Restaurant investment for a noob

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ohboy!
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Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 10:12 am

I invested in one share of a restaurant in 2015. The offering was described to me as being 50% sold to "shareholders", my investment of $20k represented 2% of the total business. The offering touted 20%+ returns, split with a 10% preferred interest and an additional share of profits. The first year I received that return. The second year I was returned my principal and told I would no longer receive the preferred interest but still receive the share of profits. The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.

Obviously I would have done better to invest in an index fund. Even McD's stock would have been a better choice. I realized restaurants are difficult businesses and that many fail. I realize it was risky investment. I also realize I did receive my principal investment back.

I'm guessing that they paid off my investment with a loan and now they are having to stay in compliance with the loan instead of paying me my share. I am admitting to being a noob when it comes to this, and hoping to learn in the process, where it would have been smarter to learn before the process of course.

Does anyone have experience with similar or insight?

barnaclebob
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Re: Restaurant investment for a noob

Post by barnaclebob » Tue Mar 19, 2019 10:30 am

No insight but thanks for sharing your story. At least you made something off of this. Its good to know how these "amazing" investments fall apart. What was the restaurant? Are the doors still open? Did you eat there?

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 10:58 am

barnaclebob wrote:
Tue Mar 19, 2019 10:30 am
No insight but thanks for sharing your story. At least you made something off of this. Its good to know how these "amazing" investments fall apart. What was the restaurant? Are the doors still open? Did you eat there?
There are a couple locations and I’ve been to one that I’m not invested in. Can’t disclose the name. The doors are still open. As I said, I’m paying taxes on some sort of gain but not receiving that gain. I’m being told it’s held for compliance and I will be paid later. Two years of that....

cherijoh
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Re: Restaurant investment for a noob

Post by cherijoh » Tue Mar 19, 2019 11:11 am

ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?

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Wiggums
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Re: Restaurant investment for a noob

Post by Wiggums » Tue Mar 19, 2019 11:23 am

cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?
I had the same question regarding the K-1 document. Since they returned the principle back to you, maybe they decided to keep the profit in the business. Glad you got your principle back.

The restaurant business is not an easy one and Many new businesses fail. I guess the annoying part is that you took the risk and the reward changed. Can you sell your share?
Last edited by Wiggums on Tue Mar 19, 2019 9:15 pm, edited 2 times in total.

mrmass
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Re: Restaurant investment for a noob

Post by mrmass » Tue Mar 19, 2019 11:27 am

cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?

I'm shocked, shocked to hear the books might be cooked at a restaurant! All joking aside I believe that any non public business, keeps 3 sets of books
One for the current owners, another for a potential buyer or investor, and another for the IRS.

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White Coat Investor
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Re: Restaurant investment for a noob

Post by White Coat Investor » Tue Mar 19, 2019 11:29 am

Restaurants are a tough business, even when diversified which you were not. I'd be glad you got your money back. Sounds a little like a TimeShare in that you might be willing to pay just to get rid of it and its annual fees.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Restaurant investment for a noob

Post by White Coat Investor » Tue Mar 19, 2019 11:29 am

cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?
Yea, it's a pass through entity. So even if the profits are left in the business the owners (like you) have to pay taxes on them.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 11:33 am

White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?
Yea, it's a pass through entity. So even if the profits are left in the business the owners (like you) have to pay taxes on them.
That’s what I understand. Though how long can I take the tax burden with no income payment? I assume if it goes belly up that I could then take the loss. I’m worried though that the loss will not be able to completely offset the taxes paid. And meanwhile the money is going nowhere.

Anything I should consider doing?

Minty
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Re: Restaurant investment for a noob

Post by Minty » Tue Mar 19, 2019 11:33 am

See if one of the other participants will buy you out. If the offering documents require distribution of profits, as your initial post suggests, pointing that out might get the conversation going.
Core Four with nominal bonds and TIPS.

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 11:38 am

White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
Restaurants are a tough business, even when diversified which you were not. I'd be glad you got your money back. Sounds a little like a TimeShare in that you might be willing to pay just to get rid of it and its annual fees.
It gets a bit worse perhaps but I’d like to stay on the topic of this tax producing asset with no income.

Other info is:
I actually have two others of these with different restaurants. I used the returned principal + cash to buy them. One is performing fine. One hasn’t produced anything yet. I won’t get into any more though unless I learn a lot more and my general feeling is they aren’t worth the risk.

