Zara Restaurant and Lounge

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Ethnic Food Restaurant Business Plan

Financial Plan

Zara Restaurant & Lounge financial model is based on a business concept to "Plan for the Worst, but Manage for the Best." We have approached the financial plan as follows:

The First Year projections anticipates a below average sales volume, below average seat turn, and above average food/beverage cost. This position will help us ensure sufficient financial planning to accommodate a reasonable ramp-up period, and business success, also ensuring that we do not enter this venture under-capitalized.


Financial Pro Forma

In addition to the $110,000 of owner investment and $130,000 in grant monies, Zara is seeking $300,000 in long-term loans and $200,000 in investment for renovations, furniture, kitchen equipment, liquor license, food & restaurant supplies, legal fees, working capital, marketing and personnel.

 The Financial Plan includes:

  • Important Assumptions
  • Risk Analysis & Mitigation Plan
  • Sales Forecast (5.3.1, above)
  • Break Even Analysis
  • Profit and Loss Statement
  • Cash Flow Statement
  • Balance Sheet

Investment Opportunities

The Zara Investment Program allocates equity position of 20% for a total of $200,000 in investor capital. The Investment structure is as follows:

Investment Opportunity

Total Investor Funding Opportunity:   $200,000
Minimum Investment Amount $15,000
Investment Term (Investor Selection) 3-5 Years
Total Equity Offering (1% per $15,000 Investment) 20% Max
Starting Year 2
Silver: Projected Annual IRR on Investment of $15,000 - $49,000 10%
Gold: Projected Annual IRR on Investment of $50,000 - $99,000 11%
Platinum: Projected Annual IRR on Investment of $100,000 or more 12% + Residuals

 

Investor Payback Program

Each Investor will receive equity shares as a part owner, with a non-managerial interest in the Restaurant. Based on financial estimates, the maximum annual IRR is 12%. Over and above the interest and principal repayment, Investors contributing $100,000 or more will receive residuals for the life of the business as a bonus incentive.

As with our investors, our primary goal is to earn real profits and not ‘Paper Profits'. As such we will focus on expediting returns to investors where possible. Our existing payback structure will begin paying dividend every quarter, starting in Year 2 of business operations. Investors will receive quarterly interest and annual principal reduction payments over the full term of the investment. Payback to Financial and Private investors will take priority over any profit shares to the owners, Alex Hunte and Peter Smith.

Important Assumptions

The financial plan depends on important assumptions, most of which are reflected in the financial statements that follow. We have been cautious with our projections, and incorporate a mitigation for all manageable risks. The key underlying assumptions are:

Economy

Slow Economic Recovery. We anticipate a slow-growth economy, recovering from an economic recession.

Business Growth

Annual Growth Rate Percentage. We anticipate modest growth over the coming years. The financials account for the following growth projections:

    • Year 2: 6%     Year 4: 4%
    • Year 3: 5%     Year 5: 4%

Weekly Sales Variance. Saturday will typically be our best sales for the week. The sales volume for all other days is represented as a percentage relative to Saturday. Therefore our weekly sales will vary as follows:

Monday: 55% Thursday: 95%
Tuesday: 60% Friday: 90%
Wednesday: 75% Saturday: 100%

Seasonal Sales Variance. In Atlanta, October through the late season is the most productive sales period, while the summer months tend to be the slowest restaurant period. This trend is reflected in the financials though a seasonal variance as follows (where October is targeted to be our most successful sales month):

June: 70% October: 100%  February: 95%
July: 75%  November: 95% March: 85%
August: 80%  December: 95% April: 90%
September: 85%  January: 85%  May: 90%

 

Industry & Start-Up

Fiscal Year-1 Ramp-up. Our experience in the industry confirms a longer ramp-up stage for restaurants over other retail/service businesses. Our Annual Sales Growth is based on attaining the following seating capacity percentage per dining period:

  • Year 1: After-Hours = 53%, Lunch = 70%, Dinner = 88%
  • Year 2: After-Hours = 70%, Lunch = 82%, Dinner = 100% (implied wait period)
  • Year 3: After-Hours = 80%, Lunch = 87%, Dinner = 100% (implied wait period)

