Business Case: Should I Start a Restaurant?

Coffee Shop

Submitted by:
Mr. Rahul Vaidya
Executive MBA (2008/11)

Executive Summary

I would recommend Vinayak and Preeti to start a “Coffee Shop” at Kalyani Nagar. The key steps
of the decision making process and the anticipated cash flows for fiv e years have been
detailed out in the following pages. However key financial figures are as below:
• Initial inv estment anticipated for the v enture is about INR 50 lacs
• Debt to be raised from financial institutions is about INR 1.2 Crores
• Debt is likely to be repaid in two years
• The NPV of cash flow (on pre tax basis) is about 1.8 Crores

Decision Making Process

Both Vinayak & Preeti hav e to follow a detailed step wise decision making process that would
help them arriv e at a decision of starting their restaurant. Key steps in this decision making
process has been highlighted in the following pages:
1. SWOT Analysis
• SWOT analysis would be an assessment of their Strengths, Weaknesses,
Opportunities and Threats.
• It would be a basic and most important assessment before taking a plunge in to
this new business v enture.
• This assessment would giv e them a clear understanding of their strengths (passion
to start some thing new, a common sense approach, availability of capital and
most importantly love for making and eating food), their weaknesses (zero
experience of running a restaurant business), the opportunities (change in eating
habits of the city populace) and threats (saturated market, presence of brands /
chains of restaurants, health and hygiene concerns).

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2. Restaurant Typology
• Vinayak and Preeti hav e a wide range of choice to pick the format / typology of
restaurant they are keen on starting. The choices av ailable are:
o Restaurant in a 5 star hotel
o Occasional treat restaurant
o Once a month (family) restaurant
o Everyday restaurant
o Coffee Shops and snacks parlour
• They hav e to decide on the best format that would suit them after deliberation
on the following aspects:
o Financial resources required
o Lev el of inv olvement / expertise required out of them
o Scale of operations and future scalability
o Risk and returns profile of each restaurant format
o Exit options and exit mechanism
• This analysis would help Vinayak and Preeti arriv e at a restaurant format with a
clear understanding of the efforts & finances required and the exit options in case
things turn out in fav our as planned.

3. Location Identification
• Every restaurant format has its demand driv ers and typical clientele. Based on a
clear understanding of requirements of the identified restaurant format, Vinayak
and Preeti would have to shortlist and identify the suitable location of business.
• Identify suitable property at the location that would compliment the restaurant
format identified.

4. Buy OR Lease
• The next important business decision would be to decide whether to buy or to
lease the property for operating the restaurant. Following would be key
determinants in making this decision:
o Financial resources required
o Intention of creating an asset or intention of checking suitability of
business venture
o Ramification of taxation and property laws

5. Dev elop expertise OR Hire Expertise

• The next important business decision would be to decide whether to dev elop a
team in house to operate and manage the entire show or alternativ ely seek a
franchisee roust. Both would have its fair share of adv antages and concerns.
• The restaurant type, scale and its complexities would help in taking the decision.

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Selected Alternative & Justification

Based on the abov e mentioned decision making process, the alternativ e recommended to
Vinayak and Preeti is to v enture in “Coffee Shop”. Following are salient features of the selected
alternative.
1. It is recommended to open the Coffee Shop at Kalyani Nagar due to the following
reasons.
a. It is a cosmopolitan area predominantly catering to the higher income segment
population
b. It is a prominent node of IT / ITeS in Pune
c. It has a strong youth population both in the working as well as student class
d. The families staying in Kalyani Nagar hav e a strong tendency to spend in eating
out
e. There is limited competition in this category

2. It is recommended to be a franchisee of a popular brand in the Coffee Shop segment

(CCD, Barista etc.) due to following reasons:
a. Vinayak and Preeti do not hav e any prior experience of running a restaurant
b. Vinayak and Preeti do not hav e the required expertise and it would take time to
dev elop such expertise
c. A franchisee route would sav e a lot of their hassles, as they would benefit from a
structures approach with definitiv e results

3. It is recommended to lease a shop rather than buy it, as:

a. This would reduce the initial inv estment required for running the business
b. Reduce any ramifications of taxation and property laws
c. Agreements can be structured to a fiv e year period with definitiv e clauses on
increments in rent as well as exit clauses. This reduces concerns relating to any
premature exit by the land lord.

