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									The Restaurant Industry: An Entrepreneurial Analysis

                   Mary Brennan
                      FIN 402
                December 11, 2002
                                  Executive Summary
It was upon learning of a close friend‟s intention of starting up his own restaurant that the author
was motivated to research the restaurant industry and write this paper. The author felt that her
friend had not thoroughly thought through his prospective investment. In turn, she sensed some
sort of obligation to inform him of what exactly was in store for him as a restaurateur, as she
perceived him to be overly confident.

In researching the restaurant industry, the author tapped into several valuable resources. Such
resources included scholarly journals, trade publications, professional associations‟ publications,
the Internet, and several databases storing a variety of publications.

As a restaurateur, one must be familiar with the industry‟s trade publications and professional
associations. Restaurant trade publications provide detailed information about the industry, its
segments, and even its sub-segments. Professional associations often offer similar publications
and most supply “how-to” advice for the restaurateur who is considering starting up and
managing his own business. Historically, restaurants have been owned and operated by sole
proprietors or small partnerships. Despite the appearance that large corporate franchises
outnumber small restaurants, this simply is not the case; instead, most restaurants are small
businesses. Trends that currently dominate the industry also indicate that many opportunities
exist for the restaurateur. One such trend is the growth in the industry‟s share of the consumer‟s
food dollar. Another trend favoring the industry is the rise in disposable income.

While such trends suggest a bright future for the industry, it, nonetheless, has its share of
challenges. For example, existing restaurant operators are grappling with recruiting, training,
and retaining decent employees. After all, the industry is well-known for its notorious employee
turnover rates. Others operators are more concerned with the potential impact that the current
recession will have on their bottom lines. For the restaurateur just starting up, the challenges that
must be confronted are quite different. The restaurateur must finance the start-up, which can
easily run between $250,000 and $500,000. It is not uncommon for these funds to be obtained
through the employment of bootstrapping techniques. The restaurateur will also be responsible
for making critical decisions that will affect his business, including how to manage inventory and
determining which risks to bear and which to transfer through insurance. Decisions of another
nature will also have to be made. For example, the restaurateur must identify a way to operate
his business successfully without compromising his ethical standards. Some of the common
ethical issues that arise in the restaurant industry involve labor practices, misrepresentation of
food quality, invasion of employees‟ privacy, and conflicts of interests between the restaurateur
and the customer‟s well-being.

Investigation into the financial attributes that characterize the restaurant industry revealed some
key points, as summarized below.
    The restaurant industry is in fact a cash business.
    Inventory comprises the next largest portion of a restaurant‟s current assets, second to
    Restaurants typically have slightly positive, if not negative, net working capital.
   Much of a restaurant‟s short-term financing needs are fulfilled through trade credit
    extended by suppliers. Besides this, many restaurateurs depend on short-term loans
    granted by family, friends, and colleagues.
   Restaurants are capital-intensive because they require a significant investment into
    equipment and, if the restaurateur does not opt for a lease, land and a building. Since the
    lives of these assets are long-term, the financing of these assets are likewise long-term.
    Loans drawn to finance fixed assets often require a significant amount of the assets‟ value
    to be pledged as collateral and sometimes stipulate a personal guarantee by the
   While banks and other traditional sources of external, long-term financing have been
    reluctant to lend to restaurants because of their high probability of failure, they are more
    willing to do so (and on more favorable terms) if the loans are guaranteed by the Small
    Business Administration (SBA). Among the most popular of the SBA‟s lending
    programs available to restaurants are its 7(a) Guaranty, LowDoc, and 504 Certified
    Development Company (CDC) loan programs.
   Restaurants can easily spend just as much on COGS (cost of food and beverages) as they
    do on payroll.
   Restaurants typically achieve slim profit margins.
                                                     Table of Contents

