Methods for
Raising Money for a Restaurant, Bar and/or Club
Acquisition – Part I
Methods for raising money for a restaurant, bar
and/or club acquisition is a two part series and in
this first part I will discuss the following topics:
1. raising you own money, 2. seller financing and 3.
third party financing. The second part which I will
discuss in the next edition of Restaurant Rap will
include investor financing
1. Raising Your Own Money. If you are
fortunate to have your own financial resources this
is usually the easiest way to raise money for your
investment. A good source for creating liquidity for
an investment is to take an equity line of credit
from your home as the interest expense is tax
deductable. Make sure that you can easily pay back
this loan should a worse case scenario occur and
your investment becomes unsuccessful. Other sources
for raising cash yourself include selling your
stocks and bonds and cashing in your retirement fund
although there could be stiff penalties for doing
so. I strongly recommend to not accept investment
money from family member or close friends. The risk
factor is so high in the restaurant, bar and club
business that there is a strong possibility that
they could lose their money and you might not be
able to pay them back which will most likely damage
your relationship with them in the future.
It is important to maintain good relationships with
your family and with your close friends and in many
cases it is already challenging enough to maintain
good relationships with them without having
financial problems muddy the waters. If your uncle
invests $50,000 with you and your business becomes
unsuccessful and you can’t pay him back this could
have a detrimental impact on your relationship with
him and the family in the future. I have had first
hand experience with this situation and I strongly
recommend staying away from accepting investment
money from family and friends.
2. Seller Financing. In this case the seller
carries back a negotiated amount of the purchase
price in the form of a seller carry back promissory
note secured by the assets of the business and
personally guaranteed by the buyer individually. In
California this lien against the business assets is
in the form a UCC1 security agreement which is
recorded with the Secretary of State and will appear
as a cloud against the title of the business should
the business owner decide to sell the business
before the lien is paid off. This means that if the
business fails the seller can take legal action
against the buyers and regain control of the
business and its assets. For example, lets assume
that the selling price of the business is $250,000
with $100,000 cash down at the close of escrow and
the seller agrees that he’ll carry back the $150,000
balance in a seller carry back note. Furthermore the
terms of the seller carry back note are 8% per annum
interest computed from change of possession of the
business so as to fully amortize over 60 months
(i.e. $3,041.96 per month), payments to begin one
month from change of possession, secured by a
security agreement on the assets of the business and
personally guaranteed by the buyer with the right to
prepay without penalty. Many of my business broker
associates in California who sell businesses other
than restaurant, bar and clubs tell me that seller
carry back financing is a common technique used in
selling businesses. However, from my experience in
selling restaurants, bars and clubs I have found few
sellers that are willing to carry back a portion of
the purchase price using a seller carry back note
due to the high risk factor in this industry. Most
sellers I have dealt with would rather get a lower
all cash price than carry back a seller note. In the
limited transactions where I had sellers willing to
finance a portion of the price in the form of a
seller carry back note the seller, in many cases,
required the note be secured by real property owned
by the buyer in addition to securing the note with a
UCC1 security agreement against the business and
assets being sold and having the note personally
guaranteed by the buyer. In these cases where real
property was being used to secure the sellers note
the seller usually specifies that the total debt on
the real property being secured including the seller
carry back note does not exceed seventy percent of
the fair market value. A current appraisal is
usually requested by the seller to approve the
buyer’s real property as additional security. The
sellers insist on this conservative loan to value
ratio to assure themselves that if the buyer fails
there is enough equity in the property to handle the
foreclosure costs, legal costs, etc required for the
seller to take title of the property in case the
buyer defaults.
3. Third Party Financing
a). SBA Loans – SBA stands for Small Business
Administration which is a United States government
program whereby the government guarantees loans made
by banks to small businesses. The major SBA program
for small businesses is called 7(a) loans which are
the most basic and most used type loans of SBA’s
business loan programs. All 7(a) loans are provided
by lenders who are called participants because they
participate with SBA in the 7 (a) program. Not all
lenders choose to participate, but most American
banks do. There are also some non-bank lenders who
participate with SBA in the 7(a) loans. The lender
and SBA share the risk that a borrower will not be
able to repay the loan in full. Repayment ability
from the cash flow of the business is a primary
consideration in the SBA loan decision process but
good character, management capability, collateral
and owner’s equity contribution are also important
considerations. All owners of 20- percent or more
are required to personally guarantee SBA loans. The
guaranty is a guaranty against payment default.
Eligibility factors for all 7(s) loans include:
size, type of business, use of proceeds, and the
availability of funds from other sources. The
maximum loan available in this program is $2 million
of which the government will guarantee 75% of the
loan. For more information on SBA loans look up SBA
on the internet and in particular check our the
following websites:
www.sba.gov and
www.sba.org.
b). Small Minority and Woman-Owned Business Loans
– There are numerous loan programs available for
small minority and woman owned businesses and to get
information for the particular loan program you are
looking for go to the internet and search Small
Minority and Woman-Owned Business Loans.
c) Bank Loans - If you have had a
pre-existing relationship with a bank you may be
able to have the bank provide the necessary
financing to purchase the business. Usually the bank
will want to secure the loan with other tangible
property such as real estate and securities.
In the next edition I will discuss several methods
of how to purchase a restaurant, and/or club using
investors money to create a win win situation for
both parties.
Jennifer & Steven
Sarver -
San Francisco Soup Company
San
Francisco Soup Company is a family owner business
started by Jennifer Sarver in early 1999. Inspired
by the success of soup bars in New York City after
the famous “soup Nazi” Seinfeld episode, Jennifer
saw a great opportunity to open a chain of soup
restaurants in the SF Bay Area. She used her
professional skills and education in cognitive
psychology from Carnegie Melllon to bring a concept
that promotes fresh ingredients that make the
perfect meal to nourish the body and warm the soul
to the market. Her husband Steve Sarver joined her
in the San Francisco Soup Company endeavor in June
of 1999 after a number of years in the business
world working for such companies as Clorox and GJM,
a major supplier to The Limited where he utilized
his undergraduate degree in finance from
Wharton and his MBA from Harvard.
Since opening the first store in Crocker Galleria in
downtown San Francisco, the Sarvers have added
opened 16 locations in the Bay Area ranging from San
Francisco to Berkeley to Palo Alto. They serve 12
soups daily with a wide variety of flavors including
vegetarian, low fat, dairy free, spicy and now low
carb and gluten free options. They have expanded the
menu to add sandwiches as well as salads to give the
customer a full range of choices.
San Francisco Soup Company has been at the forefront
of promoting sustainability as a core value. They
have been using biodegradable products since 2002
and always offer organic choices on the menu. They
are supportive of local purveyors and try to offer
as much support as possible locally. Their most
recent location is San Francisco Soup Company/Urban
Bistro in Burlingame which offers a more extensive
menu including a selection of flat breads, 4 types
of macaroni and cheese and both French fries and
sweet potato fries. Restaurant Realty is pleased to
have been involved in them acquiring this location
and wish the Sarvers continued success.