Six-Month Start-Up Stage. As a new restaurant entry to the Midtown market, the ramp-up in customer draw is expected to extend over 6 months. This is reflected in a higher than average monthly sales variance shown as follows (Worst-case / Expected-case):

  • Month 1: 32% / 51%     Month 4: 64% / 75%
  • Month 2: 41% / 58%      Month 5: 80% / 90%
  • Month 3: 52% / 66%      Month 6: 90% / 92%

Market Analysis findings are static. We assume that there are no unforeseen changes in findings outlined in the Market Analysis.

 

Pricing & Cost Control

Competitive Pricing Model. Revenue calculations are based upon competitive price comparisons and established menu values in the current marketplace. The following are baseline assumptions on Average Check Totals, and Average Seat Turns:

Daily average for lunch spending is $10.50 per person, dinner at $27.50 per person; and $17.50 per person for After-Hours dining (All check totals include Beverages, but not Bar). Seat Turn averages are modestly estimated at:

  • Year 1: After-Hours = 0.7, Lunch = 1.0, Dinner = 1.0
  • Year 2: After-Hours = 0.7, Lunch = 1.0, Dinner = 1.0
  • Year 3: After-Hours = 1.0, Lunch = 1.0, Dinner = 1.25

Cost Control. Cost of goods sold have been calculated as a percentage of sales and will be monitored on a daily basis in order to keep Cost of Food within the range of 31 - 33%, Bar Costs within 28 - 31%, and Cost of Beverages (Non Alcohol) below 9%. With a focus on Cost Control, we anticipate 6 months to fine tune the restaurant operations and manage our costs within the defined tolerance range.

Inventory turnover and Accounts Payable. Accounts receivable turnover is calculated to be 0 days, as payment is rendered with service. Inventory is turned on a 7 day cycle as inventory is used daily within all categories, and accounts payable are projected to be 30 days.

Risk Analysis/Mitigation

1. How do we allow an adequate startup period and capital to launch the concept and grow our customer base in a competitive sector?

Our financial plan is budgeted to support the Worst-Case business scenario. We addressed the financial risk as follows:

  • We looked at our monthly break-even.
  • We calculated worst-case monthly financial shortfall based on the ramp-up sales percentages outlined in our financial assumptions.
  • We budgeted operational shortfall in an operational contingency budget that we will utilize if the need arises.

2. How do we ensure we have addressed all resource gaps, and have the right industry knowledge?

Owners Alex Hunte and Peter Smith have a combined 20 years of Restaurant Management, Operations and Business Management Experience.

The Financial Plan incorporates a budget for an Atlanta Restaurant Consulting group. Their services are budgeted for the business start-up analysis, rollout, and on retainer for 4 months of business operations. The selected firm has experience with over 72 Restaurant launches, specializing in the Atlanta Market.

We will be recruiting a seasoned chef (national search) whose style is in accord with the Restaurant concept and our market segment. We will be offering an equity interest to our select Chef to maintain the industry knowledge.

Our Accounting service will be contracted to a firm specializing in Restaurant accounting.

3. The current Economic slowdown and recovery state was a key consideration in our restaurant concept. How do we manage a successful restaurant in current market conditions?

Our original effort was to open a restaurant twice the proposed size. As we are in the midst of an economic recovery, we have scaled back the size to reduce business overhead, startup requirements, and business operating capital.

Another mitigation has been our overall Restaurant concept. We have the menu priced at a mid-tier level with no entrée over $20. In addition, we have an extended Tapas and Appetizer selection priced between $3.50 - $9.50, allowing budget dining in a distinguished restaurant.

4. How do we confirm that our Funding Requirement is sufficient?

Peter Smith has an extensive background in restaurant startup. He is currently an International Consultant for various restaurant ventures, and we will use his expertise in past projects as a comparative basis.