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Financial Analysis
Key Rev enue Assumptions
Restaurant Timi ngs:
Weekdays
Mornings 11:00 am to 4:00 pm
Evenings 4:00 pm to 10:00 pm
Weekends
Mornings 11:00 am to 4:00 pm
Evenings 4:00 pm to 10:00 pm

No. of tables 40

Average occupancy: in %
Weekdays
Mornings 25%
Evenings 75%

Weekends
Mornings 40%
Evenings 90%

Tabl e Turnover per day

Weekdays
Mornings 4
Evenings 4

Weekends
Mornings 6
Evenings 8

Average table turnover per day:

Weekdays
Mornings 40
Evenings 120

Weekends
Mornings 96
Evenings 288

Average table turnover per w eek

wekdays 800
Weekends 768
Total 1,568

Average no. of persons per table 2

Ticket size per person 125

Average ticket si ze per table 250

Revenue from Operations per week 392,000

Revenue from operations per month 1,568,000

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 Key Cost Assumptions
Interiors & furniture 700,000 one tim e
Kitchen equipment 500,000 one tim e
Marketing cost 600,000 per annum
Salary of staff 900,000 per annum
Rent for store 900,000 per annum
Brokerage charges (2 months rent) 150,000 one tim e
Deposit for store (6 months rent) 450,000 one tim e
Launch Party expenses 1,000,000 one tim e
Electricity charges 120,000 per annum
Approvals & licenses for operating restaurant 1,000,000 one tim e
Franchisee fee 5% of the revenue
Cost of raw m aterial 20% of Revenue from operations
Salary of Advisor / Expert 1,200,000 per annum
Prom otors Salary 2,400,000 per annum

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 Cash Flow for First Year of Operations
Cost Stream 1 2 3 4 5 6 7 8 9 10 11 12
Interiors & furniture - Expenditure spread over 3 mo nths 233,333 233,333 233,333
Kitchen equipment - Expenditure spread over 2 mo nths 250,000 250,000
Market ing co st - 25% for fi rst two months & 100% thereaft er 12,500 12,500 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000
Salary o f staff - 50% for first three mont hs & 100% thereaft er 37,500 37,500 37,500 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000
Rent fo r store 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000
Brokerage charges (2 mo nths rent) 150,000
Deposi t for st ore (6 months rent ) 450,000
Launch Party expenses - o ne tim e expenditure 1,000,000
Electricity charges - 50% for first three months & 100% thereafter 5,000 5,000 5,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Approv als & licenses for o perati ng restaurant 333,333 333,333 333,333
Franchi see fee - 5% of the annual revenue - - - 14,700 21,952 27,440 32,928 47,040 58,800 70,560 88,200 117,600
Cost of raw m aterial - 20% of revenue from operations - - - 58,800 87,808 109,760 131,712 188,160 235,200 282,240 352,800 470,400
Salary o f Adv isor / Expert 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000
Promot ors Salary 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000
Contingencies - 5% of operating costs 5% 31,917 31,917 31,917 19,175 20,988 22,360 23,732 27,260 30,200 33,140 37,550 44,900

Total Costs 1,628,583 1,278,583 2,316, 083 602,675 640,748 669,560 698,372 772,460 834,200 895, 940 988,550 1,142,900

Revenue Stream 1 2 3 4 5 6 7 8 9 10 11 12
Rev enue from Dine-in operations 1,568,000 1,568,000 1,568,000 1,568,000 1,568,000 1,568,000 1,568,000 1,568,000 1,568,000 1,568, 000 1,568,000 1,568,000
Av erage rate o f operations 0% 0% 0% 15% 20% 25% 30% 40% 50% 60% 75% 100%
Sub Total of Dine-in o peratio ns - - - 235,200 313,600 392,000 470,400 627,200 784,000 940,800 1,176,000 1,568,000
Rev enue from Take away & Home deliv eries
(% of sales of Dine in Revenue) 0% 0% 0% 25% 40% 40% 40% 50% 50% 50% 50% 50%
Sub Total of tak e away and home deliv eries - - - 58,800 125,440 156,800 188,160 313,600 392,000 470,400 588,000 784,000
Total Revenue - - - 294,000 439,040 548,800 658,560 940,800 1,176,000 1,411, 200 1,764,000 2,352,000

