9.1: Lenders

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Chapter 9 Learning Objectives

Understanding the psychology of Menu Engineering
Gain a working knowledge of menu engineering worksheet construction.
Gain a working knowledge of menu engineering evaluation.
Understand the importance of contribution margin.
Understand ‘menu engineering’ usage for profitability.
Learn to re-think menu costing based on consumer acceptance.
Gain the ability to apply different classes of ratios to evaluate different elements of the operation.

“As much as you need to know your operations, if you do not understand the finance side and how to do the business, you're never going to be successful. So you might be the best operator or visionary, but if you do not understand the finance side... I'm successful because I know the finance side, but I also know operations; it's not an accident. “
Tilman J. Fertitta

“You can make a lot of mistakes and still recover if you run an efficient operation. You can be brilliant and still go out of business if you're too inefficient.”
Sam Walton

The most important portion of your business model is your ‘pro-forma’ or projected profit or loss statement (P & L statement) and a balance sheet. The income statement indicates what you expect sales and expenses to be and subsequently your profitability. The income statement indicates weekly, monthly and yearly profitability from operation. However, it does not indicate overall profitability. If you indicate to the lender that you are making $11,000 per week, in essence that tells them nothing because your debt structure could be more than that figure. This is why you will need to submit a balance sheet to display your assets, debt, and owner’s equity (financial investment into the business).

Lenders or funders will want information from you and will have many questions about the operation. Both of these elements are for answering one particular question. If your entire presentation fails to answer that question sufficiently, you will not receive the money you need to fund the operation. The concept alone will not excite the lender. What seals the deal is a clear description of the main thing they want to know: how will you pay back the loan, and what will be source of the payments?

This chapter begins with by detailing some of the information different lenders or management would want to know and management would want to ponder prior to meeting with a lender or investor. The chapter also present a typical loan package, common to banking institutions. How to prepare profit or loss statements with an example, and the components of a balance sheet follow. Finally, a section on different types of ‘ratios’ useful to evaluating your business presents helpful information in this area of analysis.

What Lenders Want to Know

Creditors

Creditors are ultimately concerned with a borrower's ability to make interest and principle payments. The types of questions they might raise include:

What is the reason or cause for borrowing?
What is the firm's capital structure?
How much debt is currently outstanding?
How well has debt been serviced in the past?
How liquid is the firm?
What will be the source of debt repayment?

Investors

Investors will usually attempt to arrive at an estimation of a company's future earnings stream. Typical concerns might be:

How well has the company performed in the past?
What are future expectations?
What is its record with regard to growth and stability of earnings?
How much risk is inherent in the firm's existing capital structure?
What returns can an investor expect?
How successfully does the firm compete in its industry?
How well positioned is the company to hold or improve its competitive position?

Management

Management must consider financial statement analysis as it relates to a 'variety' of user groups including creditors, investors, employees, general public, regulators, financial press, and so forth. Management must always demonstrate an understanding of the company in terms of profitability and competitive advantage. Ongoing concerns of management would include:

How well has the firm performed and why?
What operating areas have contributed to success and which have not?
What are the strengths and weaknesses of a company's financial position?
What changes should we consider in order to improve in the future?

Management data for analysis would include:

Auditor's report (unqualified or qualified)
Management's discussion and analysis
Supplementary schedules (i.e. segmental data)

Loan Package Outline

General Narrative

The nature of the business
The amount and purpose of the loan
Repayment terms
Equity share of borrower (equity/debt ratio after loan) (your share and loan need)
Security or collateral (listed with market value estimates and quotes on cost of equipment to be purchased with the loan proceeds)

Personal information

On individuals owning more than 20% of the business

Education and work history
Credit references
Income tax statements (last three years)
Financial statement ( no older than 60 days)

Business information

Whichever is applicable below:

New business

Business Plan
Life and Casualty insurance coverage
Lease agreement

Business acquisition (buyout)

Information on the acquisition
Business history (including seller’s name, reasons for sale)
Current balance sheet (not older than 60 days)
Current profit and loss statement (past three to five years)
Business federal income tax statements (past three to five years)
Cash flow statements for last year
Copy of sales agreement with breakdown of investors, fixtures, equipment, licenses, goodwill, and other costs
Description and dates of permits already acquired
Business Plan
Life and Casualty Insurance

Existing business expansion

Information on the existing business
Business history
Current balance sheet (not more than 60 days old)
Current profit and loss statement (within 60 days)
Cash flow statements from last year
Federal income tax returns for past three to five years
Lease agreement and permit data
Business Plan
Life and Casualty Insurance

Projections

Profit and loss projection (monthly, for one year, and explanation of projections)
Cash flow projection (monthly, for one year) and explanation of projections)
Projected balance sheet (one year after loan) and explanation of projections