We have leveraged our membership with the National Restaurant Association to look at industry averages for this market segment for Restaurant startup and Operations. Additionally, we included a contingency buffer in the financial estimates to account for any potential cost variance.

We have worked with our Restaurant Consulting firm to validate our cost estimates to their industry knowledge.

5. How do we know we have selected the right location for this concept?

Again we will draw on the Consulting group that has the expertise in site selection and lease negotiation. In all, there are no guarantees with location, but we took a very objective approach with our concept. Instead of going in with a predefined business concept, we let the Market Analysis define the need. Based on the results, the Zara Restaurant concept was formed specific to Midtown Atlanta. Site selection was based on space, visibility, and functionality; the city grant award confirmed our decision.

6. What if there is an additional need for Business Capital after the Restaurant has exhausted its 6-month buffer?

Our intent is to be a self-sufficient business far in advance of the 6-month probation period. But as we are considering all contingencies, we have looked at this risk. We have accounted for an operational contingency budget that will be used to supplement any slow periods. Our next step would be to approach our private investors for capital by extending their return on investment. We would also look to the partners' capital reserves as another source of funds.

General Assumptions
Year 1 Year 2 Year 3 Year 4 Year 5
Plan Month 1 2 3 4 5
Current Interest Rate 6.00% 6.00% 6.00% 6.00% 6.00%
Long-term Interest Rate 7.00% 7.00% 7.00% 7.00% 7.00%
Tax Rate 30.00% 30.00% 30.00% 30.00% 30.00%
Other 0 0 0 0 0

Profit and Loss Statement

The most important assumption in the Projected Profit and Loss statement is the gross margin. We show an adjustment increase in Year 2 as we exit our start-up phase of the business and move into our expected annual sales forecast.

This transition shows the restaurant managing through its start-up period, and gaining efficiency and customer loyalty. In summary, the restaurant will develop its customer base and reputation and the growth will pick up more rapidly towards the second and third years of business. Month-by-month assumptions for Profit and Loss are included in the appendices.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3 Year 4 Year 5
Sales $1,073,769 $1,211,088 $1,279,204 $1,341,260 $1,406,670
Direct Cost of Sales $371,416 $398,407 $406,976 $415,276 $423,597
Other $0 $0 $0 $0 $0
Total Cost of Sales $371,416 $398,407 $406,976 $415,276 $423,597
Gross Margin $702,353 $812,681 $872,228 $925,984 $983,072
Gross Margin % 65.41% 67.10% 68.19% 69.04% 69.89%
Expenses
Payroll $399,588 $400,788 $429,828 $431,128 $432,728
Marketing/Promotion $18,656 $22,000 $25,000 $15,000 $15,000
Depreciation $6,500 $6,500 $6,500 $6,500 $6,500
Leased Equipment $12,000 $12,000 $12,000 $12,000 $12,000
Accounting/Payroll Processing $6,600 $6,600 $6,600 $6,600 $6,600
Legal Retainer Fees $2,400 $2,400 $2,400 $2,400 $2,400
Business Licenses & Permits $6,000 $6,000 $6,000 $6,000 $6,000
Credit Card Expense $18,576 $19,983 $21,107 $22,131 $23,210
Bank Fees $1,200 $1,200 $1,200 $1,200 $1,200
Music & Entertainment $3,744 $3,744 $3,744 $3,744 $3,744
Training / Employee Retention Programs $0 $5,008 $6,008 $6,008 $6,008
Repairs & Maintenance $9,000 $9,000 $9,000 $9,000 $9,000
Utility Services (Gas/Electric/Water/Sewer) $24,996 $26,496 $27,821 $28,933 $30,091
Telephone/Communication Expense $1,800 $1,800 $1,800 $1,800 $1,800
Insurance: Fire/Theft/Liability/Liquor/Product $20,400 $21,624 $22,705 $23,613 $24,558
Restaurant Occupancy Cost (Lease) $75,000 $77,250 $79,568 $81,955 $84,413
Payroll Taxes (FICA/FUTA/SUTA) & Employee Benefits $0 $0 $0 $0 $0
Exterminator/Trash Removal $4,800 $4,800 $4,800 $4,800 $4,800
Dishware/Uniforms/Cleaning Supplies/Decor $11,760 $12,466 $13,089 $13,612 $14,157
Printing/Paper/Postage/Subscriptions $9,156 $9,500 $9,500 $9,500 $9,500
Facility (Exterior Cleaning/Grease Trap/Hood/Windows,etc.) $3,333 $3,640 $3,640 $3,640 $3,640
R&D Meals $2,200 $2,400 $2,400 $2,400 $2,400
General Business Comps $12,400 $22,850 $23,125 $23,125 $23,125
Owner Comps $2,124 $2,124 $2,124 $2,124 $2,124
Other Expenses (ComAreaMaint, etc.) $4,200 $4,200 $4,200 $4,200 $4,200
Total Operating Expenses $656,433 $684,372 $724,158 $721,414 $729,198
Profit Before Interest and Taxes $45,920 $128,309 $148,070 $204,571 $253,875
EBITDA $52,420 $134,809 $154,570 $211,071 $260,375
Interest Expense $19,189 $15,984 $12,640 $9,296 $5,952
Taxes Incurred $8,020 $33,698 $40,629 $58,582 $74,377
Net Profit $18,712 $78,628 $94,801 $136,692 $173,546
Net Profit/Sales 1.74% 6.49% 7.41% 10.19% 12.34%

