Invest for success

In 2006, business partners Jeff Leach and Randy Crochet opened NakedPizza (nakedpizza.biz), the New Orleans-based, social media-savvy, healthy-pizza pickup and delivery concept, with the overall goal of changing the way people consumed fast food in the future. And while the first year may not have created huge headlines, by the end of 2009, two billionaire parties—Mark Cuban, owner of the Dallas Mavericks, and The Kraft Group—had made major investments in the single-unit pizzeria’s future. Today, with more than 300 stores in development and more than 4,000 franchisee inquiries around the country, Crochet attributes two factors to their success: a tried-and-true business model (similar to major national delivery chains) and a message that sets them apart from the competition. “The goal was always to franchise,” he says. “We genuinely care about what people eat on a day-to-day basis. But we also knew that if you want to save the whales, you’ve got to be able to afford the boat. First, we had to prove that our concept could make money.” 

While NakedPizza’s story may not be uncommon in the pizza industry, the basic tenets of their philosophy ring true today for all entrepreneurs who seek an investment as the economy continues to recover and credit remains unstable. Whether you’re looking for a small business loan or an angel investor, your concept must make money and be interesting if you’re going to market it as a viable investment opportunity. However, you can take several routes to find financial investments for all levels of expansion. If you’re starting from scratch, you’ll likely need multiple sources of funding. “If you’re credit-worthy, it’s probably better to get a business loan, because private investors generally want a higher rate of return and a higher level of ownership,” says John Hamburger, president of the Restaurant Finance Monitor. “Credit is a lot tighter now than it was three or four years ago but, generally, it’s always been tight in the restaurant industry. Just about every business depends on some sort of investor in the beginning.” Hamburger notes that first and foremost, it’s important to be realistic with yourself and your investment partners when planning for growth. Private investor amounts can range from large sums given by wealthy, profit-seeking people or organizations (as in the case of NakedPizza) to an interest-free infusion of cash from a family member. Either way, you need a good financial advisor to help map out a business plan. For example, if opening a new location is going to cost $200,000 and the bank will approve half, with you and other private parties making up the difference, there needs to be a clearly outlined path of return. “You need to understand what you’re getting into,” Hamburger says. “If you take on the bank and they use the building as collateral, and other parties take stock as collateral, whose business is it really? If you can’t realistically meet the terms of your agreement, it’ll never be your business.”

Start Small, Dream Big

Luckily, some available funds are aimed directly at benefiting small businesses. As part of the American Recovery and Reinvestment Act, passed by Congress in February 2009, $730 million in loan money was set aside for the Small Business Administration (SBA). When the owners of Home Slice Pizza (homeslicepizza.com) in Austin, Texas, recently decided to quadruple their kitchen size and seating area, they borrowed $700,000 on an SBA-guaranteed loan, with 11 years to pay it back. These loans are aimed at businesses with fewer than 500 employees and help reduce borrowers’ fees, according to recovery.gov. “Pretty early on, we saw that it would benefit us to expand our oven capacity, but that wasn’t an option in our small space,” says Jen Strickland, co-owner of Home Slice. “When the building across the parking lot from us came up for lease, it was perfect timing.” Jen’s husband, co-owner Joseph Strickland, notes the pizzeria’s professional momentum was the primary reason their loan was approved. “Our track record was the main thing that we had going for us. It also helped that our lender was a regional bank with offices just down the street from us. They know us, know our market and went out of their way to help us.” 

Seeking funding through your city government or area economic development council is another option to consider. Last May, La Grande Pizza (lagrandepizza.com) in Wapakoneta, Ohio, was awarded $50,000 through the city’s Revolving Loan Fund, a low-interest loan program designed to attract business to the town. The restaurant’s owners used the funds to purchase new ovens and help cover payroll in the first days of operation. 

Another group that offers free professional counseling to small businesses is the Service Corps of Retired Professionals (SCORE), a nationwide nonprofit organization with 370 chapters and more than 10,000 business advisors who can assist with virtually every topic concerning business administration, including accounting and concept development. The overall goal of the group is to help small businesses grow, and thus develop communities. “We council more than 300,000 small businesses every year,” says Kenneth Yancey, CEO of SCORE and a former investment banker. “We offer free counseling online and in person, and we also offer various workshops around the country.”

Under Your Nose

If you fancy yourself a culinary rock star, you may be able to tap into your existing clientele for potential investors. In some instances, restaurateurs have created preferred customer programs for those who invest in a concept early on, based on a fixed return. “If you have a regular customer who’s interested in what you’re doing, he may be a good source of potential financing,” Hamburger says. “Every once in a while, you’ll see situations where a chef has gotten a hot hand and people want in; the investors get VIP cards and special treatment. But that can be heavy stuff for the investor.” In some instances, high-end restaurants have amassed interest-free cash by selling credit at the store. For instance, if an investor puts in $5,000, he could automatically be granted $7,000 in food and beverages. Hamburger notes that taking such a step can be as easy as advertising business opportunities on your napkins. 

The connections in your personal life can also be used to your advantage if you market yourself correctly. Miki and Radha Agrawal, twin sisters and co-owners of Manhattan’s Slice pizzeria (sliceperfect.com), spent more than six months wining and dining potential investors at invitation-only presentations in New York to raise their start-up capital. Eventually, after plenty of “face planting” and perseverance, the two entrepreneurs brought in more than 20 investors to get the business started. “At the time, I didn’t have enough money to get a small business loan—and, quite honestly, it was a little scary to think about having to pay it back right away,” Miki says. “My investors were generally quite wealthy and willing to invest in me professionally.” The duo sold shares in the company for $100, then $150, and so on. Five years later, with a second location now open in the West Village, the value of the initial investments in Slice have grown significantly.

Play It Safe

Because you’re dealing with your livelihood, finding the right loan, the right advisor and the right investors are not steps to be taken lightly. If your goal is to franchise exponentially, remember that you’re selling yourself and—more importantly—a way to make money. A simple business model is often strongest and easiest for investors to understand, and if you can combine profit-yielding practices with an interesting concept, you need only look out for the right person or organization. If you’re looking to build a sister restaurant to an already successful venture, do your homework first so that you don’t roll the dice and damage your thriving business. Seek help from nonprofit organizations that can guide you through the investment-seeking process on a one-on-one level. If your customers are energetic and loyal, toss around the idea of a VIP program to see if there’s any interest. But, most importantly, never bite off more than you can chew in the restaurant business; as Hamburger notes, “You can tweak most any restaurant model, but you have to have staying power and anticipate everything up front. Restaurants always cost more than you think they’re going to.”

Andrew Abernathy is PMQ’s associate editor.