Your Questions About Investing In Restaurants Return

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William asks…

How do I determine if an investment in a club/lounge/bar is worthwhile?

I’ve been approached to invest in a upscale club in a major US city. However, I have zero understanding of the industry, besides being a patron. In addition to my pondering below, are there any resources and/or literature that might guide/educate me on investing in the nightlife industry?

What are the top issues to consider? What type of returns are typical? What is the historical success rate of such venues? Is such an investment riskier than a restaurant? What sort of metrics are typical (i.e. cost per square feet, management fees, etc.)? What sort of terms are customary (i.e. liability, distribution of returns, sale of shares, etc.)? Above all, is such an investment wise if I do not live in the same city as the club (I do make frequent trips to the city for other reasons, but cannot keep weekly tabs on the club’s performance)?

Justin answers:

As you may or may not know, anytime one invests in a high risk business such as a club, you are asking for failure. Now, if you are talking about an Upscale Lounge, then it can be a very profitable business to get in to. The top issue would be liability due to the alcohol being served. The insurance rate for such an endeavor is high, but if it was a dinner club that also served food, the rates are somewhat better. I have lived in many big cities around the country, and the one thing I have noticed about Night Clubs is; They will be hot for about a year to a year and a half, then its downhill from there. I am in the entertainment business, and know for a fact that all clubs seem to boom for a short period, and then the next thing you know it is closed. For whatever reason may be debatable, but still they don’t seem to last very long. If one invested in a club on a short term (such as a Two year term) you could see a very nice return on your investment. Beyond that, is no man’s land, and gets risky. On the other hand IF the business were to be highly sucessful to the point of expanding into more cities, one could see huge returns. Your major problem would be finding management that one could trust, since you would not be in town to watchdog the business. I have a neice that manages a business such as you are talking about, and they have been highly sucessful for about five to six years now, and the business has went from one club to many clubs across the southeastern United States. Her Job has been to train the managers, and get each club on its feet. I can’t say this for many clubs, as this is not the norm. Then again every business doesn’t share the sucess of McDonalds. You say you cannot keep weekly tabs on the club’s performance. I question this thinking since we live in an information age. Many business’s are ran this way now, and can be kept under your control through video conferencing and computer technology. Your biggest problem IS finding someone you can TRUST to oversee your investment. If you cannot be there to watch the progress, then I would suggest you find someone that can do the job for you, or not take the risk. All the other concerns you have are mute unless you are more specific as to location, regional factors, proximity to suppliers, and the exact type of club you have in mind. Are you considering a Rock-n-Roll Club, or a Chicken wing Sports bar, or a very upscale black tie members only type club? Employing an investment firm to hammer out the details, and a managment team to impliment your vision would be in line with being able to answer the other questions. What I see is a person with capital to invest, but with reservations about the endeavor to begin with. As you may know, there are only two things in life for certain, death and taxes! The sucess of your marketing scheme cannot be projected until you are knee deep in the details. One may have the best idea since sliced bread, but if it is not marketed properly, and placed behind a rock solid managment team, the risk factor can get very shakey. Many finiacial and investment firms are there for the answers, and many studies will have to be accounted for in order to give a thumbs up to the risk factors involved. If it sounds too good to be true, then it probably is!
I hope I have been of some assistance to your questions, and have gave you solid advice. Good Luck!!!

Charles asks…

Financial Mini Case………..?