The Restaurant Industry: An Introduction ...................................................................................... 1
Major Professional Associations..................................................................................................... 1
Major Trade Publications ................................................................................................................ 2
Trends ............................................................................................................................................. 3
Getting Started ................................................................................................................................ 4
Typical Business Structure ............................................................................................................. 5
Restaurant Failures.......................................................................................................................... 5
Ethical Issues .................................................................................................................................. 7
Risk Management ......................................................................................................................... 10
Inventory Management ................................................................................................................. 11
Financial Analysis ......................................................................................................................... 11
Common Exit Strategies ............................................................................................................... 15
Conclusions ................................................................................................................................... 16
Appendix A ................................................................................................................................... 17
Appendix B ................................................................................................................................... 18
Appendix C ................................................................................................................................... 19
Appendix D ................................................................................................................................... 26
Works Cited .................................................................................................................................. 29
                The Restaurant Industry: An Introduction
The restaurant industry is one in which many entrepreneurial opportunities exist. At first glance,
the restaurant industry may appear to be comprised mostly of large corporations and their
franchisees. However, the truth be told, most restaurants are independently owned and are
classified as small businesses. Statistics have shown that as disposable income increases, as it
has over the years, consumers will spend more on food and will allocate more of their food dollar
on food away from home. For this reason, demand for food away from home has increased and,
in turn, the industry has caught the eye of some entrepreneurs. Perhaps the more important
reason that entrepreneurial opportunities exist within the industry is because there is so much
innovation out there that has yet to be exploited by restaurateurs.

                       Major Professional Associations
When starting up any type of business, it is important to be aware of what professional
associations exist. These professional associations often provide information and services that
prove to be invaluable to the entrepreneur or any business person for that matter. Some of the
most widely recognized restaurant associations and a brief description of their purposes are
found below. Additionally, Appendix A lists these associations‟ website addresses.
     National Restaurant Association (NRA)
       The NRA‟s “mission is to represent, educate and promote the rapidly growing industry
       that is comprised of 858,000 restaurant and foodservice outlets employing 11.6 million
       people” (NRA “About Us”). Moreover, the association has 52,000 member companies
       that represent more than 254,000 restaurant establishments (NRA “About Us”). It is also
       a member of the International Hotel and Restaurant Association.
     National Restaurant Association Educational Foundation (NRAEF)
       The NRAEF is the educational arm of the NRA. It is responsible for “helping the
       industry attract, support, guide, train and teach people” that represent the future of the
       industry (NRAEF “President‟s Message”).
     State Restaurant Associations
       State Restaurant Associations serve the same purposes as the NRA at the more local
       level. The Nebraska Restaurant Association, for example, “acts as the principal advocate
       for Nebraska‟s Hospitality Industry and promotes the qualities of strength, unity and
       excellence in and of its membership” (Nebraska Restaurant Association “About the
     American Culinary Federation (ACF)
       The ACF “is a professional, not-for-profit association for chefs and cooks” that has set
       out “to promote the professional image of American chefs worldwide through education
       among culinarians at all levels, from apprentices to the most accomplished certified
       master chefs” (ACF “About the ACF”).
     International Association of Culinary Professionals (IACP)
       The IACP is a not-for-profit association with 4,000 members from 35 different countries
       (IACP “What is the IACP?”). Its mission is to serve “as a resource and support system
       for food professionals worldwide” and “to help its member achieve career success
       ethically, responsibly and professionally” (IACP “What is the IACP?”).
                                                                                     Brennan    2

      National Bar & Restaurant Association (NBRA)
       The NBRA‟s “mission is to provide discounts, services and networking opportunities
       enabling restaurant, bar and hospitality professionals to increase revenues and profits
       through innovative promotions, marketing and management” (NBRA “Benefits of
      American Institute of Wine and Food (AIWF)
       The AIWF is an organization “dedicated to understanding and celebrating the pleasures,
       benefits and traditions of the table” (AIWF “About the AIWF”). It has 30 chapters in the
       U.S. and more than 7,000 members who are restaurateurs, food industry professionals,
       food educators, nutritionists, chefs, wine professionals and dedicated food and wine
       enthusiasts (AIWF “About the AIWF”).
      International Hotel & Restaurant Association (IH&RA)
       “The IH&RA is a global network of independent and chain operators, national
       associations, hospitality suppliers and educational centers in the hotel and restaurant
       industry” (IH&RA “About the IH&RA”).

                             Major Trade Publications
It is equally important for entrepreneurs to read some of the major trade publications relevant to
their industry. Below, some of the major restaurant publications are listed and described.
Appendix B provides the website addresses for those trade publications that are available on-line.

