrenched in the community, represent a harder, though not impossible, find. Roth has seen the emergence of family offices—essentially affluent families with investment arms—becoming more involved in restaurants, albeit selectively, while existing franchisees of tired restaurant concepts might also be a target.
“These industry folks need growth and are trying to figure out how to get that,” Roth says of franchisees. “Sometimes, financing is about figuring out who needs you.”