RESTAURANT CAPITAL

What is it? How much do you need? Where do you get it? By Francis Bennett

We all blame those nasty bankers for the 2008 recession. “They’re always up to some kind of swindle, and they dupe us poor innocents into all kinds of self-destructive behavior.” Restaurateurs usually attach negative emotion to the finance function. They are “intimidated” by the banker, “resent” the needed but unwanted financial partner, “loath” the loan shark, and “despise” the cold-hearted landlord.

If we wish to become successful small business entrepreneurs, we must grow beyond our negative beliefs about borrowing and lending. We must take destructive emotions out of the financing function and go about building our businesses based on positive beliefs about capital and how it can be used effectively to achieve our goals.

YOU ALREADY HAVE ALL THE CAPITAL YOU NEED: From an economic perspective, a restaurant is not a place to eat. It is not a beautiful dining room attached to a modern kitchen. It is not a place at all. A restaurant is an ATM machine. Its economic value lies in its ability to generate a positive cash flow. Your education, experience, energy, focus, and good faith are the essential ingredients that fuel your restaurant’s ability to flow cash in the future. Its asset value is your skill and willingness to create and operate a “going concern”. You are your own capital.

CONVERTING CAPITAL INTO FUEL: You might look at your restaurant as if it were a steam locomotive with a coal tender attached. The coal is your initial capital. In order to get your locomotive moving, you must shovel some of the coal out of the tender and into your locomotive’s boiler. As you do so, your train begins to move. As you move down the track, you pick up more coal along the way. If you keep shoveling, your train keeps moving, and your coal tender continues to refill.

FINANCE: Finance is nothing more than converting capital into fuel so the train will move along and pick up more capital. The future cash flows of your restaurant venture have value to you and to others. You own them all at the outset. But, in order to get your train moving, you have to convert the rights to your future cash into present-day cash. If you had all the cash required to open your restaurant, you would have no need of finance. Since you don’t have all the cash required, you need to trade your restaurant’s ability to flow cash in the future for some cash right now. That is finance. That’s all it is.

INVESTORS: Who wants to make this trade? Investors. Investors trade present-day cash for the rights to future flows of cash in the hope that the future flows will add to their present cash pile. Remember, they don’t have a locomotive to move their cash pile down the track in order to gather more cash. You have the locomotive. They want to purchase the right to use your locomotive. You have no need to fear a banker or resent an investor. They need you as much as you need them. Your edge is that you only need them for the moment. They need you (or someone like you) forever.

COST: Lenders of all kinds, landlords, and partners are all investors. Each has a different formula for adding to their cash pile, and each represents a different cost to you.
BANKERS: trade present cash for a limited claim on your future cash flows for a limited time. They require collateral in the form of tangible assets. Because the collateral guarantees that the amount of future cash flows will equal the amount they lend, plus the interest they would have collected in the event the future cash flows are interrupted, their interest rate is usually modest as compared to other investors.

EQUIPMENT LESSORS: trade equipment for a limited claim on future cash flows for a designated time. They require only the equipment they finance as collateral. They charge a slightly higher interest rate than bankers and limit the term of the lease to the economic life they assign to the equipment. Because they, in fact, own the equipment, they require very little principal reduction allowing you to “buy” the equipment at the end of the lease term.

LANDLORDS: trade the present-day cost of leasehold improvements for a limited claim on future cash flows for the term of your lease; the more expensive the leasehold improvements, the higher the monthly rent payments.

PARTNERS: Equity investors trade present-day cash for a defined, but unlimited claim on future cash flows. Their claim on cash is forever. If you fail, they are the cheapest. If you succeed, they are the most expensive.

IN THE FINAL ANALYSIS: We hope to dispel any negative feelings you have about finance. If you start with emotional beliefs, your analysis is bound to be faulty. You must see the cumulative economic value of your experience and training as capital that you can trade to investors who crave it. You are in the driver’s seat when it comes to finance—don’t forget it.

Learn more about Francis Bennett at www.francisbennettcreative.com