Restaurants have extremely high failure rates, 23% in the first year according to Restaurant Startup & Growth magazine. And the few restaurateurs who are extremely successful, can often obtain bank loans and use working capital from their existing operations rather than raising money from individual investors. Outside investors that invest in restaurants are often willing to accept a low rate of return because of other benefits they perceive they will get from investing such as the prestige of telling others that they are part-owners of a particular restaurant, or the possibility of getting free food and drinks.
A lot of service businesses you can try with low startup costs and minimal capital investment. Many people go to real estate school, earn their license and then go on to barely sell anything before they give up and pursue full-time employment elsewhere. Other businesses like starting a consulting business or interior design may also not have that many startup expenses beyond LLC filing and website design. These businesses don’t need outside investors or employees. When the entrepreneur fails, they wasted their time but not necessarily a lot of money.
The restaurant business is different. Restaurants need real estate. Their space is often leased and will require tenant improvements that are either paid for by the tenant upfront or structured into a multi-year lease. They require employees. They require a variety of equipment and furnishings from ovens to chairs, plates to refrigerators, signs to point-of-sale terminals. Restaurants require a lot of marketing and promotion. All of these things are going to cost money, and on top of that, a lease or purchase of real estate is probably going to require a personal guarantee.
There is a lower cost way to invest in the restaurant business, either as an owner-operator, or as a passive investor or lender. The startup cost for a food truck business is a fraction of the cost to open a restaurant. Whether it is a franchise operation like Kona Ice or a unique concept you come up with like Garbo’s Fresh Main Lobsters, the food truck has a lower startup cost and provides a way to experiment with a particular concept to see if it might be successful. You typically can avoid the need to sign a multi-year lease with a personal guarantee, which can lock you into a money-losing venture for years.
Food trucks can be bought used and re-sold if necessary. If things go south, there are a variety of companies and brokers that can buy your used food truck or offer it to other potential buyers. This makes it much better collateral typically than something like a leased restaurant where the lease itself is unlikely to have any value and is probably a major liability, and the fixtures and equipment can likely only be sold for dimes on the dollar. While you may not get all your money back if the food truck business fails in its first year, the amount you will lose as an owner-operator or investor will be far, far less.