Courting Private Backers
Tired of working for other people but can't figure out where to get the cash to go off on your own? Jeff Senior, a veteran restaurateur in and around Boston, was in a similar bind a few years ago. He and three partners were angling to launch Skipjack's, a new seafood establishment, but no bank (he approached 15) was willing to provide more than a token amount of money until he had equity in hand. So, to raise about $500,000, Senior contacted all the friends and acquaintances who had ever hinted they might want to own a piece of his future restaurant.
Getting people to actually write checks for $25,000 a throw proved to be much harder than he had expected. Despite Senior's attractive projections, prospective backers dragged their feet. "To make it happen," notes Senior, "I realized that we had to give away a lot." Indeed, he offered to pay limited partners nearly all his pretax income after expenses (97.5%) until they recouped their entire investment. After that, he proposed paying out 75% of the restaurant's income until they doubled their money, and assuming the business hit that milestone, they'd get 25% of the income for the remainder of the eatery's 10-year lease.
Clearly, the way the deal was formatted struck a chord. Senior and his partners got their money. And since then, they've been able to raise more than $900,000 in a similar manner for two subsequent restaurants. While the more recent deals are less favorable to investors (limited partners get 75% of a unit's pretax profits until they've received twice their initial money; after that, they'll get 25%), many of the same people have participated again.
So far, Senior says, investors have done quite well. Limited partners in the first deal will double their money in less than six years, while those in the others are on their way to reaching that goal sooner.
This approach to raising money has definite downsides, says Senior. "For one thing, it's expensive." Also, it will likely take many years of paying money out before you can start building meaningful amounts of equity for yourself. But if you're committed to working for yourself, it's a strategy worth considering, he says. "Our goal is to reach a point where we're not dependent on any outside money, but we couldn't do that right away. We have to pay our dues."
-- Bruce G. Posner* * *