      Restaurants USA. This on-line magazine is published monthly by the NRA and provides
       comprehensive coverage of the foodservice industry.
      Restaurant Economic Trends. This is a monthly newsletter published by the NRA and
       provides updates “on industry and economic issues such as food prices, wages, sales and
       the overall health of the U.S. economy” (NRA “Restaurant Economic Trends”).
      Nation’s Restaurant News. This is a weekly on-line publication that covers an array of
       topics, namely trends, tips and upcoming events.
      Restaurant Hospitality. This is a monthly publication “for chefs and other commercial
       foodservice professionals” that is aimed in keeping them “informed of industry trends
       and happenings and helps them run their operations more profitably. Topics regularly
       include new food and equipment products and trends, menu and recipe ideas, industry
       news, new technology, food safety, emerging new concepts, consumer attitudes and
       trends, labor and training, and profiles of successful operations” (Restaurant Hospitality
       “Subscription Information”).
      Restaurants & Institutions. This is a monthly publication that provides food trends,
       business analyses, exclusive research and a broad industry perspective.
      Cornell Hotel & Restaurant Administration Quarterly. This publication “publishes
       articles that help hospitality managers work smarter and do their jobs better” (Cornell
       University “Cornell Hotel & Restaurant Administration Quarterly”).
      Food Review. This is a publication that tracks the “trends in the agricultural and
       restaurant sectors of the U.S. economy” and is published by the Economic Research
       Service (NRS), a division of the U.S. Department of Agriculture (NRA “Resources”).
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        Legal Monitor. This NRA publication provides “a monthly sampling of recent court
         decisions and administrative rulings that could affect the restaurant industry” (NRA
         “Legal Monitor”).

The NRA expects total industry sales “to reach a record $407.8 billion in 2002, an increase of
3.9%,” or 1.4% after adjusting for inflation, from 2001 (“2002…Overview”). If this sales
projection is accurate, restaurant sales will equal roughly 4% of U.S. GDP and will average $1.1
billion daily (NRA “2002…Overview”). Nebraska restaurant sales, in particular, are expected to
grow 3.6% in 2002 (NRA “2002…Outlook”). Interestingly, in 2000, the Midwest outpaced all
other regions with expenditures of $2,322 per household or $929 per capita (Ebbin).

Household Income. In 2000, households with an average pre-tax income of $70,000 or more,
which represented 19% of the population, accounted for the largest portion (36%) of total
spending on food away from home (Ebbin). Figure 1 in Appendix C shows the breakdown of
spending on food away from home by household income for 2000.

Age. Today, spending on food away from home represents 46.1% of the consumer‟s food dollar
(NRA “2002…Overview”). In 2000, households headed by persons under the age of 25 spent
48.8% of their food dollar on food away from home, which was more than any other age group
(Ebbin). However, households headed by persons age 45 to 54 spent $2,638 per household on
food away from home, the most of any other group (Ebbin). Even still, households headed by
persons age 55 to 64 spent the most ($999) per capita on food away from home in the same year
(Ebbin). The logic backing up these statistics is that people aged “35 to 54 are in the prime of
their earning potential and their higher income result in higher spending on food away from
home” (Ebbin). The same is true of the 35 to 44 age group but because they are also in their
prime child-raising years, their per capita restaurant spending is diluted by a higher average
household size (Ebbin).

Household Size. In 2000, one-person households had the highest restaurant spending per capita
“($1,348) and allocated the largest share of the food dollar on food away from home (47.7%)”
(Ebbin). Nonetheless, these households spent less than the nation‟s average while households
comprised of two or more persons spent a total of $2,454 per household on food away from
home (Ebbin).

Household Composition. Households comprised of a husband, wife and children spent 35%
above the national average on food away from home (Ebbin). However, households with just a
husband and wife “posted the highest per-capita spending on food away from home” (Ebbin).
Moreover, statistics indicate that in households with children, as the children get older, restaurant
spending increases significantly (Ebbin).

Number of Wage Earners. Spending statistics show that “both household income and total
spending on food away from home rise with the number of wage earners in a household”
                                                                                                  Brennan         4

Occupation. “Persons employed in managerial and professional occupations posted the highest
total and per-capita spending on food away from home” and “allocated the highest proportion of
their total food dollar to food away from home” in 2000 (Ebbin).

Table 1 in Appendix C summarizes what operators identified as being the biggest challenges for
2002. Clearly, quick service operators and low-end full service operators expected difficulties in
recruiting and retaining employees1. The industry is already characterized by incredibly high
employee turnover. For example, the employee turnover rate is 84% for full-service restaurants
with an average check size of $15-$25 and 96% for fast-food chains (Standard & Poor‟s 8). On
the other hand, full service operators with larger average check sizes seemed to be more
concerned with the economic slowdown.

                                          Getting Started
It is not enough to have a good idea and match it with an opportunity in order to be an
entrepreneur, or at least a successful entrepreneur. To begin with, the restaurateur must be able
to finance the start-up. As it is the case when starting up any kind of business, a certain amount
of capital investment is required. The cost of financing a start-up restaurant varies widely, as
demonstrated in Exhibit A in Appendix C. However, the CEO of the Texas Restaurant
Association says that “as a general rule, restaurant startup costs range from $250,000 to
$500,000” (Colley). If the restaurateur is able to finance the startup, it is critical that he or she be
able to manage the business. According to a career-oriented website, a restaurant manager must
possess certain skills, abilities and knowledge, as summarized below, in order to be successful
      Restaurant managers must have the following skills and abilities:
             o Leadership
             o Decision-making
             o Planning
             o Marketing
             o People
             o Team management
             o Communication
             o Computing/Accounting (especially if they‟re running their own business)
             o Works well with others
             o Works well under pressure
             o Ability to accept criticism
             o Calmness in emergency situations
      Restaurant managers must have knowledge of the following areas:
             o Food and bar management
             o Licensing laws
             o Health and safety regulations

 As a manager at McDonald‟s, I can attest to this. As sales have stagnated, the management team has had to cut
employees‟ hours and freeze merit increases. As a result, employees have come to feel underappreciated and many
have submitted their notice of resignation.
                                                                                        Brennan     5

          o Competitors‟ price and services
          o Wholesalers‟ products and prices
          o Business, marketing and market trends
      Restaurant mangers must possess the following personal qualities:
          o Friendliness
          o Patience
          o Helpfulness
          o Tactfulness
          o Adaptability
          o Motivational
          o Restaurant managers must meet some physical requirements:
          o Fit
          o Healthy
          o Stamina (for long hours standing)
          o Neat and tidy appearance

                            Typical Business Structure
“Despite a trend toward consolidation, the U.S. restaurant industry remains highly fragmented.
Eating and drinking places in America are mostly small businesses; historically, about more
than half are sole proprietorships or partnerships, according to the National Restaurant
Association” (Standard & Poor‟s 6). In fact, “one out of three eating-and-drinking place firms
are sole proprietorships or partnerships” and “more than seven out of 10 eating-and-drinking
places had less than 20 employees in 1999” (NRA “2002…Factbook”). While there is no one
clear reason why restaurateurs have chosen to operate their businesses as small proprietorships
or partnerships, a comparative analysis of the different types of legal structures provides some
insight. The table presented in Appendix D makes the pros and cons of each type of legal
structure more visible. Undoubtedly, the greatest benefit that proprietorship and partnership
forms offer to the restaurateur is simplicity. Proprietorships and partnerships are easy to form,
avoid many of the legal formalities to which other legal structures are subjected and allow the
owner(s) to retain a significant amount of, if not complete, control of the business.

                                  Restaurant Failures
Consider this: “53% of all entrepreneurial startups across all industries fail within five years”
(Crandall, Vozikiz, Sparks 33). Unfortunately, this statistic is accurate and representative of
failure rates in the restaurant industry. Researchers at Cornell University and Michigan State
University conducted a study of restaurants in three markets over a period of ten years. The
results of their study are summarized in the table below (Farkas 60).

