Financial Analysis

Store development is a very expensive endeavor and it requires laser focus by experienced professionals in order to avoid some very nasty and very expensive pitfalls. Hopefully that’s why you’ve visited our site and why you’re reading this material. How expensive is scaling a restaurant? Let’s take a very basic look.

Imagine that you want to open a chain of exclusive café’s around a metropolitan marketplace:

Total Stores = 10
Average Lease Rate = $45 per square foot (PSF)
Average Minimum Lease Term = 10 years
Average Space = 1,800 square feet (SF)
Average Buildout Cost = $125 PSF
Average Tenant Improvement Allowance (TIA) = $36,000
Average Furniture, Fixtures and Equipment Package (FF&E) = $450,000
Average Soft Costs (Design – Architecture & Engineering – Attorney – Due Diligence, Etc.) = $50,000
Average Pre-Opening Expenses (Training – Public Relations – Inventory) = $25,000

Total Cost to Build 1 Café = $714,000
Total 10 Year Lease Commitment = $810,000
Total Cost to Build 10 Cafés = $7,140,000
10 Year Lease Commitment on 10 Cafes = $8,100,000

So you need $7,140,000 to build your empire or you need $714,000 to build your one location. Have you taken everything into consideration? What about your brand design? If you are a franchisee you don’t have to worry about this but you do need to consider ‘Initial Franchise Fees’ (IFF). What about market planning? Where are you going to build your 10 locations or your first? Are you going to rely on a commercial real estate broker to point you in the right direction? There are ‘Pre-development’ fees that are often missed but very important to consider when scaling a business. These are not site specific costs and do not have an immediate ROI applied to them. This is a cost of doing business expense that is wildly overlooked and the primary reason for poor site selection. Due diligence is expensive but not near the cost of developing in the wrong market with the wrong site. Proper brand development and market planning expenses are worth their weight in gold in the long run and an absolute must for anyone considering multi-unit development.

Now that you have an appreciation for the true costs associated with store development, you need to create a development proforma that includes the cost of initiating the business coupled with the cost of operating the business over the primary lease term. For example, if you sign a 10 year primary lease commitment, you need to take 10 years of operating the business into consideration. On-going food costs, labor costs, advertising, repairs and maintenance, utility services, payroll services, taxes, bank notes, royalty fees (if applicable), rent, common area maintenance, office expenses, etc, etc, etc must be considered when determining the viability of your business.

There are several financial benchmarks to take into consideration when creating your proforma. This very important tool is the backbone to your business as it will take every aspect of income and expenditure into consideration for analysis. Some very common benchmarks include:

  • Year 1 Return on Investment (ROI)
  • Break Even
  • EBITA (Earnings Before Interest, Tax & Amortization)
  • Internal Rate of Return (IRR)
  • Net Present Value (NPV)
  • Cost of Occupancy
  • Reversion (value of business at time of sell)
  • Total Cash Flows
  • Contribution Margin
  • Total Fixed Costs
  • Expected Valuations

Each measurement is as important as the next. The more restaurants you develop, the more complex the calculations become. This very important procedure determines viability of your business and memorializes every aspect of your operations. It should be used in every stage of business development such as design, food quality, pricing, hours of operation, lease negotiations, land purchases, training, labor deployment, management salaries and benefits, hourly wages, hierarchy design, bonus programs, etc, etc, etc.
As you can see this is not a ‘once and done’ procedure and should be treated as a living document throughout the entire development process. It is important to be disciplined with your proforma and not to cause ‘paralysis with analyses. Remember to refer back to this procedure for refinement as your due diligence unfolds and make certain that you have someone who is experienced in proforma analysis to assist/advise you. It is perfectly fine if you’re not a financial wizard (most restaurateurs are not)! Just make damn certain that you don’t over simplify the financial analysis process because you don’t understand it or are afraid of the results. Be sure to hire the right advisors to help you in this extremely important process (we recommend Restaurant Development Experts, LLC.)!

For more information on our unique approach to financial analysis, please do not hesitate to call us direct anytime or shoot us an e-mail with your questions and we will be sure to promptly respond.

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