Arz al-Lubnan Hookah Bar

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Hookah Bar Business Plan

Financial Plan

The business is expected to grow significantly in its first three years as it meets the market need for an alternative to local youth-oriented hookah bars. Growth to a second location will occur in the fourth year, financed by the cash reserves of the business.

Start-up Funding

While the owners will invest substantially in the company, the bulk of the start-up funding will be provided primarily by outside investors, with an additional long-term loan against the assets of the bar. Credit card debt will make up the remainder.

Investors will be provided with 40% of shares for their investment, as the current partners are contributing considerable sweat and financial equity of their own, as well as their specific expertise and credibility as Lebanese-Americans.

Start-up Funding
Start-up Expenses to Fund $80,000
Start-up Assets to Fund $175,000
Total Funding Required $255,000
Assets
Non-cash Assets from Start-up $135,000
Cash Requirements from Start-up $40,000
Additional Cash Raised $0
Cash Balance on Starting Date $40,000
Total Assets $175,000
Liabilities and Capital
Liabilities
Current Borrowing $8,000
Long-term Liabilities $50,000
Accounts Payable (Outstanding Bills) $0
Other Current Liabilities (interest-free) $0
Total Liabilities $58,000
Capital
Planned Investment
Sivrihisar Geobekli $35,000
Willusa Geobekli $35,000
Other Investors $127,000
Additional Investment Requirement $0
Total Planned Investment $197,000
Loss at Start-up (Start-up Expenses) ($80,000)
Total Capital $117,000
Total Capital and Liabilities $175,000
Total Funding $255,000

Important Assumptions

We assume that the growth in hookah bar popularity will continue and that the country is ready for a national chain. We assume that anti-smoking lobbyists and anti-Middle Eastern sentiment in the Unites States will not damage the reputation and image of hookah bars.

Break-even Analysis

A projected monthly fixed operating cost is shown in the table below. With this level of fixed cost, break even is expected in the sixth month of operation.

Break-even Analysis
Monthly Units Break-even 4,200
Monthly Revenue Break-even $35,279
Assumptions:
Average Per-Unit Revenue $8.40
Average Per-Unit Variable Cost $2.28
Estimated Monthly Fixed Cost $25,703

Projected Profit and Loss

Key expenses will include the cost of sales attributed to supplies and raw materials, payroll for the growing staff, marketing to promote the bar in the community, and the bar's rent and depreciation. The bar will show a profit in the first year which will continue to grow. This is expected due to the high gross margins of selling tobacco through hookahs and the type of food and drinks sold.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $498,723 $1,210,000 $1,710,000
Direct Cost of Sales $135,368 $327,000 $465,000
Other Costs of Sales $15,914 $48,400 $51,300
Total Cost of Sales $151,282 $375,400 $516,300
Gross Margin $347,442 $834,600 $1,193,700
Gross Margin % 69.67% 68.98% 69.81%
Expenses
Payroll $183,600 $337,000 $482,000
Marketing/Promotion $44,000 $55,000 $75,000
Depreciation $16,800 $20,000 $24,000
Rent $24,000 $2,500 $26,500
Utilities $3,600 $4,000 $4,500
Insurance $2,400 $2,700 $3,000
Payroll Taxes $27,540 $50,550 $72,300
Permit Renewals $500 $2,000 $800
Supplies $6,000 $15,000 $25,000
Total Operating Expenses $308,440 $488,750 $713,100
Profit Before Interest and Taxes $39,002 $345,850 $480,600
EBITDA $55,802 $365,850 $504,600
Interest Expense $5,341 $3,200 $1,400
Taxes Incurred $10,098 $102,795 $143,760
Net Profit $23,562 $239,855 $335,440
Net Profit/Sales 4.72% 19.82% 19.62%

Projected Cash Flow

The cash flow table and chart show the business becoming cash flow positive within six months of operation. Cash will be retained in the business and invested in short-term holdings in preparation for expansion of the franchise after the third year of operation.

Long-term debt will be paid over the first three years of operation with a grace period for the first six months. Short-term borrowings will be paid over the first year of operations.

Some current assets must be replenished each year, and long-term assets must be replaced beginning in the second year as some equipment ages.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $498,723 $1,210,000 $1,710,000
Subtotal Cash from Operations $498,723 $1,210,000 $1,710,000
Additional Cash Received
Sales Tax, VAT, HST/GST Received $44,885 $108,900 $153,900
New Current Borrowing $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $0 $0 $0
Subtotal Cash Received $543,608 $1,318,900 $1,863,900
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $183,600 $337,000 $482,000
Bill Payments $228,259 $609,251 $847,567
Subtotal Spent on Operations $411,859 $946,251 $1,329,567
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $44,885 $108,900 $153,900
Principal Repayment of Current Borrowing $8,000 $0 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $9,000 $18,000 $18,000
Purchase Other Current Assets $2,400 $3,000 $3,500
Purchase Long-term Assets $0 $10,000 $10,000
Dividends $0 $0 $0
Subtotal Cash Spent $476,144 $1,086,151 $1,514,967
Net Cash Flow $67,464 $232,749 $348,933
Cash Balance $107,464 $340,213 $689,146

