Weighing the Value of Restaurant Investments

by: Adam, Modest Money Staff Writer

There's something about a restaurant that just draws investors. Maybe it's an association with their own celebrations at favorite eateries over the years, or just the enjoyment of being there as other people celebrate. The business has been heavily glamorized with a wide array of reality television shows lately, featuring everything from food trucks to rescues of failing restaurants.

Whatever the draw, it's a common choice for people making investment choices as well as those with an entrepreneurial spirit wanting to start their own business. But like any investment instrument, it's one that requires some education about its unique risks.

Product Liability

All investments are highly speculative, and restaurant chains are no exception. Business history is full of examples of restaurants and other food-service entities that hit the financial skids after a case of food borne illness was allegedly linked to the business. That's without regard for the role of vendors-or even for the validity of the accusation. And poor management at one location can bury the whole chain.

Before you put any money into a restaurant, make sure that the staff is properly trained in food safety, like the programs offered by State Food Safety . Nothing can remove 100% of the risk, but with properly trained staff, the risk is certainly minimized.

The financial impacts of food poisoning can last for years, so before you gamble on a restaurant, verify that their processes and personnel are up to par.

A Fickle Market

Having the most popular restaurant in town is exciting. You're getting all the buzz, people are lined up out the door, and your money is growing. It's a heady experience.

Then a new place opens its doors, and just like the song by the Eagles, there's a new kid in town. Suddenly your trendy place is old news, and management is scrambling to become relevant again.

Consumers are like that. They love to have traditions, but they also seek out new things all the time. Understanding the importance of a good strategy to renovate, redesign, and reinvent the restaurant, from placemats to menus, is essential for keeping ahead of the doldrums . Every major chain does periodic renovations at their stores, updates logos, and adds new items. It's how they keep their name fresh.

An Investment With Personality

Now let's look at the upside. As we mentioned earlier, people develop a lasting affection for certain restaurants. It's where they celebrate, relax, and even grieve with friends and family. A brand carries much more value than just the results on their check.

And so it is for investors. There is always something to be said about instruments that provide more than just a dividend. Obviously you should be making money on your stocks and other portfolio items, but many investors also like to see positive intangibles. They want to support companies that farm ethically, or that support their favorite charities. And at the local level, they like thinking that they are a part of making those special moments happen for others.

The restaurant business can be an exciting and profitable place to invest. It certainly has its hazards, but those risks aren't any greater than those of other businesses, they're just different. Learning about the profitability and popularity of a restaurant chain isn't enough. A deeper understanding is essential for choosing the right place to put your money.

Opinions expressed in this article are those of the author and do not necessarily reflect the views of New Kapitall Holdings LLC nor it's subsidiary broker-dealer Kapitall Generation

© 2017 - All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics