It’s like that winter cold that just won’t go away, causing headaches and sleepless nights. In any entrepreneurial field, and especially in the restaurant industry, the need for cold hard cash is ever present, sometimes hanging on longer than planned.
While there are numerous ways to finance a first restaurant, a 50th location or the acquisition of an additional concept, it isn’t always easy, operators and restaurant financiers say.
Industry lore includes such stories as that of the late burger magnate Carl Karcher putting his new 1941 Plymouth up as collateral for a $311 loan he used to buy his first pushcart kitchen, and of the late Ruth Fertel taking a $22,000 mortgage on her home to purchase the first restaurant in the now 100-plus-unit Ruth’s Chris Steak House chain.
Those kinds of extreme measures are still used today, demonstrating that the ever-present cash crunch in the restaurant industry hasn’t been cured, even after the recent years of deep pockets and easy access to capital that the industry had enjoyed, until the onset of the credit crunch in recent months.
Even during that heyday of beneficial lending terms, low interest rates and high levels of private-equity enthusiasm for the industry, restaurateurs struggled to get funding.
Before founding Raising Canes Chicken Fingers, now a nearly 70-unit chain, Todd Graves worked in a Los Angeles oil refinery and then netted sockeye salmon in Bristol Bay on the southwestern shore of Alaska, a job full of life-threatening danger.
Another operator, Jeff Ackerman, chairman of Chair 5 Restaurants LLC in Boston, didn’t exactly risk his life in working to build his 13-unit group of franchised Qdoba Mexican Grills. But he did have to take a second mortgage on his own home to collateralize the loan he needed to open his first unit in 2003.
“You have to scrape and scrap,” Ackerman says. “My background was in finance, so I was comfortable with that side of things, and, that being said, it was still not easy. No matter my background or assets, [the bank] still wanted my house. They had every bit of downside protection, and that was how I was able to get it done.”
Ackerman now plans to open 23 more Qdoba units in the Boston and New Hampshire areas. His company also is expecting to open its first Pollo Campero restaurant this year, after signing a five-unit agreement with that Guatemala-based system.
“It does get easier,” he says. Ackerman was able to refinance and use a more traditional lending structure once his first three Qdoba units were successful.
“The perception, and I think maybe a misguided one, is that the restaurant space is a more risky category,” Ackerman says. “Even in a traditional franchise business, with a proven concept, for whatever reason you still get lumped in with the one-off upstart restaurants. You constantly hear the joke,‘If I wanted to make $1 million in the restaurant business, I would start with $2 million.’”
Indeed, finding financing for independent restaurants without the backing of a proven franchisor’s branding or operational know-how is probably the most difficult avenue for aspiring restaurateurs. While banks can offer small-business loans with federal-government backing, opening a chef-driven restaurant is typically done through rich aunts or uncles or generous friends.
Sue Torres, chef-owner of the New York restaurant Suenos, relied on her personal savings and help from family members to open the Mexican-style eatery in 2003.
“I looked into banks,” she has said, recalling how she financed her first restaurant opening. “They promised help, and then it fell through. They are an unreliable source for a restaurant because they believe we are so high-risk. It just wasn’t an option.”
While Suenos operates, Torres has added another chef title to her resume, at Los Dados, another Mexican-inspired restaurant in New York.
Trey Brown, managing director of GE Capital Solutions Franchise Finance in Scottsdale, Ariz., recommends that operators looking for cash focus on what lenders look for when evaluating a potential client, especially in today’s tight credit market.
“It’s time to return to the basics,” he says, “which include consistent operations, consistent accounting that is well-audited, and predictability [in future results], which is tough.”
GE has been active in the restaurant industry for more than 30 years, and its lending or financing capabilities range from $150,000 loans to mergers or acquisitions totaling $100 million or more.
Operators should also “over-communicate [to lenders] right now,” Brown adds. “Discuss your business model, your strategies,” he says. “Treat your lender as part of your board. Make sure they are constantly aware of changes in the business as they happen.”
Exploring all financing options is one way restaurant operators can make certain they can surmount the cash crunch. Studying debt financing, venture capital, selling an equity stake in the business or arranging cash advances can help operators decide between the various options and sort out their respective pros and cons.
Industry experts say operators should place the utmost importance on matching the right type of funding to a restaurant company’s specific goals, whether building the brand or building infrastructure. Equal consideration should be given to the company’s age, whether startup or mature, finance veterans also stress.
Debt financing often comes with unfavorable terms and can be no less risky than going it alone. However, selling an equity stake can dilute a founder’s say in the future of the brand, and seeking a cash advance can come with high interest rates and a dependence on up-front money. The positives, of course, are having the capital to grow.
Operators say the best way to overcome the cash crunch is to succeed in operations.
“You need outstanding unit economics before any financing,” says Craig Miller, chairman, president and chief executive of Heathrow, Fla.-based Ruth’s Chris Steak House Inc. “First develop the strength of the brand, and capital will follow.”
Ruth’s Chris has used almost every form of financing since Fertel’s founding of the chain in 1965. After she secured a loan to buy and rename the Chris Steak House, the company that subsequently developed eventually was sold to private-equity firm Madison Dearborn Partners, and Miller was part of the team that took Ruth’s Chris public in 2005.