HOW TO FUND A RESTAURANT

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1 HOW TO FUND A RESTAURANT

2 2 MARISA UPTON HOW TO FUND A RESTAURANT Getting Started The time has come. After years of thinking about it, probably with both trepidation and profound excitement, you have decided to go for broke, find the investors you need, and open up the restaurant of your dreams. Good for you. There will probably be countless people, friends and family included, that will suggest you may be a little close to the crazy end of the spectrum of mental health. Others will applaud your bravery. There is one thing for certain you are going to need capital, and quite a bit of it, to get your dream off the dock and headed for a successful voyage. The most important part of this journey is to have all your ducks in a row before embarking on the quest for investors and capital. Your first, and most important duck, is your business plan. Chase the vision, not the money, the money will end up following you. Tony Hsieh, Zappos CEO

3 HOW TO FUND A RESTAURANT MARISA UPTON 3 A Business Plan Your business plan is, in essence, your vision. It also includes the numbers and data to back up your vision and explains why your restaurant will succeed and thrive amidst the other 620,000 plus establishments in the U.S. What makes you and your business so special? Executive Summary An investor looks for strong management and a very compelling story. This story is the first page of your business plan and requires you to capture your readers, i.e. investors, attention. Like any pitch, you have a brief moment in time to grab someone s interest. Rewrite this section until it sends a shiver down your spine. A restaurant investor does so not just for the money there are a wealth of other investments that are not so risky. They do so because they want to be a part of the dream you have created in your mind, see it in concrete form, and contribute to its success. Executive Summary is supposed to summarize the reasons why the customer should buy from you. The executive summary should therefore focus on basic issues and bottom-line results-and it should be written first, in order to set the tone and direction of the body of the proposal. Concept Your concept further defines your vision. Is your restaurant going to be fine dining or fast-casual? Are your servers going to be friendly and outgoing or courteous, professional and slightly aloof? Explain your restaurant in its totality, but don t forget to keep your story in mind. You ll need a plot that keeps the reader engaged. Include a menu and make sure that reading it causes an intense desire to experience it. Include pictures and know your numbers. This includes prices based on detailed cost analysis including estimated average check projections.

4 4 MARISA UPTON HOW TO FUND A RESTAURANT Market Analysis This includes your target audience and location the two of which are inexorably connected. It includes your competition as well as your marketing strategy. Each piece of the puzzle must lead to the next. Your brand and voice leads to your design and menu creates your target audience and location. Management This is the part of the business plan where you sell yourself and your team. What are you bringing to the table that makes you qualified to make this business a success? Financials Create realistic financial expectations based on concrete numbers. This includes seating capacity, turnover, number of covers and average check. Financials include a projected P & L for the first three years of operation, break even analysis and capital requirements budget. If this sounds daunting, obtain the services of an accountant who specializes in the restaurant business. Individual commitment to a group effort -- that is what makes a team work, a company work, a society work, a civilization work. (Vince Lombardi)

5 HOW TO FUND A RESTAURANT MARISA UPTON 5 Funding Types You re now ready to undertake the sometimes long and arduous, and often exhilarating, task of finding the funding you require for your restaurant. Your capital requirements budget that you included in your business plan lays out the amount of money you need and why you need it. It s always best to err on asking for more than your projections instead of finding yourself having to search for additional funds halfway through the project. Family and Friends Funding The simplest and most effective option for funding is family and friends funding. This financial backing is the quickest and often the easiest way to raise the funds needed for your new venture. It involves meeting and speaking to everyone you know and presenting your business idea to them through your business plan. You may even want to do a tasting of the menu that you plan to offer at the restaurant to inspire investors with your

6 6 MARISA UPTON HOW TO FUND A RESTAURANT concept and build excitement about investing in your operation. In most cases, if you do not have a track record of successes, you may have to offer some sort of payback with a higher than normal interest rate, usually 3 points over prime or more, plus an equity incentive. This equity incentive can be structured as part of the investment that becomes vested right away or at the end of the payment of the loan. Family and friends should be treated the same way as any other potential investors. There should also be an understanding of what happens should your venture head south and you are forced to close. Credit Card and Home Equity Loan Some people have financed a portion of their new venture through credit cards. While this may be easier than raising funds, it carries a high burden interest rate that is anywhere from 0 to 22 percent, depending on your credit. According to an article in Entrepreneur, the Ewing Marion Kauffman Foundation has found that for every $1,000 in credit-card debt that a small business takes on, its chances of longterm survival fall by more than 2 percent. If you are a home owner, obtaining a home equity loan or line of credit is an option. A loan is a lump sum that is paid off in a certain amount of time with a fixed rate. A line of credit has a revolving balance often with a variable rate. This strategy works best in a strong economy. The big question is: Are you willing to risk your home if your new venture does not work out? Since a home equity loan is a secured debt, the average interest rate is typically lower than what you ll pay on an average credit card or other form of unsecured debt. Home equity loans also offer potential tax savings as interest payments may be tax deductible.

