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By: Marc D. Pelletier, Vice President
Betsey Miller and Maria Giovanni have always dreamed of opening their own restaurant and plan to open a 60-seat restaurant in an aging shopping center more known for hardware than haute cuisine. Three other restaurants have failed miserably in this particular shopping center. The partners have never worked together and have no contingencies in place for an unexpected event. The grand opening party is scheduled in 90 days.
Betsey, the wife of a second-generation commercial printer, has no prior business or restaurant experience. Her partner, Maria, is an Italian-native with a flair for lamb chops, roasted salmon, tortellini, and scalloped potatoes. Neither partner was particularly driven by money, but rather an intense challenge to prove it could be done.
Where do the partners begin? Financing their vision is the first issue they must face. They started by contacting the U.S. Small Business Administration (SBA). Many businesses that are now household names - AOL, FedEx, Nike, Intel, and Ben & Jerry's - received help from the SBA along the way. The SBA's counseling and training arm, the Small Business Development Center (SBDC), helps clients prepare financial and marketing plans, write business objectives, and assist with SBA loan applications. In our example, the partners' capital investment and working capital was subsequently funded through the SBA 7(a) Loan Program. Their bank's SBA Preferred Lender status enabled them to receive reduced approval time for their loan.
The next step was to contact the right team of professional advisors - including accountants, lawyers, insurance agents, and real estate brokers. The partners decided the accountant who serviced the commercial printing company was not appropriate for their start-up business. The partners found an eager CPA who could meet monthly to discuss cash flow, cost controls, accounting software, and tax planning.
The partners then asked their financial institution to review their lease. Important considerations included rental rates, market conditions, lease term, building permits, personal guarantees, and common area maintenance charges. Their bank was able to provide important insights and a referral to a contractor for the renovation of the interior.
The partners spent little time planning beyond their menu and interior design. This is not uncommon while in the start-up mode. How would the business react to unforeseen events such as the death of a partner, break-up of the partnership, or a major liability incident? How could the business afford a second location if they spent too heavily on kitchen equipment and fixtures? The partners subsequently retained a lawyer for a buy/sell agreement and an insurance agent for keyman life insurance. The partners significantly reduced capital investment costs by locating used equipment.
Quickly converting a sale into cash flow aids any business. The partners obtained the right treasury services to ensure an efficient operation, including processing of major credit cards, ACH payment capabilities, online reporting, direct deposit for employees, overnight investment of idle funds, and monthly reporting options.
How much should be borrowed? What repayment plan is reasonable? The partners worked in conjunction with their financial institution, accountant, and the SBDC. The partners initially planned to borrow heavily for the capital investment in furniture, equipment, and fixtures. It was decided that leasing equipment and furniture would improve cash flow and allow partners the flexibility to open a second location in the next eighteen months. Finally, the bank suggested a back-up line of credit for potential cost overruns for the design of their eclectic atmosphere.
The two entrepreneurs took all of the right steps to ensure the success of their start-up business. Will it make it in the long run? That depends on whether the scalloped potatoes were a hit with the local food critics!
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.