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:
The Zara Investment Program allocates equity position of 20% for a total of $200,000 in investor capital. The Investment structure is as follows:
|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.
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:
Slow Economic Recovery. We anticipate a slow-growth economy, recovering from an economic recession.
Annual Growth Rate Percentage. We anticipate modest growth over the coming years. The financials account for the following growth projections:
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:
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):
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.