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za JULY 2014 15
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14 JULY 2014 www.hotelandrestaurant.co.za
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THE FUTURE
FINANCE FIRST: Businesses succeed or fail often not on the innovation
of the idea, but due to a lack of understanding of managing nance.
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.
To an outsider, starting a restaurant can
appear to be an overwhelming challenge
because of the enormous knowledge required
and the signicant nancial 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 diculties 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 nancing
new and existing hospitality businesses.
Obtaining nance 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. Insucient cash ow for the rst 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
orpurchasing.
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 dicult to verify gures 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 franchisors head oce, 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
tourismindustry.
The Ikwezi Tourism Facility can
provide business development support
including training, mentorship and
guidance for access to the market, in
addition to access to nance.
TEP chief executive Salifou Siddo
said: Although there is a plethora
of banks and other development
nance institutions in South Africa,
access to nance has always been
a major challenge to SMME owners
as they struggle to develop and grow
theirbusinesses.
The complaint from SMME
operators is that, in addition to the
complicated and time-consuming
red tape involved in the funding
application process, the interest rates
charged by commercial banks are
often punitive and unaffordable.
We have long realised that
access to nance is the missing link
in our SMME development strategy.
By adding access to nance, Ikwezi
allows us to enhance our well-
established business development
services offering to tourism SMME
clients, he said.
@
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with advice as they also want to ensure that
you succeed as their reputations are also
on the line. To 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 todays economy, chances of obtaining
a loan are slimmer than they were a few
years ago. However, banks and nancial
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
thebusiness.
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 fromfamily. 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 nancing company
that deals with small and medium
businesses. Tey also provide advice.
Venture capitalists and private equity
rms will only invest in restaurants that
are established, which have franchise or
growth opportunities.
An experienced investor should be able to
evaluate the opportunities and risks of the
proposed restaurant venture. Tey are going
to evaluate you rst. Te quality of your
business plan will be a direct expression of
your capabilities as an operator. In addition,
as with any individual seeking credit or
nancing, 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
082805 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 nancing 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 ve years. If your business is
successful and exceeds expectations, quite a
few restaurateurs settle their loans sooner.