1. Chapter 15 Financing and Leasing
Courtesy of Sysco
Financing and Leasing
The Restaurant: From Concept to Operation, 7th edition

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
Describe the various forms of business ownership
Recognize the legal aspects of doing business
Discuss the various types of government regulations

4. Financing Where does the money come from? Borrowing on property
Relatives, friends
Partnership
Groups of investors

5. 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

6. 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

7. 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

8. 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

9. 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?

10. 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

11. 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

12. 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

13. Budget Forecast of Sales
© John Wiley & Sons, Inc.

14. 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)

15. Projected Income Statement

16. 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

17. 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

18. 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

19. 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

20. 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

21. Operating Ratios

22. 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

23. 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

24. Cash Flow Budgeting Any business needs available cash
Managing cash is crucial during first few months of operation
Positive cash flow is enhanced by increasing sales or decreasing costs while maintaining sales
Can be achieved by: Cash receipts journal, cash flow budget collecting ASAP

25. 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

26. 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

27. Securing a Loan
Only people who are independently wealthy can ignore funding; everyone else will need to secure a loan

28. Compare Interest Rates
One percent over a period of years is big money
Avoid points if possible
Beware of bankers who demand
Compensating balance
Interest discounted in advance

29. 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)

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

31. Talking to SBA Loan Officer

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. Keep the Loan Line Open One loan may lead to another
Development of a line of credit is a valuable asset

41. Avoid Personal Liability
Shrewd individual who guarantees a sizeable loan has very few personal assets that can be claimed in case of default
Giving one’s assets to another may be hazardous

42. 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

43. 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

44. Drawing up a Lease Ask questions before agreeing on a lease:
Why is building for rent?
Who was the last tenant?

45. Lease Terminology and Length
Both parties should consult a lawyer versed in real estate terminology to avoid misunderstandings
If the business does not survive you are still liable for the payment if you signed a personal guarantee.
Triple net lease
Renewable lease
Five- year term plus three five- year renewal options.

46. 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
Term of Lease
Most foodservice leases are for five years with two more five-year options
Power supply
Typical retail spaces are provided with 200 amps of electrical service
Negotiate with landlord for cost of repair to site and to run lines from the main panel to the tenant space.
Financial responsibility
Who will pay off lease in case, for any reason, the restaurant must close its doors?
Preserve the roof warranty
Restaurant owner can either pay the landlord or decrease the tenant improvement allowance
Maintenance agreement
Who is responsible for repairs to the building?
Real estate taxes
Each city and county decides on the value of land and buildings.
These taxes are typically due once a year, but most ask taxes to be prorated and paid monthly.
Municipal approval
Cover your bases by insisting, in writing, that this lease is void if city or county does not approve the location to operate.
Leasing and insurance
Tenant is responsible for obtaining insurance against fire, flooding, and other natural disasters as well as general liability.

47. Restaurant Insurance Types: Property/building General liability
Business income
Workers′ compensation and employers′ liability
Employee benefit liability
Liquor liability

48. Restaurant Insurance (cont’d)
Equipment breakdown
Food contamination/spoilage
Crime
Auto/valet liability
Umbrella/excess liability
Fire
Several others

49. 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