Assume you have just been hired as business manager of PizzaPalace, a pizza restaurant located adjacent to camps. The company‘s EBIT WAS $500,000 last year, and since the university’s enrollment is capped, EBIT is expected to remain constant ( in real terms) over time. Since no expansion capital will be required, PizzaPalace plans to pay out all earnings as dividends. The management group owns about 50 percent of the stock, and the stock is traded in the over-the-counter market.
The firm is currently financed with all equity; it has 100,000 shares outstanding; and P0= $ 25 per share. When you took your corporate finance course, your instructor stated that most firms’ owners would be financially better off if the firms used some debt. When you suggested this to y our new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm’s investment banker the following estimated costs of debt for the firm at different capital structures:
Percent Financed with Debit, WdRd
0%-
208.0%
308.5
4010.0
5012.0

If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. PizzaPalace is in the 40 percent state-plus-federal corporate tax braket, its beta is 1.0, the risk-free is 6 percent, and the market risk premium is 6 percent.
a.Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the weighted average cost of capital and free cash flows.
b.(1) What is business risk? What factors influence a firm’s business risk?
(2) What is operating leverage, and how does it affect a firm’s business risk? Show the operating breakeven point if a company has fixed costs of $200, a sales price of $ 15, and variable costs of $10.
c.Now, to develop an example that can be presented to PizzaPalace’s management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, Which uses $10,000 of 12 percent debt. Both firms have $20,000 in assets, a 40 percent tax rate, and an expected EBIT of $3,000.
(1)Construct partial income statements, which start with EBIT, for the two firms.
(2)Now calculate ROE for both firms.
(3)What does this example illustrate about the impact of financial leverage on ROE?

d.Explain the difference between financial risk and business risk.
e.Now consider the fact that EBIT is not known with certainty, but rather has the following probability distribution:
Economic StateProbabilityEBIT
Bad0.25$2,000
Average0.503,000
Good0.254,000

Redo the part a analysis for Firms U and L, but add basic earnings power (BEP), return on invested capital (ROIC, defined as NOPAT/Capital = EBIT (1 – T)/TA for this company), and the times-interest-earned (TIE) ratio to the outcome measures. Find the values for each firm in each state of the economy, and then calculate the expected values. Finally, calculate the standard deviations.
f.What does capital structure theory attempt to do? What lessons can be learned from capital structure theory? Be sure to address the MM models.
g.With the above points in mind, now consider the optimal capital structure for PizzaPalace.
(1)For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC.
(2)Now calculate the corporate value, the value of the debt that will be issued, and the resulting market value of equity.
(3)Calculate the resulting price per share, the number of shares repurchased, and the remaining shares.
h.Considering only the capital structure under analysis, what is PizzaPalace’s optimal capital structure?
i.What other factors should managers consider when setting the target capital structure?

Any one can solve this case Scientifically?
Califrich- Thank you match for passing through my question at least? I did all my homework, 21 cases like this. But wondering what people are doing here, it seems that they are having fun only.
Good Luck!

Justin answers:

I think you should do your own homework. Any answers you get here are likely to be bogus.

Richard asks…

Finance questions: cash vs. checks?

I’m a server in a restaurant and I average about $100 +/- a day extra in cash. The rest I try to save. I remember in accounting class we used to talk about the advantages of cash over accounts receivable in the sense that ready cash may be immediately invested for larger returns vs money that is owed to you which may be gaining minimal interest. I understand that no real investment is 100% guaranteed to make money; as well as the fact that large companies are typically dealing with very large sums of money, which in turn generate considerable returns. Where would be the best place to start taking my money? Can I expect to gain any decent rate of return by making many small investments in different accounts, or should I lump everything together in one or two places? As I am growing up, I am finding myself more and more interested in investment, but I could not find any advice which seems relevant to my situation. Any help would be appreciated.

Justin answers:

For a waitress that wants to save I think a savings account at the bank would be a reasonable approach.

Donald asks…

How do I solve this equation?

104. Venture capital. Henry invested $12,000 in a new
restaurant. When the restaurant was sold two years
later, he received $27,000. Find his average annual
return by solving the equation 12,000(1 +r)^2=
27,000.

Justin answers:

Divide both sides by 12000
(1+r)^2=2.25
1+r=squareroot(2.25)=1.5
r=0.5

Steven asks…

Can anyone please help me find the venture capital?

Henry invested $12,000 in a new restaurant. When the restaurant was sold two years later, he received $27,000. Find his average annual return by solving the equation 12,000 (1 + r )^2 = 27,000.

Justin answers:

(1+r)^2=27/12=(1.5)^2
r=0.5
God bless you.

James asks…

How in the world can anyone solve this problem?

enry invested $12,000 in a new restaurant. When the restaurant was sold two years later, he received $27,000. Find the average annual return by solving the equation

12,000(1 + r)2 = 27,000

Justin answers:

12,000(1 + r)^2 = 27000. Divide by 27000.

(1 + r)^2 = 2.25. Root both sides.

1 + r = 1.5.

So, r = .5.

He got a 50% annual return on his place.

-John

Joseph asks…

Interpreting Financial Statements?

Hello everyone,

Please I need help with this question. Can someone solve it for me please? I be gladly appreciate for your help. Thank you.

Bob Evans Farms, Inc. operates 579 restaurants in 18 states and produces fresh and fully cooked sausage products, fresh salads, and related products distributed to grocery stores in the Midwest, Southwest, and Southeast. For a recent 3-Year period Bob Evans Farms reported the following selected income statement data ( in millions of dollars ).

Year 2007

Sales $1,654.5
Cost of goods sold $482.1
Net Income $60.5
Total assets $1,197.0

Year 2006

Sales $1,584.8
Cost of goods sold $469.7
Net Income $54.8
Total assets $1,185.1

Year 2005

Sales $1,460.2
Cost of goods sold $443.2
Net Income $37.0
Total assets $1,150.9

Instructions

(a)Compute the percentage change in sales and in net income from 2005 to 2007.

(b)What contribution, if any, did the company’s gross profit rate make to the decline in earnings?

(c)What was Bob Evans’s profit margin ratio in each of the 3 years? Comment on any trend in this percentage.

(d)The chief executive officer’s letter stated that the company continued to invest prudently in restaurants, opening 10 new restaurants in 2007, compared to 20 openings in 2006. What effect would you expect this change to have on return on assets? Calculate the company’s return on assets for 2006 and 2007 to see if it reflects the increase in number of stores.

Justin answers:

A) subtract “net income 2005” from “net income 2007”. Divide the answer by “net income 2007” (write the answer as a percent not a decimal)

b) i don’t understand what they’re asking, but subtract “cost of goods sold” from “sales”. The answer is your gross profit. To get your gross profit rate divide the answer (aka your gross profit) by “sales”. The bigger the percent the better.

C) For each year divide “net income” by “sales” the answer is your profit margin ratio. The bigger the better (write the answer as a percent not a decimal)

d) the math is net income divided by total assets. Generally speaking if your net income is going up and you have less assets you’d have a higher return on assets.

David asks…

claiming investment losses?

I invested $30,000 in a restaurant (Oct 2011) and did not make any money from it in 2011. Can I file it as a loss on my income tax return, and if so, how?

The restaurant has not gone bust – I put in $30K as part of a $350K start up. I am also listed as an owner, but not as the primary.

Justin answers:

You said “The restaurant has NOT gone bust”. Sparky assumed you said the opposite.

You are not an owner, you are a PARTNER.

The managing partner of the restaurant should have given you financial statements for 2011 allowing you to complete form T2125, Statement of Business or Professional Activities for your share of the profit OR loss of the business, and attach it to your 2011 tax return.
Http://www.cra-arc.gc.ca/E/pbg/tf/t2125/README.html

If the business has SIX or more partners, the business needs to file a Partnership Information Return:
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/prtnrshp/hs-eng.html

Read this guide cover to cover and understand your filing obligations:
http://www.cra-arc.gc.ca/E/pub/tg/t4002/t4002-e.html

And more information on partnerships here:
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/prtnrshp/menu-eng.html

And no, you will only be able to claim a loss of your capital investment in the final year of the business, or when you sell your stake in the business. In the mean time, you can claim your share of the OPERATING LOSS, as described above.

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