Chapter 16

1. Chapter 16 Financing and Leasing

2. Objectives • After reading and studying this chapter, you should be able to: • Forecast restaurant sales • Prepare an income statement and a financial budget • Identify requirements for obtaining a loan in order to start a restaurant • Discuss the strengths and weaknesses of the various types of loans available to restaurant operators

3. Objectives (cont’d.) • List questions and the types of changes a lessee should consider before signing a lease • Discuss the strengths and weaknesses of the various types of loans available to restaurant operators

4. Sufficient Capital • Many try to start restaurants with only a few thousand dollars in capital • Such ventures usually fail • Number-one factor of failure • Lack of management • Second factor of failure • Lack of finance and working capital • Standby amount of cash to open the restaurant and get through unprofitable months of operation

5. Sufficient Capital (cont’d.) • Commercial banks • Common source of funds • Lending officers in the banks • Paid employees, not owners • Also limiting their risks • Performance is largely judged by good loans • Tend to be ultraconservative • Want proof of income, debt, employment, and credit history • Bank also wants collateral • Assets they can take should the loan not be repaid

6. Sufficient Capital (cont’d.) • Types of loans • Term loan • Repaid in installments • Usually over a period longer than 1 year • Intermediate loans • Made for up to 5 years • Single-use real estate loans • Typically run less than 20 years

7. Preparing for the Loan Application • Restaurateur bought furniture and fixtures from an existing restaurant for $30,000 • Money is paid to previous person leasing the property • Work they had done to set up a restaurant • Paid after a due diligence • Thorough check to assure everything works and health department isn’t about to shut it down • Larger restaurants will naturally cost more • Just a matter of finding a location and price that are right for you

8. Preparing for the Loan Application (cont’d.) • Important financial questions: • How much money do you have? • How much money will you need to get the restaurant up and running? • How much money will it take to stay in business?

9. Budgeting • Purpose: “do the numbers” • Forecast if the restaurant will be viable • Sales • Must cover all costs • Must allow for reasonable profit • Financial lenders • Require budget forecasts as a part of the overall business plan

10. Budgeting (cont’d.) • Basic categories to project sales and operational costs • Sales • Cost of sales • Gross profit • Budgeted costs • Labor costs • Operating costs • Fixed costs

11. Forecasting Sales • At best, calculated guesswork • Many factors beyond control of the restaurant • Examples: economic factors and weather • Without a fairly accurate forecast of sales • Impossible to predict success or failure • All expenses are dependent on sales for payment • Sales volume components • Average guest check • Guest counts

12. Income Statement • Provides information about financial performance over a given time period • Allows for analysis and comparison of sales and costs • Shows income after expenses have been deducted (net income or loss)

13. Budgeting Costs • Cost categories • Fixed costs • Unaffected by changes in sales volume • Real estate taxes, depreciation, insurance premiums • Variable costs • Change proportionately according to sales • Food and beverage costs

14. Gross Profit • Money left from sales • After subtracting cost of sales • Must provide for all other operating costs • Plus leave enough for a satisfactory profit • If insufficient the business must be redone

15. Controllable Expenses • Expenses that can be changed in the short term • Variable costs • Salaries and wages • Benefits • Direct operating expenses • Heat, light, and power • Administration • General repairs and maintenance

16. Uniform System of Accounts for Restaurants • Benefits • Outlines uniform classifications and presentations of operating results • Allows for easier comparisons to foodservice industry statistics • Provides a turnkey accounting system • Is a time-tested system

17. Balance Sheet • Used to determine a sole proprietor’s or company’s worth • Lists all assets and liabilities • Must always balance: • Assets = Liabilities + Net Worth • Snapshot of financial standing at a given moment in time • Usually at the end of a financial period or fiscal year

18. Pre-Opening Expenses • Include: • Initial purchase of all equipment • Hiring and training of personnel • Preopening advertising • Fixed costs: • Depreciation • Insurance • Property taxes • Debt service

19. Pre-Opening Expenses (cont’d.) • Variable costs: • Change in direct proportion to the level of sales • Examples: food, beverage, labor, heat, light, power, telephone and other supply costs

20. Productivity Analysis and Cost Control • Various measures of productivity have been developed • Meals produced per employee per day • Meals produced per employee per hour • Guests served per wait person per shift • Labor costs per meal based on sales • Simplest employee productivity measure • Sales generated per employee per year

