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Buying a piece of a hot restaurant sounds like fun. Think again

I have to admit that owning a piece of a hot new bar or restaurant sounds awfully glamorous. Operators woo prospective investors with projections of double-digit returns, as well as the insider appeal of being able to grab a prime table whenever they want.

My problem is that I know better. I've co-owned half a dozen places ranging from a gourmet burger joint to a high-end wine bar, and my experience in the glamorous food trade has consisted largely of unclogging toilets, finagling belligerent drunks out the door and posting bail for rowdy sous-chefs.

Bars and restaurants are a ton of work. Start a place from scratch, operate it yourself – that's where the toilets and drunks come in – and you can do okay. However, outsiders who believe they can buy an existing restaurant or bar and make a good return on their investment are usually fooling themselves.

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Minority investors who simply want to put down money in exchange for a piece of the action are even more deluded.

Bars typically operate on thin profit margins – think 5 per cent of sales. The hottest spots squeeze out a few percentage points more, but crowds are fickle and it's an unusual place that remains hot for the minimum of three years it will take to give you the 25 to 33 per cent returns that are frequently projected.

Of course, you won't find any of these caveats in the typical restaurant prospectus, which tends to be more upbeat than anything this side of a Richard Simmons exercise video.

"My best advice [to prospective investors] is don't do it, " says Douglas Fisher, president of restaurant consultants FHG International.

"It's extremely high risk."

I couldn't agree more. The problems begin with bartenders who pocket money and kitchen staff who hand out "free" food. Then there's the constant need to reinvest in everything from new stoves to more marketing. On top of that, there's partner risk: In a business that still operates largely in cash, it's not always clear where money is going.

Only a few minority investors manage to make money in this scenario. Peter Brauti, a Toronto criminal lawyer, is one of the few I've met. Over the past decade, he has gone from co-owning one hot bar grossing $4-million a year to eight ventures and $37-million in overall sales.

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He says one key is insisting on partners you trust and who have solid business acumen.

"Just because someone makes a great martini doesn't mean they can run the place."

Another key is constant accountability as well as detailed shareholder agreements that spell out everyone's responsibilities. He meets weekly with all his restaurant partners and operators " to pore over every single expense and sales figure and fix any issue as it happens."

Stephen Murphy of OMG Realty in Toronto acts as a broker for many restaurant deals and says the investors who succeed are those who go into the business with realistic expectations. They insist on putting down everyone's obligations in writing, keep an eagle eye on costs and aren't afraid to occasionally roll up their sleeves and get their hands dirty.

"We sell a lot of restaurants, " he says.

"It's not unusual to hear first-time investors say they want to get into this industry to make money, meet women and not have to work hard. I just scratch my head and know I'll be selling this one again soon."

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  • NUMBER OF CANADIAN RESTAURANTS: 69,200
  • NET CLOSURES IN 2014: 3,000
  • AVERAGE PROFIT MARGIN: 3.5 per cent
  • FAILURE RATE WITHIN THREE YEARS: 60 per cent
  • DECLINE IN ALCOHOL BEVERAGE SERVINGS SINCE 2010: 5 per cent

More from this month's issue of Globe Investor magazine.

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