Strategic Expansion: Effective Debt Structuring Solutions for Growing Your Restaurant or Franchise

At a glance

• The main takeaway: Effective debt structuring is integral to the growth of a restaurant or franchise.
• Impact on your business: The right debt structure is crucial for the financial health and growth of any business. Depending on your needs, there are several types of financing available.
• Next steps: Aprio’s Restaurant, Franchise & Hospitality team understands the restaurant and franchise industry and its complexities. We are here to help you assess the pros and cons of debt structuring, depending on your restaurant or franchise’s needs.

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The full story:

The right debt structure is crucial for the financial health and growth of any business. In this article, we explore the different types of financing available to owner/operators that can optimize their financial position and get them one step closer to achieving their goals. To maximize the benefits of debt, explore various financing options to determine which align with your goals and to avoid financial strain.

Understanding the specific needs of the restaurant or franchise is paramount. Consulting with a professional advisor who knows the complexities of the restaurant industry is beneficial, as they can optimize your tax position to enhance profitability and growth.

What is debt structuring in the restaurant industry?

Debt structuring refers to how restaurants manage their financial obligations and liabilities. Below is a snapshot of some of the financing options common to restaurant and franchise owners:

Types of financing available

• Small Business Administration (SBA) debt: Typically, SBA loans can offer lower payments and favorable loan terms. Borrowers tend to have quicker access to funds, although there can be a large amount of paperwork involved to apply for an SBA loan. The SBA offers a variety of loans based on your unique circumstances and eligibility:
  • 7(a) loans: Can be used to cover any business-related needs. The maximum loan amount is up to $5 million.
  • 504 loans: Better fit to cover for long-term costs used to purchase or improve assets. You will not be able to use this to cover short-term costs and if you are a nonprofit. The maximum loan amount is up to $5.5 million.
  • Microloans: Offers up to $50,000 for small business owners looking start or grow their business. It can be used for any business-related need (similar to the 7(a) loan), but not for paying existing debt or purchasing real estate.
  • Express loans: Part of the 7(a) loan program. The maximum loan amount is up to $500,000.

• Bank debt: Borrowers may be able to receive larger sums when applying for loans from a bank. However, borrowers may also need to meet stricter eligibility criteria as well as collateral, such as making a personal guarantee. Borrowers also should be mindful of the current economic landscape that can affect interest rates.
• Investor funding: Having angel investors or private equity investors can typically bring larger sums of money to your restaurant or franchise. Investors can also give you access to mentorship or additional resources that can benefit your career and your restaurant if you bring them in either as a partner or as a lender. The downside is that there could be instances in which you may have to give up ownership control. For example, in situations where accelerated scalability might be necessary, investors could encourage aggressive growth in exchange for equity or money.
• Franchising: Should you decide to expand your business, franchising is another option. Franchising allows other stakeholders to operate under your brand in exchange for a franchising fee. But there can be complexities that go along with franchising. Developing a detailed franchise development document is important to ensure consistencies in branding, expectations for guest service and more.
• Crowdfunding: This is a modern option for tapping into alternative sources of funding that allow you to adapt to emerging trends and stay competitive in the industry. One advantage to crowdfunding is that it can help you build an enthusiastic customer base; crowdfunding makes people excited because they feel like they are connected to the business and part of the ownership family. On the other hand, crowdfunding can be time-consuming and manual in terms of setup.

Depending on your needs, we recommend exploring different types of financing options to determine which of them can benefit you the most. Explore what type of terms you can get to see if you qualify. Analyze your risk profile and pros and cons to determine which funding sources make the most sense. Ideally, a risk assessment is important to determine which type of financing best fits your restaurant’s needs.

Some questions to consider are:

• What do I want out of this venture?
• What am I willing to give up?
• What am I unwilling to give up?
• What is the current interest rate?
• What will my funding source require for me to obtain another loan?
• Are my current finances in a good position to share with other people?

Key strategies for effective debt structuring

Effective debt structuring is crucial for the financial health and growth of any business. Here are some key strategies:

• Create a detailed expansion plan: Consider doing market research, SWOT (strengths, weaknesses, opportunities, and threats) analysis, risk assessment, and financial projections when expanding. Understanding your target audience, industry trends, and competitive landscape is necessary to create a well-defined plan.
• Set goals, KPIs, and budgets: Define clear objectives for your expansion. These goals could be increasing revenue, growing market share, or pursuing acquisitions. KPIs are your key performance indicators: conversion rates, customer retention, or ROI are all good measures of business success.
• Focus on scalability: This ensures your business thrives without major disruptions. Invest in the latest technology that can handle increasing demand, streamline processes for greater efficiency, and maintain flexibility to adapt to the ever-changing restaurant industry.

The bottom line

If you are considering expansion, Aprio’s team can talk to you about your plans and what makes sense for you to achieve your goals, now and in the future. Aprio’s Restaurant, Franchise & Hospitality professionals understand the restaurant and franchise industry and its complexities. We are here to help you assess the pros and cons of debt structuring, depending on your restaurant or franchise’s needs.

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