Time Period                                        Failure Rate
After 1st Year                                     27%
After 3rd Year                                     50%
After 5th Year                                     60%
Entire 10-Year Span                                70%
                                                                                       Brennan      6

Additionally, according to BizMiner, restaurant start-ups pose higher than average risk to the
entrepreneur than any other start-up and have higher failure rates than the collective restaurant
industry and small businesses within the industry. The table below presents BizMiner‟s

                  Firms Tracked          Survival         Failure         Risk Index
                  from 1/98 – 1/01       Rate             Rate            where 1.0 = Average
Industry          487,661                70.10%           29.90%          0.96
Small Business    262,078                71.92%           28.08%          0.90
Start-Ups         27,914                 54.17%           45.83%          1.47

While all these statistics may be discouraging for some entrepreneurs, it is somewhat comforting
to know that “81.4% of small business failures result from forces within the owners/managers‟
control” (McQuaig C7). That is, owners and mangers can be proactive in avoiding the pitfalls
that lead to a small business‟ demise. The table below presents one study‟s findings on small
business failures (McQuaig C7).

Reason for Failure                                      % of Business Failures
Poor management of financial activities                 32.1%
Lack of management competence or experience             14.6%
Inflation or economic conditions                        12.4%
Poor books or records                                   12.3%
Sales/marketing problems                                10.7%
Staffing problems                                       9.0%
Union problems                                          6.2%
Failure to use external advice                          2.7%

Moreover, Mike DeLuca, a writer for Restaurant Hospitality, says that there are “Seven Deadly
Sins” that lead to restaurant failure that are within management‟s control and are summarized as
follows (14). Perhaps abstaining from such “sins” would aid the restaurateur in achieving
    1. Sloth. Management neglects the restaurant‟s “appearance, hygiene, and daily
        management needs.”
    2. Envy. Instead of taking any action whatsoever to counter a competitor‟s efforts,
        management sits back and stews over jealousy.
    3. Greed. Management prices “items unreasonably and charges even for items that are
        expected to be free, such as ice water.”
    4. Pride. Management declines the advice of others because it possesses the know-it-all
    5. Lust. Management becomes involved with co-workers or hires workers on the basis of
        attraction and the relationship distracts management from what it should be concerned
        about—running the business.
    6. Gluttony. Managers are slobs.
    7. Anger. Managers have quick tempers.
                                                                                     Brennan    7

                                     Ethical Issues
Employee Stealing. The practice of stealing employees from competitors is well known by the
restaurant industry. In fact, one restaurateur had some chefs walk “right into his kitchens and
offer his cooks more money,” adding that employees “will jump ship just to make a quarter more
an hour, even though they receive regular raises” (qtd. Walkup 138). When labor markets are
tight, it is very difficult for restaurants to retain employees and attract new ones. Moreover,
“finding and keeping wait staff is even more troublesome than retaining kitchen workers” (qtd.
Walkup 138). He adds that Hispanic kitchen workers are easier to retain than Americans
because they are more loyal and do not “have a problem doing the same job every day” (qtd.
Walkup 138).

Discrimination. If it is the case that Hispanics have proven to be better kitchen workers, a
potential ethical issue may be racial discrimination. Are restaurateurs partial to certain racial
groups? “The 2000 U.S. Census revealed a significant increase in the number of minorities in
the United States, especially the Hispanic community” (LaGreca). Even though “Hispanics
accounted for only 10% of all employed civilians in 1999”, they “accounted for 16% of eating-
and-drinking-place employees” (LaGreca). Most worked as “miscellaneous food-preparation
workers” while slightly fewer worked as cooks (LaGreca). Gender discrimination, too, may
exist in the foodservice industry. “According to a 1995 report published by the Glass Ceiling
Commission, the U.S. labor force remains gender- and race-segregated, with white men filling
most top management positions in corporations” (Hedden). While 43% of women hold
“executive, administrative and managerial positions, they account for less than 3-5% of top
executive positions” (Hedden). Clearly, the glass ceiling has yet to be shattered. Pay inequities
still exist too. According to the Women‟s Bureau, in 1994, “women working full-time and year-
round averaged 72 cents for each dollar that men earned” (Hedden). In fact, the typical
foodservice industry manager is male (54%) and white (84%) (LaGreca).