Break-even Analysis

For our First Year Break-Even Analysis, we have an average running fixed costs of $60,230 per month which includes our full payroll, rent, and utilities, and an estimation of other running costs. With direct cost of goods (inventory, in this plan) at 35% of sales, our monthly break-even point is $92,081. We will surpass our break-even point in October of our first year.

As we exit the start-up phase of the business and focus on cost control, we will drive the Cost of Goods Sold (COGS) down, dropping our break-even value, and increasing our Gross Margin.

Break-even Analysis
Monthly Revenue Break-even $83,630
Assumptions:
Average Percent Variable Cost 35%
Estimated Monthly Fixed Cost $54,703

Cash Flow Statement

The cash flow depends on assumptions for inventory turnover and payment days. We have no sales on credit, so our cash flow does not track accounts receivable. Our projected same-day collection is critical, and is reasonable and customary in the restaurant industry. We do not expect to need any additional financial support, even when we reach the less profitable months, as the downturns are incorporated into the monthly revenue variance figures. Month-by-month assumptions for projected cash flow are included in the appendices.

Pro Forma Cash Flow
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Received
Cash from Operations
Cash Sales $1,073,769 $1,211,088 $1,279,204 $1,341,260 $1,406,670
Subtotal Cash from Operations $1,073,769 $1,211,088 $1,279,204 $1,341,260 $1,406,670
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0 $0 $0
New Current Borrowing $0 $0 $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0 $0 $0
New Long-term Liabilities $0 $0 $0 $0 $0
Sales of Other Current Assets $0 $0 $0 $0 $0
Sales of Long-term Assets $0 $0 $0 $0 $0
New Investment Received $0 $0 $0 $0 $0
Subtotal Cash Received $1,073,769 $1,211,088 $1,279,204 $1,341,260 $1,406,670
Expenditures Year 1 Year 2 Year 3 Year 4 Year 5
Expenditures from Operations
Cash Spending $399,588 $400,788 $429,828 $431,128 $432,728
Bill Payments $601,114 $724,989 $745,324 $765,976 $792,442
Subtotal Spent on Operations $1,000,702 $1,125,777 $1,175,152 $1,197,104 $1,225,170
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0 $0 $0
Other Liabilities Principal Repayment $0 $0 $0 $0 $0
Long-term Liabilities Principal Repayment $47,772 $47,772 $47,772 $47,772 $47,772
Purchase Other Current Assets $0 $0 $0 $0 $0
Purchase Long-term Assets $0 $0 $0 $0 $0
Dividends $0 $20,000 $10,000 $10,000 $15,000
Subtotal Cash Spent $1,048,474 $1,193,549 $1,232,924 $1,254,876 $1,287,942
Net Cash Flow $25,295 $17,539 $46,280 $86,384 $118,727
Cash Balance $172,276 $189,815 $236,095 $322,479 $441,206