21. Seat Turnover • Number of times a seat turns over in an hour • Some consider the most critical number • Goal rates vary • Seven an hour to less than one an hour • Depends on the type of establishment

22. Securing a Loan • Compare interest rates • One percent over a period of years is big money • Beware of bankers who demand: • Interest discounted in advance • Borrower pays interest on a lower amount than was actually received • Compensating balance • Banker requires a certain amount to remain in the bank at all times

23. Real Interest Rates • Interest deductions allowable by the Internal Revenue Service (IRS) • Cut the real cost of a loan considerably • The higher the tax bracket, the lower the net cost of the interest paid • Tax laws change frequently

24. Loan Sources • Include: • Local banks • Local savings and loan associations • Friends, relatives, silent partners and syndicates • Limited partnerships • Small Business Administrations (SBA) • Small Business Investment Companies (SBICs)

25. Small Business Administration • User-friendly • Excellent record of success in lending money to restaurants • Principal parties: • SBA • Small business borrower • Private lender: central role

26. Small Business Administration (cont’d.) • SBA loan requirements: • Right type of business • Clear idea of which loan program is best for you • Knowing how to fill out the application properly • Willingness to provide detailed financial and market data required

27. SBICs • Small Business Investment Companies • Licensed by the SBA • Independently owned and managed • Set up to provide debt and equity capital to small businesses • Minorities Enterprise SBICs • Specialize in loans to minority-owned firms • Amounts loaned range from $20,000 to $1 million or more

28. Soliciting an SBA Loan • Qualifications: • Be of good character • Show ability to operate a business • Enough capital to operate on a sound financial basis • Show proposed loan is of sound value or secured as reasonably to assure repayment • Show past earnings and future prospects • Provide sufficient funds to withstand possible losses

29. Sequence for Securing an SBA Loan • Items: • Current business balance sheet • Income statements • Current personal financial statement • List of collateral to be offered • Statement noting total amount of financing and specific purpose of the loan • Tax returns for the most recent three years

30. Stockpiling Credit • To make the process smoother, provide: • Personal financial statement: • Education and work history • Credit references • Copies of federal income tax statements • Financial statement listing assets, liabilities, and life insurance

31. Stockpiling Credit (cont’d.) • If in business: • Business history • Current balance sheet • Current profit-and-loss statement • Cash flow statement for last year • Copies of federal income tax returns • Life and casualty insurance in force • Lease • Liquor license • Health department permit

32. Other Sources of Money • Include: • Landlord or landlord's bank • Local government • Selling and leasing back • Public • Selling bonds or convertible bonds • Farmer’s Home Administration • Economic Development Administration • Urban Development Action Grant program

33. Collateral • Collateral is security for the lender • Personal property or other possessions assigned as a pledge of debt repayment • If debt is not repaid, the lender becomes owner of the collateral • Collateral accepted by banks: • Real estate, stocks, bonds, and savings • Chattel mortgages • Life insurance and assignment of lease • Endorsers, co-makers, and guarantors

34. Leasing • Restaurant buildings and equipment are more likely to be leased by the beginner • Less capital is required • Signer is obligated to pay for the entire lease period • Lease should be good for both parties • Landlord (lessor) and tenant (lessee) • Beginners should try for a five year lease with an option to renew

35. Lease Costs • Approximate five to eight percent of sales • Can go as high as 12% • Lease costs • Calculated on a square-foot basis • $2 to $50 per square foot per month • Lease terminology and length • Consult a lawyer versed in real estate terminology to avoid misunderstandings

36. Specifics of Most Restaurant Leases • Include: • Term of lease • Power supply • Financial responsibility • Roof warranty • Maintenance agreement • Real estate taxes • Municipal approval • Leasing and insurance

37. Restaurant Insurance • Types: • Property/building and general liability • Business income • Workers′ compensation and employers′ liability • Employee benefit liability and liquor liability • Equipment breakdown • Food contamination/spoilage • Fire • Several others

38. What is a Restaurant Worth? • Potential Values: • Real estate value • Usually determined by competitive values in the community • Market value of real estate tends to follow the value set by similar properties in the area • Value as a profit generator