Teenagers. “Employees in food-preparation and foodservice occupations tend to be younger
than those employed in other occupations” (LaGreca). “In 1999, teenagers accounted for 27% of
all food-preparation and foodservice occupations and 28% of eating-and-drinking-place
positions” (LaGreca). Many states are considering imposing further restrictions on the hours that
teenagers can work (Pulley B1). Much of the legislation is driven by the fact that working
teenagers‟ tend to compromise their health and schoolwork (Pulley B1). Since the restaurant
industry is one that employs many of these teenagers, it will no doubt be affected by such
legislation. The businesses that will be affected in particular are those that are family-run. For
example, one Italian eatery in New York is run by a couple and their eight children (Pulley B1).
The Labor Department has already found in its investigations “evidence of teenagers working
illegally long hours” and “operating dangerous equipment” (Pulley 1B). With even tighter
restrictions on child labor laws, one can only imagine how well small restaurants will comply. I
suspect that some restaurateurs will engage in under-the-table practices with their teenage
employees as to avoid seeking out new, and probably more expensive, labor.
                                                                                                       Brennan       8

Former Welfare Recipients. Besides rejecting applicants on the basis of race or gender, the
restaurant industry is notorious for rejecting former welfare recipients. The restaurant industry
has been reluctant to hire former welfare recipients despite the National Restaurant Association‟s
and its state partners‟ endorsements and the potential tax credit of up to $6,000 per welfare
recipient hired (Prewitt and Allen 5). One restaurateur commented that the biggest problems
with hiring welfare recipients are “assimilating people who have not worked for a long time,”
“logistical problems like transportation,” and their “ignorance of protocol, suspicion of authority
and lack of enthusiasm” (Prewitt and Allen 5). Another “operator said that the only thing people
have to do is pass the „huff‟ test…If they can huff on a mirror and make it foggy, then they are
hired” (qtd. Prewitt and Allen 6). Apparently, there are mixed feelings regarding the hiring of
former welfare recipients. Even still, former welfare recipients are not exactly looking to be
employed by the restaurant industry either. In fact, an employee of America Works2 indicates
that most of the people he helps “want an office job with a window, pushing papers” (Prewitt and
Allen 6). Many people are stricken with “the misconceptions that restaurant positions are
menial, low-paying and arduous” and overlook the fact that “there are other things that” such
positions “could lead to if they stick with it” (Prewitt and Allen 6).

Cutting Corners.

It is not unlikely that some restaurateurs comprise the quality or safety of their products to widen
their margins. In fact, the chef/owner of one Italian restaurant articulated the actions of one of
his “sleazebag” competitors as follows: he has “been promoting free antipasto to bring people
in—though I know damn well he‟s cutting down the quality of the entrees to pay for it. And of
course once he‟s got them, it‟s all about building up the check. I mean, I pity the customer in
that place who knows nothing about wine” (Stein “Honesty” R35). He also “went on a jag
recently about successful restaurateurs who get away with serving cuisine just this side of edible:” "It's
incredible, they provide enough atmosphere -- nice decor, expensive linens, fresh flowers -- and no one
seems to notice the entrees are third-rate" (Stein “Bottom-line”).

Security Measures.

“Dishonest employees are responsible for theft of goods, bogus workers‟compensation claims,
embezzlement, credit-card fraud and a host of other crimes against their employers” (Featsent).
“Security experts suggest that operators use measures such as inexpensive background checks
and security cameras to protect themselves” (Featsent). However, restaurant owners must be
careful in instituting such security measures. The National Restaurant Association, for example,
“cautions that background checks put restaurants at risk of possible discrimination in hiring,
depending on the questions asked” (Featsent). “The Equal Employment Opportunity
Commission is sensitive to questions about an applicant‟s prior conviction record, since
convictions may be more prevalent among minority groups than nonminorities” (Featsent).
Moreover, if cameras are to be installed, they should be set up in “areas where there is not a
reasonable expectation of privacy, as there is in such areas as restrooms, and inform employees
of the cameras” (Featsent). Otherwise, employers may hinder their employees‟ right to privacy.

 America Works is a not-for-profit organization “that specializes in landing jobs for people on public assistance”
(Prewitt and Allen 6).
                                                                                       Brennan        9

Additionally, restaurateurs should be aware that installing surveillance cameras may send the
signal to employees that they do not trust them. This, in and of itself, can actually instigate
problems where none had previously existed.

Customer Well-Being.