7 HOW TO FUND A RESTAURANT MARISA UPTON 7 Conventional Bank Loan The conventional bank loan is the least favorable option in financing a restaurant. Due to the high mortality rate of new restaurants, most banks find this investment too risky. On the off chance you scout one out, they will most likely ask for two to three times the collateral to secure the loan, with over-the-top interest rates, and a shortened repayment period. The Best Options for Financing Small Business Administration (SBA) Loan Investors love to see pictures of your food. An option for purchasing a business, making an acquisition, obtaining working capital, purchasing equipment or purchasing the building for your business is the SBA. This is a good alternative if your credit score is 650 and above, you have not had a bankruptcy in the last 5 years, and you have been in business 3 years. Startups can get SBA 7a loans, but it is not easy. The maximum amount you can apply for presently is $350,000. The interest rates are favorable and repayment terms are reasonable. Loans for real estate must be repaid within 25 years; working capital loans in 7 years; and equipment loans in 10 years. In some cases, they may ask for additional collateral.

8 8 MARISA UPTON HOW TO FUND A RESTAURANT Asset-Based Lenders Asset-based lending is a loan that is secured by collateral. This can be inventory, accounts receivable or other balance-sheet assets. This type of loan works best if you are buying an existing restaurant or a second generation restaurant with equipment. As an example: If you are purchasing an existing restaurant, and it has equipment, you can get a loan on the equipment which in most cases is 20 to 50 percent of the auction value. You then lease back the equipment, making monthly payments for a preset length of time. At the end of the lease term there is, in most cases, a buyback clause which will allow you to purchase the equipment back for $1. If you are buying a restaurant with heavy inventory and receivables, you can get a loan on these items commonly known as factoring usually for around 50 to 70 percent of the inventory value and 50 percent of the receivables fewer than 90 days. The drawback is that these types of loans often come at a very high interest rate and can severely tighten your free cash flow. Regarding equipment: Once you have your restaurant, there are lenders that will finance your equipment, some at 100 percent of the cost. This is an important option to keep in mind as equipment can be one of your biggest costs. Leasing in another way to finance your restaurant s equipment and is often recommended for startups. Crowdfunding There are two types of crowdfunding: rewards-based and equity-based. Websites such as Kickstarter and Indiegogo have become extremely popular in recent years. According to an article in Entrepreneur, there are currently over 500 website crowdfunding platforms. A rewards-based platform works like this: I will give you this gift in exchange for your donation to help fund my restaurant. Here s the catch: You only get to keep the money if you raise the amount requested in the time allotted. You will need to produce a video and jump-start your campaign with a good social media outreach. You will also need to make your rewards tangible goodies that entice people to participate in your crowdfunding.

9 HOW TO FUND A RESTAURANT MARISA UPTON 9 Crowdfunding is also a great marketing tool. You ve got a built in base of customers that are rooting for your success Unlike rewards based, equity-based crowdfunding allows companies to offer shares of their stock in exchange for funding. This type of campaign is typically longer in length and good for startups seeking $100,000 or more. While rewards-based will allow you to keep any additional money over your mark, equity does not. cash flow. Regarding equipment: Once you have your restaurant, there are lenders that will finance your equipment, some at 100 percent of the cost. This is an important option to keep in mind as equipment can be one of your biggest costs. Leasing in another way to finance your restaurant s equipment and is often recommended for startups. Angel Investors Angel investors are individuals who are using their own money in exchange for equity in your business. An angel investor needs to be excited about all aspects of your business from concept to menu to location; after all, they will be part owner. Because they are using their own capital, you often get a mentor along with an investor. There are several of these groups in existence with more coming onboard at record speeds. A few of these include: AngelList, SeedInvest and Angel Capital Association (ACA) a group of 13,000 plus angels. These types of investments can be structured as a loan, straight equity, warrants, or a combination of both debt and equity. I m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance. Steve Jobs

