What are my options for funding a second restaurant site?

10 November 2005
What are my options for funding a second restaurant site?
"I've had a restaurant for two years now and it's trading well. What are my options for funding a second site?"

Simon Stracey, Marlborough Leisure First, I'll assume you're able to demonstrate the profitability of your existing restaurant with good quality, professionally prepared accounts, as banks and other investors rely heavily on such evidence.

The first question you must now consider is whether your existing venue can be properly managed in your absence. As you'll recall from the first time out, setting up a new restaurant demands an enormous amount of time and energy, during which you'll pay less attention to the day-to-day management of your established business.

Do you have reliable managers, kitchen staff and operating systems that will permit you to concentrate on other matters with the confidence that business will continue as normal? If the answer is no, you're probably not ready to take the leap into multiple ownership.

Setting a budget for your next project isn't always straightforward. There's no fixed formula dictating the ratios applicable to this part of the exercise, as they will be influenced by many factors, including your existing level of borrowing, the security you're able to offer a lender and/or the portion of your business you're willing to "sell" to outside investors - sometimes an alternative to investing your own cash.

But if you've built a profitable business (and retained some of the profit) and have established a management infrastructure that will allow you to concentrate on the next project, there's almost certainly a means by which you can raise the necessary finance. At this stage you should discuss your ideas with your accountant, bank manager or specialist broker, all of whom should be able to provide further impartial guidance.

Steven Chester, Christie First You have two options for funding the second business. Obviously, your track record in the ownership and operation of your current business will stand you in good stead. The first route is to look at the finance separately from your current business. The second is to finance the two businesses collectively.

On the first route, funding is likely to be restricted to about 75% of purchase price for a freehold business, 50% for a leasehold. If financing the businesses together, you could use the equity in the first business to support the second. Up to 100% finance could be made available.

You appear to have traded well at the current restaurant. It's therefore likely that equity is available and this route could be preferable.

The lender would be taking a first charge on both premises, which would therefore involve the refinance of the first restaurant. In both cases, should capital be an issue, the use of other property as security or the leasing of certain equipment could be considered, which would reduce the overall cash requirement. In the case of residential property being used, a second charge could be taken, leaving the residential mortgage in place which would probably be a cheaper rate of interest.

Whatever route you take, your ability to service the loan(s) is key. Lenders will be prepared to consider the projections for the new business but cash-flow must be able to service the loans during the build-up period. I would look at an interest-only period at the start of the loan, not only to cover the refurbishment period (if applicable) but also the following 12 months that the second business is operational. Capital can then be repaid over the balance of the loan and I would suggest a longer term is preferable.

Paul Thompson, Acorn Commercial Finance The first thing you need to decide is whether you want to open a second site in addition to the first, or whether you're looking to move into a larger business and apply your skills to that.

If it's the former, then you must consider your skills as well as the finances. Are you able to run two sites and do you have the management team in place to allow you to float between the two? Consider the geography. You can't be in two places at the same time, so make sure you're able to be in one or the other and not stuck on a motorway most of your day.

The finance should be OK.

As long as the existing site is trading at a profit, then your bank should be pleased to back a second, potentially lucrative site.

If you're leasing at the moment I'd expect to be able to pull between 50% and 70% out of your existing site and then provide a similar amount towards the new site. Obviously this situation is eased if freehold property is included. The percentages could be up to 75% in that situation.

Considering the above, the other option of selling the existing site and moving on may become more attractive. Get a realistic selling price and consider this as your deposit. Depending on what you're able to buy, this could be multiplied up to three to four times to give a purchase price of a prospective business, so a £100,000 deposit would give a buying power of between £350,000 and £400,000.
Another option might be to lease out the existing premises to continue to draw a rental income and also have a smaller lump sum to start the second site. There are obviously other implications here and it would need careful consideration.

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