The restaurant industry has recently been under attack for contributing to the United States‟
growing obesity epidemic. “Government surveys show that at least 55% of the nation‟s 97
million adults are overweight or obese and at growing risk of developing illnesses such as
coronary heart disease, stroke, high blood pressure, high cholesterol and diabetes” (Sullivan R6).
Considering that “at least one-third of our calories are now eaten outside the home, up from 18%
in the late 1970s,” it is little wonder why people have come to blame foodservice providers for
Americans‟ chunkiness (Sullivan R6). Additionally, the Agriculture Department reports that “fat
currently accounts for 31.5% of total calories in foods eaten at home” and 38% for meals served
in restaurants (Sullivan R6). Reportedly, “restaurant owners use fattier meads and add fat in the
form of butter and sauces to make food taste better” (qtd. Sullivan R6). Moreover, portions are
getting larger as “the American idea of „getting your money‟s worth‟” has prevailed (qtd.
Sullivan R6). Interestingly, according to a recent Gallup poll, “Americans‟ favorite meal is
steak, salad, and baked potato followed by a slice of pie for dessert” (Sullivan R6). So, it is
curious to know how restaurateurs are dealing with these facts. Are they making efforts to serve
healthier meals in smaller portions? Or, are they more concerned with making a buck by
whatever means necessary?

Despite the notoriety that some lawsuits made by obese Americans against foodservice providers
have gained, one survey reveals who people really hold accountable for obesity. The findings of
the survey, which involved 1,000 respondents, are summarized in the table below (Branch B1).

Who is Responsible for Obesity?                    Percentage of Respondents
Individuals themselves                             57%
Food Manufacturers                                 5%
Restaurants                                        2%
Other Causes                                       36%

While it appears that consumers at large really do not blame restaurants for the rise of obesity
among Americans, some individuals do. For example, Caesar Barber filed a lawsuit against
McDonald‟s, Wendy‟s, Burger King, and Kentucky Fried Chicken alleging that these fast-food
chains caused his obesity (Associated Press). At the time of the filing, he was 5‟9” and 272
pounds (Associated Press). He claims that “he ate fast food for decades, believing that it was
good for him until his doctor cautioned him otherwise” (Associated Press). His lawyer stated
“that restaurants should list ingredients on their menus!” (Associated Press). For the record, the
restaurants named in Mr. Barber‟s suit “have provided nutritional information of their meals for
many years” (Associated Press).

It would be ethical for restaurateurs to offer menu items that contribute to their customers‟ well-
being. However, the customer will make the ultimate decision as to what he/she will and will
not eat. So, the restaurateur might reason that if consumers will eat such-and-such, he might as
                                                                                      Brennan 10

well offer it because if he doesn‟t, a competitor will. Then again, not only are there ethical
implications involved in making such a decision, but legal ones as well. A restaurateur who does
not offer strictly healthy foods bears the risk of getting sued in the future by sue-happy
Americans. Is that a risk he is willing to be burdened with? The answer to that will depend
entirely on the restaurateur and his risk tolerance. Speaking of risk, the restaurateur must employ
some risk management in his operation of a business, as will be discussed next.

                                   Risk Management
The restaurateur must consider three factors when considering insurance. First, he must
determine the probability or likelihood of a loss occurring. Second, he needs to quantify the size
of the loss. Third, he must assess whether or not his business could absorb the loss. The losses
that are outside of normal business operations should not be insured. Such losses would include
the breaking of glassware and the like. According to the Entrepreneur Magazine Group, the
following list includes the types of insurance coverage most commonly considered by the
restaurateur as well as a brief description of the coverage (qtd. Illinois Chamber of Commerce
and Community Affairs and Illinois Institute for Rural Affairs 17). Take note that while all these
different types of insurance coverage are listed individually, insurers often offer policies or
packages that provide for comprehensive coverage. For example, the typical Business Owner‟s
Policy provides coverage for both property and general liability.
     “Fire and general property insurance—covering fire losses, vandalism, hail, and wind
     “Plate-glass insurance—covering window damage”
     “Consequential-loss insurance—covering loss of earnings or extra expenses when
        business is suspended due to fire or other catastrophe”
     “Burglary insurance—covering forced entry and theft of merchandise and cash”
     “Fidelity bonding—covering theft by an employee”
     “Fraud insurance—covering counterfeit money, bad checks, and larceny as well as stolen
        credit cards”
     “Public-liability insurance—covering injury to the public such as a customer or
        pedestrian falling on property”
     “Product-liability insurance—covering injury to customers arising from the use of the
        goods purchased through the business”
     “Worker‟s compensation insurance—covering injury to employees at work”
     “Life insurance—covering the life of the owner(s) or key employee(s)”
     “Business-interruption insurance”
     “Malpractice insurance—covering the owner against claims from customers who suffer
        damages as a result of services performed”
     “Errors and omissions insurance—covering the store against claims from customers who
        suffer injury or loss because of errors made, or things that should have been done but
        were not done”
                                                                                                    Brennan 11