In hindsight it feels like they paid back principal to get more investment in new opportunities. Though I obviously don’t understand the workings or motives.

cherijoh
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Re: Restaurant investment for a noob

Post by cherijoh » Tue Mar 19, 2019 11:54 am

White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?
Yea, it's a pass through entity. So even if the profits are left in the business the owners (like you) have to pay taxes on them.
Thanks for clarifying that point. I was thinking like an investor, not a partial owner.

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RickBoglehead
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Re: Restaurant investment for a noob

Post by RickBoglehead » Tue Mar 19, 2019 11:59 am

It's good that you've realized this having potentially only lost $20k of principal (why do people use "principle" all the time?).

New businesses have a high failure rate.

Restaurants have a very high failure rate. People used to quote 90%, but that was not a true number. Something like 60% fail in the first 3 years. It's also very often a low margin business, the money is in alcohol.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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Re: Restaurant investment for a noob

Post by sergeant » Tue Mar 19, 2019 12:36 pm

ohboy! wrote:
Tue Mar 19, 2019 11:38 am
White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
Restaurants are a tough business, even when diversified which you were not. I'd be glad you got your money back. Sounds a little like a TimeShare in that you might be willing to pay just to get rid of it and its annual fees.
It gets a bit worse perhaps but I’d like to stay on the topic of this tax producing asset with no income.

Other info is:
I actually have two others of these with different restaurants. I used the returned principal + cash to buy them. One is performing fine. One hasn’t produced anything yet. I won’t get into any more though unless I learn a lot more and my general feeling is they aren’t worth the risk.

In hindsight it feels like they paid back principal to get more investment in new opportunities. Though I obviously don’t understand the workings or motives.
Sounds like a ponzi scheme. I would suggest that if you don't understand something you ought not invest in it.
Lincoln 3 EOW!

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 3:24 pm

sergeant wrote:
Tue Mar 19, 2019 12:36 pm
ohboy! wrote:
Tue Mar 19, 2019 11:38 am
White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
Restaurants are a tough business, even when diversified which you were not. I'd be glad you got your money back. Sounds a little like a TimeShare in that you might be willing to pay just to get rid of it and its annual fees.
It gets a bit worse perhaps but I’d like to stay on the topic of this tax producing asset with no income.

Other info is:
I actually have two others of these with different restaurants. I used the returned principal + cash to buy them. One is performing fine. One hasn’t produced anything yet. I won’t get into any more though unless I learn a lot more and my general feeling is they aren’t worth the risk.

In hindsight it feels like they paid back principal to get more investment in new opportunities. Though I obviously don’t understand the workings or motives.
Sounds like a ponzi scheme. I would suggest that if you don't understand something you ought not invest in it.
:saluting: thanks Sarge

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Re: Restaurant investment for a noob

Post by White Coat Investor » Tue Mar 19, 2019 8:42 pm

ohboy! wrote:
Tue Mar 19, 2019 11:33 am
White Coat Investor wrote:
Tue Mar 19, 2019 11:29 am
cherijoh wrote:
Tue Mar 19, 2019 11:11 am
ohboy! wrote:
Tue Mar 19, 2019 10:12 am
The following year I was told I would be receiving a check for ~$1k. It never came. I even saw the profit on a balance sheet. I asked several times and was told it would be coming for 8 months when I was finally told it was not. I then received a K-1 for that pay that never came = a tax liability. Now I have received another similar tax liability and still no payment. I am being told that I will be eventually be paid my accrued distributions, but paying taxes on money I didn't receive sure doesn't feel great. My accrued profit being held and going nowhere also doesn't feel great.
Is that even legal? I mean the part about getting a K-1 saying that money was paid out and then not getting the money. I am not a lawyer or a tax professional, but that sounds like they are cooking the books to me. Perhaps someone more knowledgable can post on this aspect of it.

Are you the only small investor? If not, do you know any of the other ones? Are they getting similar treatment?
Yea, it's a pass through entity. So even if the profits are left in the business the owners (like you) have to pay taxes on them.
That’s what I understand. Though how long can I take the tax burden with no income payment? I assume if it goes belly up that I could then take the loss. I’m worried though that the loss will not be able to completely offset the taxes paid. And meanwhile the money is going nowhere.

Anything I should consider doing?
I dunno, but if I were getting tax bills without income I'd be getting REALLY involved. Either you figure out what's going on and are reassured or they get sick of you and let you out/buy you out of the business.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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yangtui
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Re: Restaurant investment for a noob

Post by yangtui » Tue Mar 19, 2019 9:08 pm

phantom income is common with these kinds of ownership structures. seems pretty normal from everything you have said. nothing fishy.

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Tue Mar 19, 2019 10:00 pm

Phantom income- there is my learning for the day. Thanks.

