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www.hotelandrestaurant.co.za JULY 2014 15 management management 14 JULY 2014 www.hotelandrestaurant.co.za management Suppliers of the Finest Hospitality Products www.livingstonessupplyco.co.za Ready for THE FUTURE FI NANCE FIRST: Businesses succeed or fail often not on the innovation of the idea, but due to a lack of understanding of managing finance. Industry consultant Larry Hodes throw light on this often intimidating but hugely important aspect of any hospitality business. W ith winter upon the hospitality industry and a number of hospitality and travel industry trade shows having run their course in May, there is no time like the present to think ahead and plan for the future with new and/or renovated hotels and restaurants. “o an outsider, starting a restaurant can appear to be an overwhelming challenge because of the enormous knowledge required and the significant financial exposure that comes with nearly all restaurant ventures. However, there are many enterprising and determined people who have found a way to overcome all the difficulties and create a successful restaurant business. Now, most of them would not think of doing anything else.” Tese are the words of Larry Hodes, a consultant to the restaurant industry who has worked in the industry most of his life. In this article he shares some thoughts on financing new and existing hospitality businesse s. Obtaining finance for a new business is usually one of the biggest challenges an individual will face. Some of the common mistakes that people make when opening a new or purchasing an existing restaurant are: 1. Underestimating the total capital requirements. Tings rarely go according to plan when opening a restaurant. For example, there are delays in construction and additional costs creep in. 2. Insufficient cash flow for the first few months. 3. Believing the restaurant will start making money from the Day One. Tis is rarely the case and some are not sustainable . 4. Inexperience and lack of understanding of the restaurant that you will be opening or purchasing. Purchasing a franchise is often seen as a safer option than opening an independent restaurant, as it comes with a proven dining concept, menu, brand identity, clear operational standards and support from the franchisor. However, there are still stores that fail in spite of the brand. Purchasing an existing, independent restaurant is more of a risk as sometimes it is difficult to verify figures and conduct an accurate due diligence process. As they say, there are four books that a restaurateur keeps: one for SARS, one for the landlord, one for a buyer and one that is true. At least with most franchises, the point of sale system is linked to the franchisor’s head office, so they are at least able to verify sales turnover. Opening a new restaurant is considered one of the riskiest businesses. Many people come from other industries, invest their pensions or savings in a restaurant, only for them to fail. Because of the high failure rate of new restaurants, banks are hesitant to grant loans. If you go into a new venture believing that you are going to achieve R7-milllion in sales a year and you only end up doing R4- million, chances are great that your business will not survive. Being prepared and doing all your homework makes you more likely to receive a loan from a bank or being accepted as a franchisee. Te most important part of the preparation is having a professional Follow Andrew Moth on @AndrewMoth CHEAPER LOANS FOR SMMES The Small Enterprise Finance Agency and the Tourism Enterprise Partnership (TEP) have a programme to provide loans to SMMEs (small, medium and micro-enterprises) in the tourism industry. The Ikwezi Tourism Facility can provide business development support including training,mentorship and guidance for access to the market,in addition to access to finance. TEP chief executive Salifou Siddo said: “Although there is a plethora of banks and other developmen t finance institutions in South Africa, access to finance has always been a major challenge to SMME owners as they struggle to develop and grow their businesses. “The complaint from SMME operator s is that, in addition to the complicated and time-consuming red tape involved in the funding application process,the intere st rates charged by commercial banks are often punitive and unaffordable. “We have long realised that access to finance is the missing link in our SMME development strategy. By adding access to finance,Ikwezi allows us to enhance our well- established business developme nt services offering to tourism SMME clients, ”he said. @ Find out more at www.hotelandrestaurant.co.za with advice as they also want to ensure that you succeed as their reputations are a lso on the line. o assist you in putting your business plan together and obtaining an understanding of the business that you will be purchasing, spend time in the restaurant. In today’s economy, chances of obtaining a loan are slimmer than they were a few years ago. However, banks and financial institutions are willing to provide loans if you have a sound business plan that makes economic sense and if you have guarantees in place for the amount that you would like to borrow. Banks are not in the risk-taking business: they are interested in the real assets that they can get their hands on if the business fails. Banks are also more likely to provide you with a loan if you are looking at purchasing an existing successful franchise. OTHER FINANCING OPTIONS TO CONSIDER ARE THE FOLLOWING: Bring in a partner to assist in running the business. Find an investor. With few exceptions, investors are not lenders: they are co-owners and business partners. Unlike a bank, after a period of time they do not simply go away: an investor is still around and as a shareholder in the business will want better returns than they would get from a bank. Borrow from family. However, do you really want to risk their money and your relationships if the business fails? Take a second bond on your house. Te advantage is that your repayments are much lower in the short term. Approach a financing company that deals with small and medium businesses. Tey also provide advice. Venture capitalists and private equity firms will only invest in restaurants that are established, which have franchise or growthopportunities. An experienced investor should be able to evaluate the opportunities and risks of the proposed restaurant venture . Tey are going to evaluate you first. Te quality of your business plan will be a direct expressi on of your capabili ties as an oper ator. In addition, as with any individual seeking credit or financing, having a clean credit record is crucial to your getting a loan. Most franchisors require at least 40% to 60% of the cost of the business in unencumbered cash up front if you wish to invest in their brand. Most banks will also require you to invest your own capital – the amount depends on each case – and they will still require guarantees and security for the money they loan you. Investors almost always demand that you invest at least some of your own capital into the business. Larry Hodes is a consultant to the restaurant industry .He has experience as a restaurateur, franchisee,training facilitator and consultant to the hospitality industry. He is the owner of The Restaurant Code,which specialises in consulting and training in the hospitality industry. For more information go to www.therestaurantcode.com or tel 082 805 1573. Most franchisors require at least 40% to 60% of the cost of the business in unencumbered cash up front if you wish to invest in their brand. business plan in place for both the bank and franchisor. A business plan not only provides you with direction, it also provides you with the opportunities and pitfalls of opening or purchasing an existing business. Without a proper business plan, a bank or other financing businesses will not consider providing you with a loan. Tere are various places to go for professional advice such as the Franchising Association of South Africa (FASA) and the Restaurant Association of South Africa (RASA). If you are looking at purchasing a franchise, most franchisors are happy to assist Te more guarantees and security you have in place, the better your chances of being charged a favourable interest rate. Proving you have a solid credit history and sound track record will also go a long way in securing a better interest rate. Depending on the business you open or purchase, the average time period to pay back a loan is five years. If your business is successful and exceeds expectations, quite a few restaurateurs settle their loans sooner.
