Experienced Restaurant Owners Have Options for Growth Capital

October 16, 2018

Experience is a tough teacher, as any business owner will tell you. But experience also brings with it new opportunities, including access to a wider world of financial options for restaurateurs looking to expand.

As we discussed in a recent blog on start-up funding for new restaurant owners, opening up a business for the first time in any industry is difficult. Opening up your first business in the notoriously tough restaurant industry is even harder.

But once a business has an operational and financial history, owners can start to access more traditional debt and equity options, such as bank loans and institutional investment. These sources may offer larger amounts of capital and beneficial terms that can help you grow your business.

Are You Ready for the Next Stage?

Before any business starts to approach institutional capital sources, they need to reach a certain level of “sophistication” in their business. Essentially, this means getting systems in place.

On the most basic level, restaurants need a good internal or external accounting team or outsourced accounting function. If restaurants want to talk to lenders or investors, they should be willing to invest in upping their level of sophistication. Consider monthly financial performance packets, projections and reports on collateral and assets — all fodder for a compelling investor package.

Having financial processes in place will help your business advance to the next stage of capital-raising, accessing institutional capital that was not available for your first venture.

Bankers, Debt and Loans

The first stop for many restaurants is SBA financing. These are usually underwritten by banking institutions, most of whom have almost no appetite for risk and require at least a two to three-year financial history.

Still, with collateral, a profitable record, and a sound financial system, restaurants can access up to $5 million in debt. Banks and other lenders may offer additional beneficial terms like low-interest rates or deferred payments on principal.

During this process, it is helpful to work with financial professionals who are familiar with the restaurant space. A restaurant owner may come across an enthusiastic banker claiming the bank will sign on to your restaurant deal. However, if the institution is actually unfamiliar with underwriting or financing restaurants, the deal can drag on for months. A business owner can waste valuable time negotiating terms that may never actually get underwritten.

Instead, professionals that specialize in the restaurant and hospitality industry can steer you toward friendly institutions. Different banks operate in specific professional bubbles, and some concentrate on areas like restaurants, breweries or franchises. Those who know the industry will know how businesses similar to yours have gotten financed.

Talking to accountants, consultants, attorneys and bankers who work in the industry can prevent a long, expensive, drawn-out search for loans. In short, restaurant owners should exercise the same due diligence in finding a banker as for selecting a produce purveyor.

Talking to Private Investors

Some businesses choose to pursue capital from traditional debt or equity sources.

Jan Zalud, managing director and Chartered Alternative Investment Analyst at U.S. Strategic Capital in Atlanta, has worked with a wide variety of businesses seeking capital, including hospitality groups and restaurants. He says that while a restaurant’s finances truly need to be sophisticated to access private institutional investors, it may be worth the effort.

“There are private markets that have a substantial amount of capital that may come at a different cost than SBA or other bank loans, or even equity,” says Zalud. “The capital can come with different requirements and terms.”

Retail investors may be, for example, “high net worth individuals and family offices who deploy capital outside of typical stocks, bonds and mutual funds.”

These individuals invest in private companies in many different ways, including creative terms that allow for flexibility and long-term planning. Retail investors may invest for equity and profit shares, but others can act like debt or non-equity sources.

“In this world, there can be creative arrangements,” says Zalud. Investor agreements can range from deferred payment debt timelines to equity or profit sharing options.

Flexible capital agreements are especially possible if investors like your business and believe in what you’re doing. Here, Zalud says, restaurants have an advantage. A chef’s reputation and local following is a compelling factor.

“Restaurants can create something unique. They have the benefit of a ‘cool’ perception. You can get creative with how you sell…your concept, your vision,” says Zalud.

Zalud explains that these investors will certainly want to know about the company’s fiscal particulars and the financial terms of the agreement. But the ROI in restaurants “is also based on some subjective factors.”

Of course, the main hurdle for accessing this pool of private capital is getting to know these individuals. Most business owners use private boutique investment banks that specialize in building networks of these investors. These private investment firms usually take a percentage of the money they bring to you, either outright or in the form of debt or equity.

Restaurant Groups and Franchises

Restaurant groups, or businesses with multiple enterprises, have even more capital options available to them. Restaurant groups with substantial revenue can successfully approach institutional investors that deal with large investment funds.

Restaurant groups can also get creative with their breakdown of debt versus equity capital. Zalud explains that restaurant groups who can offer significant assets (i.e. other restaurants) as collateral may be able to finance new ventures purely with debt. From there, some restaurant groups can form a wide range of structures, from profit participation formats to management companies with equity.

The power and flexibility afforded to restaurant groups stems from the well-known challenges facing restaurants. The restaurant and hospitality industry is notoriously difficult to predict and underwrite. Restaurant groups that have multiple successful ventures therefore have access to an even wider range of capital.

“If you’ve figured out how to build a team and make a restaurant successful,” says Zalud, “money will find you.”

Franchises tend to operate on a different set of rules than independent businesses.

Franchisors needing capital to maintain or expand their product and service base can use capital from franchise fees, or pursue other traditional financing channels.

Even first-time franchisees may be able to access institutional capital because there is already a track record associated with the business. Banks do due diligence on the franchise operator, but they also underwrite the franchise as a business. If franchisees are part of a franchise with a profitable history, they may have an easier time finding capital than an independent restaurateur.

Timely Working Capital

While a strong cash flow and/or bank loans may provide working capital, smaller companies have disrupted the industry with new and different options.

Kabbage, an online financial technology company based in Atlanta, tries to fill the working capital niche for small business owners.

Paul Bernardini, head of corporate communications and analyst relations at Kabbage, says that restaurants are one of the fastest growing segments in Kabbage’s company.

“It’s not that they’re stressed or pressed, it’s just that time is of the essence,” says Bernardini. “If I’m a pizzeria and my oven breaks, I need capital, now.”

Some restaurants also use working capital to test out new concepts. A recent survey done by Kabbage asked users what they thought were the greatest hurdles for their growth.

“Most businesses replied that they know exactly what they need to grow, they just need more capital to get there,” reports Bernardini.

Innovative lenders like Kabbage are working to fill a niche. Kabbage offers a quick, online credit approval process that relies on a business’s financial history and a number of other factors. If approved, customers have access to a line of credit and can choose how much capital they use, and when, for a flat fee.

For businesses older than a year that also meet Kabbage’s minimum revenue guidelines, a line of credit is easily accessible. Small business owners who need sums under $250,000 can look to Kabbage or other online lenders as one piece in the cash flow and business growth puzzle.

Growing Your Business

Experienced business owners have a wide range of options for their capital needs, both for starting new ventures and leveraging working capital. With the right systems in place and a sound financial history, there’s nothing holding you back.