I will ask for the financials, which as I understand from this thread - should be the version tailored specially for me. It is bad business in mind to operate as such.

Send a balance sheet with an income amount.

Not pay that amount and not reply regularly to e-mails.

Repeatedly tell me I received my principal back like I asked for it and use it as the response to any question I ask.

Send a tax bill for the amount.

The following two years send no financials but more tax bills. Again always replying with returned principal reminder and taking two e-mails for any response.
—/-//////

I am wondering if there is a reason why I shouldn’t publish a blog detailing my experience with names of businesses and names of owners?

Any restaurant owners or investors out there?

not4me
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Re: Restaurant investment for a noob

Post by not4me » Wed Mar 20, 2019 4:09 pm

ohboy! wrote:
Tue Mar 19, 2019 10:00 pm

I am wondering if there is a reason why I shouldn’t publish a blog detailing my experience with names of businesses and names of owners?

Any restaurant owners or investors out there?
1st OP, I think you've already done some folks a service by being willing to share this story. It sounds as if you've learned a good bit as well, even if it seems like an expensive lesson.

I'm curious as to how you got connected with these 3 restaurants -- seminar? broker? friend/acquaintance? That might give some insight.

In your initial post, you said you "even saw the profit on a balance sheet"...that caused a red flag to go up for me. I'm not sure how one tells profit from a balance sheet. So, I wasn't clear if you misspoke or (since you self-identified as a "noob") perhaps weren't familiar with what you've been given.

As another poster said, this could be normal. Perhaps you've gotten into a situation in which your interests aren't aligned with the majority who might be willing to pay tax now in anticipation of building a business that can be sold later. Depending upon your level of pain, they might be willing to let you out by you forfeiting your stake (although if they'd buy it would be even better). Then your loss would be contained to taxes paid & opportunity cost to date. They may not though & there are plenty of stories of people in partnerships they wish they never got into. Sorry if that is the case.

Another option would be to contact a state agency that regulates the type of corporation it is (that is, LLC? S-corp? etc). They could tell you what rights you might have &/or whether there may have been fraudulent claims made. Depending upon taxes you've paid, the cost to get out may exceed the benefit. I suppose there may even be something in the offering document(s) that would be a confidentiality agreement of sorts that might keep you from going public. Really writing the blog might help your feelings, but won't help the business or your chances of getting more cooperation/cash from the others.

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ohboy!
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Re: Restaurant investment for a noob

Post by ohboy! » Thu Mar 21, 2019 9:06 am

not4me wrote:
Wed Mar 20, 2019 4:09 pm
ohboy! wrote:
Tue Mar 19, 2019 10:00 pm

I am wondering if there is a reason why I shouldn’t publish a blog detailing my experience with names of businesses and names of owners?

Any restaurant owners or investors out there?
1st OP, I think you've already done some folks a service by being willing to share this story. It sounds as if you've learned a good bit as well, even if it seems like an expensive lesson.

I'm curious as to how you got connected with these 3 restaurants -- seminar? broker? friend/acquaintance? That might give some insight.

In your initial post, you said you "even saw the profit on a balance sheet"...that caused a red flag to go up for me. I'm not sure how one tells profit from a balance sheet. So, I wasn't clear if you misspoke or (since you self-identified as a "noob") perhaps weren't familiar with what you've been given.

As another poster said, this could be normal. Perhaps you've gotten into a situation in which your interests aren't aligned with the majority who might be willing to pay tax now in anticipation of building a business that can be sold later. Depending upon your level of pain, they might be willing to let you out by you forfeiting your stake (although if they'd buy it would be even better). Then your loss would be contained to taxes paid & opportunity cost to date. They may not though & there are plenty of stories of people in partnerships they wish they never got into. Sorry if that is the case.

Another option would be to contact a state agency that regulates the type of corporation it is (that is, LLC? S-corp? etc). They could tell you what rights you might have &/or whether there may have been fraudulent claims made. Depending upon taxes you've paid, the cost to get out may exceed the benefit. I suppose there may even be something in the offering document(s) that would be a confidentiality agreement of sorts that might keep you from going public. Really writing the blog might help your feelings, but won't help the business or your chances of getting more cooperation/cash from the others.
My friend who works for the company connected me with the 1st offering. The other two were offered to me after the 1st one paid back the principal.

I meant balance sheet generically I suppose. It was a net cash flow available for distribution sheet that showed my payout ready to be made. I asked for months before finally being told it wasn’t coming. Since then all I get are tax docs. I’m going to ask for more financial info from the business.

Certainly wish I had contact with any other people who were invested in this.

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