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First time for me, need advice on whats fair for a return investment of investor?

Adrian Soto's Profile

Ok so I'm in the restaurant industry and ready to pursue my dreams on owning my own establishment. I have looked into leasing which would cost roughly 7k per month which is 6% of my projected sales which is fine. However, I really don't want lease and have found a location for 150k that would need a remodel of 200k. So 350 for the building of course I still need 70k for equipment and 50k for working capital totaling out at 470k. I have spoke with bank and they feel 80-90k will get me everything I need. The reason to buy is its just a smarter business decision I feel. I can A: lease for 5 years and spend 450k in 5 years or buy/remodel and own in same time frame but moving the 90k per year to my pocket opposed to lease property owners. OK so whats fair I need 75k from an investor. I have no idea the rate, but feel what I would be offering is fair. I can pay the 75k back year one and 50k year two for interest. Is that fair? What I would prefer is they basically finance the needed money and put me on a 5 year payment plan and at the end of contract I owe 2 additional years which is 180k for loaning the money, They get to hold lean on property till the full investment plus interest is paid off so money is safe so to say with the real estate.. Is this fair? Please give me the good and bad. I appreciate all who send advice my way. Thank you

Answers

Topic Expert
Phyllis Proffer
Title: Owner, Investor Relations Counselor
Company: The Heights Company, LLC
(Owner, Investor Relations Counselor, The Heights Company, LLC) |

I was the investor relations officer for a restaurant company. Buy vs. lease is a difficult decisions, hopefully . . . the accountant and finance guys will weigh in on this. Location is everything, particularly for a new and unproven restaurant concept. My advice is to choose the best location for your concept which will help you drive traffic and grow your business. Even if all things for both location are equal, leasing a location helps in a couple of ways: 1) It will match your cash flow as a start-up; 2) you should be able to negotiate leasehold improvements which the property owner pays for rather than you; 3) Easier to get out of a lease than a bank loan if you want to move and/or the business fails. This isn't like a house. Typically, start-up restaurant companies use debt to expand when they can no longer afford to cover multiple locations with their cash flow. You really need someone from commercial real estate to provide some advice and negotiating tips.

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

Adrian, this is a big decision and you need more guidance on a variety of levels. I would suggest you contact a local SCORE office where you can get some quality mentoring for FREE from professionals. Look them up online at score dot org and read how the organization might help you in your situation.

It's a good place to start if you can find the right mentor.

Serge Wind
Title: Instructor, Department of Finance
Company: NYU School of Professional Studies
(Instructor, Department of Finance, NYU School of Professional Studies) |

Investment decisions on all uses of a company’s long-term resources are the most important element of financial analysis and significantly affect the value of the firm based on its expected future cash flows. Any decision requiring use of assets is an investment decision, ranging from determination of inventory and other components of working capital, to adding fixed assets (plant and equipment), and even extending to acquisitions of other companies.

When considering new investments, managers must ascertain that the investment will earn a return in excess of the minimum acceptable hurdle rate – the risk-adjusted cost of capital – to create value for the owners. Therefore, a “fair return,” expressed as a percent of, say, invested capital, must exceed the cost of capital (for example, the after-tax interest rate of a bank loan) required to finance the new asset.

One or more of three critical measures or procedures are almost always utilized for deciding whether to accept or reject potential investments. The single best criterion is net present value (NPV), because it directly identifies the value-added contribution of the project toward maximizing the value of the company. However, NPV, expressed in dollars, is not favored by some business managers. Two other metrics – the internal rate of return (IRR) and the modified IRR – are expressed as percentages and can often be used as surrogates for, or in addition to, NPV.

Determination of whether to lease or purchase equipment – the financing decision – is a component of investment decisions and follows a favorable decision to acquire the addition to fixed assets. This procedure is described in “Lease vs. Buy: How to optimize your asset investment decisions,” a course offered by Proformative.

You might wish to consult someone with a financial background if this general description sounds foreboding. However, the capital budgeting process, which assesses the cash flow value of your projects and investments, is critical to the success of your restaurant endeavor and is a vital component of every business and company, regardless of size.

Serge L. Wind swind2atnyc [dot] rr [dot] com

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