Projected Balance Sheet

The net worth of Arz al-Lubnan Hookah Bar will grow significantly due to relatively low liabilities and high cash reserves as the business prepares for future self-financed expansion.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $107,464 $340,213 $689,146
Other Current Assets $42,400 $45,400 $48,900
Total Current Assets $149,864 $385,613 $738,046
Long-term Assets
Long-term Assets $95,000 $105,000 $115,000
Accumulated Depreciation $16,800 $36,800 $60,800
Total Long-term Assets $78,200 $68,200 $54,200
Total Assets $228,064 $453,813 $792,246
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $46,502 $50,395 $71,388
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $46,502 $50,395 $71,388
Long-term Liabilities $41,000 $23,000 $5,000
Total Liabilities $87,502 $73,395 $76,388
Paid-in Capital $197,000 $197,000 $197,000
Retained Earnings ($80,000) ($56,438) $183,417
Earnings $23,562 $239,855 $335,440
Total Capital $140,562 $380,417 $715,857
Total Liabilities and Capital $228,064 $453,813 $792,246
Net Worth $140,562 $380,417 $715,857

Business Ratios

The business is compared here against Snack and Nonalcoholic Beverage Bars, industry SIC code 5812, NAICS code 722213, with over $1 million in annual revenue. Gross margin is expected to be higher than average due to the premium that can be earned from tobacco sales.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth n.a. 142.62% 41.32% -3.07%
Percent of Total Assets
Other Current Assets 18.59% 10.00% 6.17% 42.36%
Total Current Assets 65.71% 84.97% 93.16% 50.54%
Long-term Assets 34.29% 15.03% 6.84% 49.46%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 20.39% 11.10% 9.01% 24.20%
Long-term Liabilities 17.98% 5.07% 0.63% 52.11%
Total Liabilities 38.37% 16.17% 9.64% 76.31%
Net Worth 61.63% 83.83% 90.36% 23.69%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 69.67% 68.98% 69.81% 59.90%
Selling, General & Administrative Expenses 64.94% 49.15% 50.19% 24.02%
Advertising Expenses 8.82% 4.55% 4.39% 3.24%
Profit Before Interest and Taxes 7.82% 28.58% 28.11% 7.73%
Main Ratios
Current 3.22 7.65 10.34 1.10
Quick 3.22 7.65 10.34 0.98
Total Debt to Total Assets 38.37% 16.17% 9.64% 76.31%
Pre-tax Return on Net Worth 23.95% 90.07% 66.94% 76.30%
Pre-tax Return on Assets 14.76% 75.50% 60.49% 18.08%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 4.72% 19.82% 19.62% n.a
Return on Equity 16.76% 63.05% 46.86% n.a
Activity Ratios
Accounts Payable Turnover 5.91 12.17 12.17 n.a
Payment Days 27 29 26 n.a
Total Asset Turnover 2.19 2.67 2.16 n.a
Debt Ratios
Debt to Net Worth 0.62 0.19 0.11 n.a
Current Liab. to Liab. 0.53 0.69 0.93 n.a
Liquidity Ratios
Net Working Capital $103,362 $335,217 $666,657 n.a
Interest Coverage 7.30 108.08 343.29 n.a
Additional Ratios
Assets to Sales 0.46 0.38 0.46 n.a
Current Debt/Total Assets 20% 11% 9% n.a
Acid Test 3.22 7.65 10.34 n.a
Sales/Net Worth 3.55 3.18 2.39 n.a
Dividend Payout 0.00 0.00 0.00 n.a

Valuation

40% of equity will be awarded to investors for their cash contribution, 22% to founders for their cash contribution, and the remaining 38% to owners for their sweat equity. This values the company at $317,500 initially.

Assuming valuations at either a multiple of earnings (10 is reasonable for this industry), or a multiple of sales (2 is reasonable for this industry), the valuation at the end of year 3 of the entire company is around $3.385 million (an average of the two methods of valuation). This yields a significant, 121% internal rate of return for investors. An exit event will be possible when the company raises money for franchising or sells to an existing franchisor at the point of expansion.

Investment Analysis
Start Year 1 Year 2 Year 3
Initial Investment
Investment $197,000 $0 $0 $0
Dividends $0 $0 $0 $0
Ending Valuation $0 $0 $0 $2,120,400
Combination as Income Stream ($197,000) $0 $0 $2,120,400
Percent Equity Acquired 62%
Net Present Value (NPV) $1,269,171
Internal Rate of Return (IRR) 121%
Assumptions
Discount Rate 10.00%
Valuation Earnings Multiple 10 10 10
Valuation Sales Multiple 2 2 2
Investment (calculated) $197,000 $0 $0 $0
Dividends $0 $0 $0
Calculated Earnings-based Valuation $240,000 $2,400,000 $3,350,000
Calculated Sales-based Valuation $1,000,000 $2,420,000 $3,420,000
Calculated Average Valuation $620,000 $2,410,000 $3,385,000