Balance Sheet Statement

The projected Balance Sheet is quite solid. We do not anticipate difficulty meeting our debt obligations based on achieving the specific goals outlined in this plan. On a linear projection, Zara Restaurant & Lounge has a positive Net Worth beginning in Year 3.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3 Year 4 Year 5
Assets
Current Assets
Cash $172,276 $189,815 $236,095 $322,479 $441,206
Inventory $37,839 $39,175 $38,109 $38,843 $39,608
Other Current Assets $73,311 $73,311 $73,311 $73,311 $73,311
Total Current Assets $283,426 $302,300 $347,514 $434,633 $554,125
Long-term Assets
Long-term Assets $65,000 $65,000 $65,000 $65,000 $65,000
Accumulated Depreciation $6,500 $13,000 $19,500 $26,000 $32,500
Total Long-term Assets $58,500 $52,000 $45,500 $39,000 $32,500
Total Assets $341,926 $354,300 $393,014 $473,633 $586,625
Liabilities and Capital Year 1 Year 2 Year 3 Year 4 Year 5
Current Liabilities
Accounts Payable $58,194 $59,713 $61,398 $63,097 $65,315
Current Borrowing $0 $0 $0 $0 $0
Other Current Liabilities $0 $0 $0 $0 $0
Subtotal Current Liabilities $58,194 $59,713 $61,398 $63,097 $65,315
Long-term Liabilities $252,228 $204,456 $156,684 $108,912 $61,140
Total Liabilities $310,422 $264,169 $218,082 $172,009 $126,455
Paid-in Capital $440,000 $440,000 $440,000 $440,000 $440,000
Retained Earnings ($427,209) ($428,496) ($359,869) ($275,068) ($153,375)
Earnings $18,712 $78,628 $94,801 $136,692 $173,546
Total Capital $31,504 $90,131 $174,932 $301,625 $460,171
Total Liabilities and Capital $341,926 $354,300 $393,014 $473,633 $586,625
Net Worth $31,504 $90,131 $174,932 $301,625 $460,171

Business Ratios

Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 5812, Ethnic Food Restaurants, are shown for comparison.

The following table outlines some of the more important ratios from the Ethnic Food Restaurants industry. The final column, Industry Profile, details specific ratios based on the industry as it is classified by the Standard Industry Classification (SIC) code, 5812.01.

