Looking For Financing? Know What You Are Talking About!

restaurant taxes restaurant business plan

A friend of mine, who is not a restaurant person, recently asked me to look at a Restaurant Business Plan for what he thought was a promising new restaurant in our area. My buddy is a fairly seasoned business pro, who is CEO of a manufacturing company and former business professor at a major university. He also knows what he doesn’t know, which in this case is the restaurant industry.

David Sederholt finance taxes restaurant
David Sederholt

The email arrived with what looked like a well thought out and organized Restaurant Business Plan attached. It covered all the classic bullet points that someone tells you must be included.  Vision statements, mission statements and fluff about the best food, best service, most unique, cutting edge establishment ever created were there. Yea and management is the best, and has the most experienced and creative people in the world. Blah, blah, blah – one thing they forgot? The real pros go to the numbers and other details about the business to piece together the real story. 

I am sure that the folks behind this new venture are sincere, honest people who are pursuing their dream of having their own restaurant but they are either naïve or intellectually lazy. They are seeking $400k in financing and trying to convince potential lenders or investors that they are solid professionals who can run a great restaurant and pay back the debt or equity with a favorable return on their capital.

Unfortunately this Restaurant Business Plan told me quite the opposite. The truth was that ownership either doesn’t know what they are doing; didn’t really put the time in to research key financial data points; failed to have the business savvy to recognize simple logic; or they just guessed at the numbers.  In any and all cases, my bullshit meters went off like crazy and if it wasn’t for my friend’s kind offer to help these people out – the document would have been thrown in the garbage can.

I can’t go into all of the tripwires that presented themselves to me in a 15 minute reading, but I will point out some high level things for you to consider when crafting a Restaurant Business Plan:

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1. Know what the hell you are talking about before you look stupid!

You will be challenged to defend your assumptions. On every single line item ask yourself how did you arrive at this number both on revenue or expenses. I’m not talking about your “gut” or how your years in the business led you to the numbers – you’ve got to show the lenders your logic.

a. Revenue – in the restaurant business it’s all about butts in seats or how many meals are served. Your revenue projections should tell a realistic story. What are the number of days of operation? number of covers served by day? by meal period? average sales per cover for each meal period? etc.  Don’t just pull a number out of your rear end and say – “we will do $1.5MM in year one and increase 10% per year thereafter.”  Based on what?  Show how you got to the number. Also, don’t ignore comps, promos, discounts and employee meals as they have real cost and are a fact of life in the restaurant biz.

b. Expenses – really, really research this and get as close as possible. Assertions that are very easy to shoot holes in make you look less than knowledgeable.  The business plan in my hand has so many glaringly uninformed claims that it made me realize the owners were just low balling costs.  Labor, insurance, advertising and marketing, direct operating, R&M, utilities and so forth, are favored fairytale items. Having owned and operated over a dozen restaurants, I could smell it.

2. Stop with the fluff 

Make a solid substantive, data filled argument as to why this business will be a winner!  In this 25 page document I received – 80% of it was filled with superlatives and self aggrandizements and 20% with data, assumptions and projections that were either poorly crafted, indefensible or could come off as worse – incompetence. As an old restaurant owner once told me – “less sizzle – more steak.”

3. Don’t skip over important details 

The Restaurant Business Plan in my hand talks about demographics, household incomes, fabulous traffic… blah, blah, blah – but NOWHERE did they present the details about the most important fixed cost effecting their business.  The lease!  What are the terms of this all important liability of the business?  What is the term, base rent cost, pass through expenses, escalations, guarantees, guarantors, renewal options, rights to sub-let and assign?? Did any of this get accurately modeled into the projections? You know the answer.

4. THINK before you make rash statements 

As I went through the descriptive part of the plan then looked at the projections, I was struck by a couple of remarkable features. 

a. The management said they were going to serve lunch and dinner 7 days a week and have a late night bar with entertainment. OK, so then to my surprise, the Personnel Forecast called for a total of 3 cooks and 1 dishwasher for the entire year. This for a restaurant doing over $1.5MM in sales!! That would mean these employees would never go home!  Same for managers – just 1! The personnel cost reflected this assumption and the associated payroll they provided would pay these poor employees about $3 per hour.  This is just silly and makes these guys look like amateurs. 

b. As prescribed by Restaurant Business Plan aficionados, the plan included a long list of marketing, advertising and promotional programs they were envisioning. Print ads, TV, Radio, promotions, social media, PR, you name it. None of these fluff points spoke of cost, benefit, impact ROI.  Then I got to the pro forma P&L and they had $5,000 as the annual spend for all this. Maybe $5,000 per month could launch this plan, but not $95 a week!

c. Then my favorite – the plan was for targeting a $400,000 financing yet the financial projections did not reflect DEBT SERVICE anywhere!  How can you show a profitable P&L statement and not pay down your loan?  Deceptive or ignorant? How can you not show the debt on your balance sheet?  This tells me they’re not very concerned about paying back their lenders!!

Just going through the motions of writing a Restaurant Business Plan isn’t going to get you the financing you need. It needs to show that you know what you are talking about and can defend your position with facts, not fluff.  This is one of the reasons that so many restaurant owners can’t get the capital they need. Remember – more steak, less sizzle!

If you want to discuss your Restaurant Business Plan or have questions on finance or operations, you can email me at dsederholt@sfscapital.com

David Sederholt
David Sederholt is a multi-discipline entrepreneur who has launched and built numerous companies in specialty finance, foodservice and commercial real estate over 40 years. After owning, financing and operating over a dozen restaurants in his career he found a niche in serving small businesses seeking financing and strategic advice. For 10 years he served as Chief Operating Office of Strategic Funding Source, Inc., (now called Kapitus). David has also been a Managing Partner at a boutique investment bank and a specialty commercial real estate firm. He is a regular guest lecturer and contributor to business and industry publications as well as serving as a Board member and advisor to numerous companies and non-profit organizations. He is currently owner of Ragnar Partners, LLC, a private investment and advisory firm.