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” Sales Financial lenders
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 Variable 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: Fixed costs:
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 Beware of bankers who demand:
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 Minorities Enterprise SBICs
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 Lease costs
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