Marc Lichtenfeld’s Authentic Italian Trattoria

Years ago, my wife and I were in Ashland, Oregon. We loved the town and started talking about escaping the rat race, moving to Ashland, and opening a pizza place. We’ve repeated that conversation on trips to Banff in the Canadian Rockies, Asheville, North Carolina, and even Tel Aviv, Israel.

Considering that I know nothing about how to run a restaurant, would be unhappy if not in close vicinity to a major American city, and am a lousy cook, the pizza joint remained a happy fantasy.

But for the purposes of this book, Marc Lichtenfeld’s Authentic Italian Trattoria will serve as an example of a business with revenue and profits. We’re also going to assume that I’m your brother-in-law (your sister was always a very good judge of character) and you’ve agreed to become my partner in the business.

One day I come to you, my favorite brother/sister-in-law, with my plans for the restaurant. I have the space lined up. It’s in a popular location with a lot of foot traffic. I’ve been talking with a wonderful young chef who is eager to make an impression on local diners and critics. All that’s missing is start-up capital.

This is where you come in. In exchange for a $100,000 investment, you will receive a 10% ownership stake. I show you my projections: The restaurant will break even the first year, make $100,000 in the second year and $200,000 in the third year.

One of the questions you may have is how you’ll get your money back. Do you have to wait for the restaurant to be sold, or will you receive some of the profit each year?

If I tell you that my goal is to build the business to $1.5 million in sales and then sell it for two times sales ($3 million), where you’ll receive $300,000, your response might be very different from what it would be if I tell you that half the profits will be invested back in the business with the other half split up among the partners in a yearly payout (dividend).

Your decision on whether to give me the money will depend in part on your goals. Are you willing to speculate that you’ll receive the big payoff in several years when the business is sold, or would you rather receive an income stream from your investment but no exit strategy (plan to sell the restaurant)?

When buying stocks, investors have to make similar decisions. Do they buy a stock with the sole purpose of selling it higher down the road, or do they buy one that provides an income stream and opportunities for income growth in addition to capital gains?

I don’t know about you, but if I’m investing in someone’s business, I want to see some money as soon as possible rather than wait for an exit strategy.

Here is another factor that might affect your decision to invest in my trattoria: Instead of offering to pay you your cut of the profits ever year, I might offer to reinvest that money back into the restaurant and give you more equity. That way, your piece of the profits gets larger each year. Eventually, you can start receiving a significant cash payout on an annual basis or receive a bigger slice of the pie when you sell your stake in the business because your equity has increased above your original 10%.

This last scenario is the same as reinvesting dividends, a method that is the surest way I know of to create wealth.

And what I love about this strategy is that it works (and has worked) no matter who is President of the United States; what happens in Europe, Iran, or the Middle East; unemployment; inflation; and so on. Sure, those things will impact your short-term results, but over the long haul, they mean nothing and in fact could help you accumulate more wealth, as I’ll explain in the section on bear markets in Chapter 3.