So Where's The Money In Restaurants?

Question

I've been frequenting two local family owned restaurants for years...and I can't see how they stay open.

These are both inexpensive restaurants. They have their peak times, but I'd say 90% of the time they're less than half full. I can't see how they can stay open. They're both on a main drag in town, very nice locations...the property tax bill alone has to be huge...

One owner I've gotten to know, and the family is big into other types of REI, so this is just a write off, they just enjoy the biz?

One common thing for both restaurants is that neither owners were born in America, does that have something to do with it?

I don't know, both are high vis, very clean, well kept, big places on a main drag on town.

As I've said, the food is very inexpensive.

I don't get it.

Joel Owens · Answer

Yeah lot's of ways you can make money with restaurants.

The strategy you are talking about Joan is basically the repo model. Taking a bunch of money and then when owner defaults taking it back and reselling again.

The downside is you have to get sales up again and do repairs etc.

In that case I look for owners who are retiring or have mismanaged a place and you can pick up ultra cheap.

One of the better ones is you will see an owner that opened up and did a IRA down payment  250k build out for a franchise that nets them 50k a year. Owning a restaurant was not as much fun but more work then they anticipated for retirement. Now they want to dump it just to get out of the property.

The kickers are how cheap will they let it go?? Also the rent keeps rising year over year and equipment ages so you have to plan for a re-imaging and big cost expense. On the show Bar Rescue they often have to spend a few hundred k turning around the look of a bar.

JOAN DICKIE · Answer

A gentleman I knew owned a bar.  He couldn't make a go of it running it himself, so he owner financed it and turned it over about every year and a half to two years.  Said he made more that way than running it himself.

Joel Owens · Answer

Sounds like they do volume for cash flow and then put the cash into other higher yielding investments.

With a restaurant I will not buy myself a job and be an owner operator. If I make 6 to 7 figures then an owner operator pulling in 60k a year gross profit working 40hrs a week doesn't make sense. The business has to do a few hundred k profit after paying management to make sense to me.

Some people own gas stations and work like crazy to make 50k a year profit.

It's all about what you know and if you can get a higher return in an easier way. Some smaller towns the owners keep it open as a good will and community thing.  If they own the building they also might be holding it for redevelopment down the road etc.

Tons of reasons they still keep it open.