Ratio Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Industry Profile
Sales Growth n.a. 12.79% 5.62% 4.85% 4.88% 6.96%
Percent of Total Assets
Inventory 11.07% 11.06% 9.70% 8.20% 6.75% 3.90%
Other Current Assets 21.44% 20.69% 18.65% 15.48% 12.50% 28.39%
Total Current Assets 82.89% 85.32% 88.42% 91.77% 94.46% 37.68%
Long-term Assets 17.11% 14.68% 11.58% 8.23% 5.54% 62.32%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Current Liabilities 17.02% 16.85% 15.62% 13.32% 11.13% 19.17%
Long-term Liabilities 73.77% 57.71% 39.87% 23.00% 10.42% 29.21%
Total Liabilities 90.79% 74.56% 55.49% 36.32% 21.56% 48.38%
Net Worth 9.21% 25.44% 44.51% 63.68% 78.44% 51.62%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Gross Margin 65.41% 67.10% 68.19% 69.04% 69.89% 59.31%
Selling, General & Administrative Expenses 62.09% 59.39% 59.95% 58.34% 57.31% 39.09%
Advertising Expenses 1.74% 2.07% 2.00% 0.00% 0.00% 2.75%
Profit Before Interest and Taxes 4.28% 10.59% 11.58% 15.25% 18.05% 1.59%
Main Ratios
Current 4.87 5.06 5.66 6.89 8.48 1.26
Quick 4.22 4.41 5.04 6.27 7.88 0.87
Total Debt to Total Assets 90.79% 74.56% 55.49% 36.32% 21.56% 3.27%
Pre-tax Return on Net Worth 84.85% 124.62% 77.42% 64.74% 53.88% 54.38%
Pre-tax Return on Assets 7.82% 31.70% 34.46% 41.23% 42.26% 7.17%
Additional Ratios Year 1 Year 2 Year 3 Year 4 Year 5
Net Profit Margin 1.74% 6.49% 7.41% 10.19% 12.34% n.a
Return on Equity 59.40% 87.24% 54.19% 45.32% 37.71% n.a
Activity Ratios
Inventory Turnover 10.91 10.35 10.53 10.79 10.80 n.a
Accounts Payable Turnover 11.33 12.17 12.17 12.17 12.17 n.a
Payment Days 27 30 30 30 29 n.a
Total Asset Turnover 3.14 3.42 3.25 2.83 2.40 n.a
Debt Ratios
Debt to Net Worth 9.85 2.93 1.25 0.57 0.27 n.a
Current Liab. to Liab. 0.19 0.23 0.28 0.37 0.52 n.a
Liquidity Ratios
Net Working Capital $225,232 $242,587 $286,116 $371,537 $488,810 n.a
Interest Coverage 2.39 8.03 11.71 22.01 42.65 n.a
Additional Ratios
Assets to Sales 0.32 0.29 0.31 0.35 0.42 n.a
Current Debt/Total Assets 17% 17% 16% 13% 11% n.a
Acid Test 4.22 4.41 5.04 6.27 7.88 n.a
Sales/Net Worth 34.08 13.44 7.31 4.45 3.06 n.a
Dividend Payout 0.00 0.25 0.11 0.07 0.09 n.a

Expansion, Payback & Exit Strategy

In addressing this question we look at the Exit Strategy as a definition of our business vision and goals, as well as a contingency in the event the business is unsuccessful. We have addressed this question at several levels:

Expansion as a Business Goal

We have set multiple financial goals to grow the success of the Zara concept, and compound the profit return for Zara Investors.

  1. Expansion (Option 1): Our overall goal to maintain Zara as a unique and eclectic concept. Based on projections, the business has captured market share by the end of the first year. In addition Year 2 brings an increased sales and profit margin to sustain the addition of a full-time General Manager. By second quarter of Year 2, the owners will look to launch a second restaurant concept. This is not a chain, but another unique restaurant concept with strong growth potential. Expansion will be considered with our Financial backers and Investor partners.
  2. Expansion (Option 2): Throughout our business plan we have stayed focus that Zara would be successful as a larger venue, with greater sales capacity and revenue potential. Our objective with the site selection and lease negotiation is to have the opportunity to expand the restaurant as a logical growth and profit plan.   
  3. Private Sale: We are in the business of making money. At the close of Year 3, we see Zara as meeting 80.4% of its optimum sales potential with the current seating and space allocation. At this stage the business debt is reduced, profit margins are increasing, and Zara has established market share. We will look at the private sale of the majority interest via A) Leveraged Buyout, or B) A larger Restaurant consortium. In both cases, our interest is in delivering healthy profits to our Investors and Financial backers. Sales and profit margins will be based on the restaurant valuation in Year 3.
  4. Financial Solvency: The financial projections indicate that exit will be achievable over 3 years for the operating capital line of credit. Under a realistic scenario the Company should have over $70,000 in cash in the bank after income taxes the second year. The entire financial debt would be retired by Year 7. 


Exit Strategy to Retire the Business

We at Zara are committed to our concept and its viability. We step into this venture with confidence and the success of our respective prior business efforts. No one attempts a business anticipating failure, however sometimes ventures do not fulfill their promise. 

In the event that our venture cannot achieve profitability and retire the encumbrances, we will first attempt to sell the operation and use the proceeds to clear all outstanding balances. If we are unable to sell the operation for sufficient proceeds we will forced to default whereby the SBA loan will be in senior standing. Any further outstanding balances will be borne by the investors on a weighted percentage basis of the total amounts due.