10 10 MARISA UPTON HOW TO FUND A RESTAURANT Venture Capital This is the most sophisticated type of investment to finance your new venture. Venture capital funds are investment funds that manage the money of investors who are seeking an equity stake in startup enterprises with high-growth potential. These firms are all about high-risk and high-reward. Venture capital funds are often more hands-on to the point of occupying a seat on the Board of Directors. These firms have hundreds of business plans coming across their desk every day. In order to be considered, your executive summary must catch their attention right away or your plan will be filed in the round filing cabinet post haste. If you get past the initial stage and they want to meet with you, you will need to present a clear and precise presentation about what your business is, how you are going to implement it and what the returns are expected to be. While restaurants have not been big receivers of venture capitalist funding in the past, times are changing saw the most investments in restaurants since the recession hit and it is expected to continue to rise through Food companies raised $89 million in the second quarter of this year alone and have raised nearly $350 million since the second quarter of 2013, the strongest performance for the category over the past five years, according to CrunchBase data

11 HOW TO FUND A RESTAURANT MARISA UPTON 11 Investor Payback This is one of the first questions that a potential investor will ask you: What are you willing to give me? It s good to have preset boundaries before heading to the negotiating table. In general terms: most investors are looking for at least 25 to 35 percent of the company. If this is your first restaurant, you can expect upwards of 40 percent. Investors also expect a large chunk of the profit, often in the 90 percent mark, until their investment plus interest has been returned. Aim to pay off any investor within two to five years. Once you have one restaurant under your belt, this part of the process will be easier. When just starting out, it can be tempting to jump at the first investor that seems inclined to fund your restaurant, but you will want to remember that this is a long-term commitment and investors can be very much like a partnership. I knew that if I failed I wouldn t regret that, but I knew the one thing I might regret is not trying. Jeff Bezos, CEO Amazon An investor isn t just investing in your business concept and plan, they are investing in you. It is your enthusiasm, attention to detail and thoughtful presentation that draws them in. It will be your ability to relate your trustworthiness and tenacity that makes them stay.

12 12 MARISA UPTON HOW TO FUND A RESTAURANT How much is Enough There is a fine line when looking to fund your restaurant. You need enough that you will not find yourself having to search for additional investors before the doors open. You also want enough to keep you going through the initial opening some experts recommended six months of working capital. On the other hand, the less debt, the more freedom. Here are some of the items to consider when putting together your capital requirements: Furniture, Fixtures & Equipment These typically account for 30 to 40 percent of the total hard cost budget. Technology A good POS and reservation system will help you keep your costs analyzed, your inventory up-to-date, and will provide the analytics that can help you tweak your menu for better profits. This is one area you do not want to scrimp on. Rent If you have a landlord that is willing to work with you, or you will be their anchor tenant, there are several options they may consider that will decrease initial costs. These possibilities include delaying rent until the restaurant opens and providing build-out costs or low base rents in exchange for equity. Construction Costs This is an important area to do your homework as construction fees vary widely. A local company will often come in at a lower bid, while offering equal quality, as a national contender. In addition, a local company that lets their friends, family and neighbors know about the new restaurant going in is always a good thing.

13 HOW TO FUND A RESTAURANT MARISA UPTON 13 Investment Sites Here are just a few of the many sites where you will find potential investors. Perseverance is the name of the game. You may have to kiss a lot of frogs before you find your prince. Crowdfunding: Remember once you launch your campaign, you have 30 days to make it or break it. You need to have your campaign in place, your story welltold, and a pre-campaign digital marketing strategy already in place before your launch. When you re ready, here are two sites to consider that are specifically designed for restaurants: EquityEats and Foodstart. Venture Capital: Traditional venture capitalists rarely invest in startups. Today s entrepreneur friendly environment has produced a few exceptions. These super-angels, as they are sometimes referred to, will invest upwards of $100,000 as compared to the $1 million plus the traditionalists require. A few sites to consider: Gastro Ventures and Great Oaks. One of the number one reasons why new restaurants fail is undercapitalization. Having a good business plan in place, a good team behind you, and investors you trust by your side will give you a fighting chance to be one of the new kids on the block that makes it big. In the end, a vision without the ability to execute it is probably a hallucination. Steve Case, cofounder AOL For more advice and solutions please contact us; Emerging Capital Partners Website: Phone Number: (312) contact@emergingcp.com