I have seen hundreds of business plans over the past 30 years as a restaurant owner, executive and later as an alternative finance provider. Many restaurateurs seeking financing put a great deal of effort into their presentation and many worry more about form than substance. Unfortunately that can work against them.
This past week I received what looked like a well thought out and organized business plan. It covered all the classic bullet points that someone expects, but a deeper look revealed weaknesses and lack of solid business sense on the part of the new owners. Their primary drive was to “sell the deal” based on soft issues not real substance.
Professional financiers go to the facts, numbers and other details about the business, location, management, concept to piece together the real story. They are generally skeptical and are looking for holes, obstacles or anything that might be counter to what is in the plan. They want to look inside your head.
The business plan I just received was seeking $400,000 in financing and was filled with superlatives about the location, concept, market and management. I am sure that the folks were sincere, but their plan made me think they were either inexperienced, naïve or intellectually lazy. They would not be able to convince potential lenders or investors that they are solid professionals who can run a great restaurant and pay back the debt.
What was wrong?
Many aspiring restaurant owners are caught up in the dream and focus their plan on pitching how wonderful everything is and dump volumes of positives into the document. If you are going to succeed in attracting lenders or financial partners you need to present a well-researched argument along with realistic projections that can be validated. You also need to highlight the downsides, competition and risk factors in launching and operating this business. I will point out some high level things for you to consider when crafting one of these documents:
Don’t Pull Numbers Out of the Sky
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.
Revenue: In the restaurant business it’s all about covers and meals served. What are realistic check averages? Your revenue projections should show a realistic story. What are the days of operation and number of covers served by daily meal period? Don’t just pull a number out of the air 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, when illustrating this logic stream don’t ignore comps, promos, discounts and employee meals as they have real cost and are a fact of life in our business.
Expenses: It is natural for entrepreneurs seeking financing to present the most profitable picture. As a result they often understate expenses. It is important to really research this and get as close as possible. The business plan in my hand has so many glaringly low ball costs that I knew they were trying to stretch the story. Labor, insurance, advertising and marketing, direct operating, R&M, utilities and so forth, are favored fairytale items.
Stop Selling so Hard
If there wasn’t a baseline interest in your proposal, the investor wouldn’t even read it. The business plan should be a solid substantive, data filled argument as to why this business will be a winner which transparently shows the good and the possible bad side of the restaurant. Too many plans spend 80% of the pages filled with superlatives and only 20% with defendable data, assumptions and projections. Meaningful details about competition, past history of the location and the lease should be discussed. As an old restaurant owner once told me – “less sizzle – more steak”.
Focus on Fixed Costs
The are usually volumes spoke about items described as variable costs but not the areas that will be tougher to control. Busness plans highlight menu, cost of good, labor, marketing but rarely take a deep look at the lease, insurance costs, taxes. All of which are central to many restaurant failures. Talk about it up front.
Think Before You Make Rash Statements
Stretching the truth or showing you didn’t really think your claims through. Stating they were going to serve lunch and dinner seven days a week, do $1.5MM in sales and then forecasting a total of three cooks and one dishwasher and one manager for the entire year showed the weakness. That would mean these employees would never go home. The personnel cost in the projections reflected this assumption. This is just makes them look like amateurs.
The Devil is in the Details
I have seen plans that are asking for financing but then never show the debt service in the pro forma financials or they make unrealistic representations. One plan showed a four percent interest only five-year balloon note without thinking that this would be almost impossible to secure. Another plan showed a business that was barely profitable for the first two years but then if you put in a reasonable debt service, turned the P&L entirely upside down.
Investors want to see that you have skin in the game. Hardly any business plan that I have seen discussed what the new entrepreneurs are actually putting into their new venture in hard cash. Investors are not really interested is “sweat equity”. It’s great that you care and want to work hard but they want to know that you stand to lose if something goes wrong. It aligns everyone’s priorities.
Just going through the motions of writing a 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 hype. This is one of the reasons that so many restaurant owners can’t get the capital they need.
Remember – more steak, less sizzle.