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 Cash Flow for Fiv e Years of Operations
Particul ars Year 1 Year 2 Year 3 Year 4 Year 5
Cost Stream
Interiors & furniture 700,000 - - - -
Kitchen equipm ent 500,000 - - - -
Marketing cost 525,000 600,000 600,000 600,000 600,000
Salary of staff 787,500 900,000 900,000 900,000 900,000
Rent for store 900,000 900,000 900,000 900,000 900,000
Brokerage charges (2 months rent) 150,000 - - - -
Deposit for store (6 m onths rent) 450,000 - - - -
Launch Party expenses 1,000,000 - - - -
Electricity charges 105,000 120,000 120,000 120,000 120,000
Approvals & licenses for operating restaurant 1,000,000 - - - -
Franchisee fee 479,220 1,517,040 1,630,818 1,753,129 1,884,614
Cost of raw m aterial 1,916,880 6,068,160 6,068,160 6,068,160 6,068,160
Salary of Advisor / Expert 1,200,000 6,068,160 6,523,272 7,012,517 7,538,456
Prom otors Salary 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000
Contingencies - 3% of operating costs 355,055 808,668 808,668 808,668 808,668
Subtotal 12,468,655 19,382,028 19,950,918 20,562,475 21,219,898
Cost escalation per annum 7.50% 1.00 1.08 1.16 1.24 1.34
Subtotal (after escalation in cost) 12,468,655 20,835,680 23,055,780 25,544,698 28,338,519
Sensitivity Analysis - Increase / decrease in cost stream 0.00% 1.00 1.00 1.00 1.00 1.00

Total Cost 12,468,655 20,835,680 23,055,780 25,544,698 28,338,519

Particul ars Year 1 Year 2 Year 3 Year 4 Year 5
Revenue Stream
Revenue from operations 9,584,400 28,224,000 28,224,000 28,224,000 28,224,000
Revenue escalation per annum 7.50% 1.00 1.08 1.16 1.24 1.34
Subtotal 9,584,400 30,340,800 32,616,360 35,062,587 37,692,281
Sensitivity Analysis - Increase / decrease in revenue stream 0.00% 1.00 1.00 1.00 1.00 1.00

Total Revenue 9,584,400 30,340,800 32,616,360 35,062,587 37,692,281

Net Cashfl ow (before Interest) (2,884,255) 9,505,120 9,560,580 9,517,889 9,353,762

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Particul ars Year 1 Year 2 Year 3 Year 4 Year 5
Equity 5,000,000 5,000,000
Internal Accruals 101,954,677 2,500,000 22,095,680 23,475,780 25,544,698 28,338,519
Debt 12,000,000 12,000,000

Loan Schedule
Opening balance 12,000,000 12,000,000 6,000,000 - -
Interest Paym ent 14% 1,680,000 1,260,000 420,000 - -
Principal repayment 6,000,000 6,000,000
Closing balance 12,000,000 6,000,000 - - -
DSCR 4.22 1.14 1.42
Net Cashflow (after Interest) (4,564,255) 8,245,120 9,140,580 9,517,889 9,353,762

Cost of Equity 20%

Cost of Debt 14%

WACC 16%

NPV (pre-tax) 18,000,000

Vinayak would earn approx. INR 1.8 Cr at present value after 5 years of running / operating the
Conclusion: coffee shop at Kalyaninagar

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Conclusion
The prospects of Vinayak and Preeti look positiv e and as per the assumptions made, they are
likely to earn about INR 1.8 Crore (at Present Value) over the next five years from the restaurant.
Key financial aspects are as follows:
• Initial inv estment anticipated for the v enture is about INR 50 lacs
• Debt to be raised from financial institutions is about INR 1.2 Crores
• Debt is likely to be repaid in two years
• The NPV of cash flow (on pre tax basis) is about 1.8 Crores