                                    Inventory Management

As inventory is a critical aspect of the restaurant business, possibly more so than in most other
retail industries, it is vital for the restaurateur to be prepared to cope with the various issues that
arise. While there is a plethora of inventory issues which the restaurateur must consider, be
aware that only a few are briefly discussed here. Likely the most obvious inventory issue that
the restaurateur must deal with involves perishable goods. Ineffective management that results
in a lower-than-optimal turning of perishable goods can result in large losses for a restaurant.
That is, if perishable goods are not used, they spoil and must be accounted for as waste. On the
alternative end, if not enough inventory is ordered, the restaurant will not be able to serve
customers with the entrees they desire. In turn, many restaurants take a two-prong approach to
inventory control. First, many restaurants are equipped with computer systems that feed point-
of-transaction data into a program that itemizes the approximate amount of each ingredient used
to prepare the meals purchased by customers. These amounts are then deducted from the starting
inventory. Management, in turn, can approximate how much and which inventories need to be
replenished. However, a physical inventory should also be taken. Hence, the second prong. The
physical inventory almost always reveals that not all diminished inventories have been accurately
captured by the computer system. This is likely caused by some combination of three things:
employee theft, waste, and larger- or smaller-than-expected portions of ingredients used in the
preparation of meals. The use of both specialized computer systems and physical inventories can
aid restaurant managers in effectively managing inventory levels3.

                                        Financial Analysis
The Financial Statements.

The Balance Sheet.
Exhibit B in Appendix C shows the compilation of balance sheet data from 689 eating-and-
drinking establishments in year 2000. Note that cash accounts for 12.8%, or the majority, of
current assets, confirming that the restaurant industry is in fact a cash business. “Because
virtually all sales in the restaurant industry are transacted in cash or equivalents like credit cards,
many restaurant companies operate with a negative working capital” (Standard & Poor‟s 17).
Naturally, inventory makes up the next largest portion of current assets. Overall, however, these
establishments‟ assets are largely made up of fixed assets. Eating-and-drinking places are
required to invest into a lot of capital like property and equipment. By looking at the claims-
side, it becomes evident that these establishments tend to be heavily leveraged. It appears that
the largest component of current liabilities is accounts payable, which arise from trade credit
extended by suppliers. Gift certificates sold, too, are recorded as payables. The long-term debt
can be attributed to the financing of big-ticket items like equipment, buildings, and leasehold
improvements. Exhibit C in Appendix C provides balance sheet data for the restaurant industry
in greater detail.

  For example, at McDonald‟s the computer system keeps a perpetual inventory that is trued up by a physical
inventory that is conducted at month-end.
                                                                                          Brennan 12

The Income Statement.
Exhibit D in Appendix C shows a high-level perspective of the restaurant industry‟s income
statement. Note that restaurants spent almost equal amounts on the cost of goods sold (cost of
food and beverages) and employee compensation. Exhibit E paints a similar picture, but breaks
down the various cost items into more detail. Moreover, it shows a pre-tax profit that is
considerably larger than that indicated in Exhibit D. Clearly, the restaurant industry is one in
which margins are slim and, in turn, is highly dependent upon volume.

Exhibits F and G in Appendix C show the restaurant industry‟s key financial ratios. While these
ratios reflect the norms for the industry, it is not practical to expect a start-up restaurant to
achieve the same ratios. Nonetheless, the restaurateur can aspire to achieve such ratios over time
as his business develops and are fairly useful in the benchmarking process.

Short-term Financing.

As shown in Exhibit B in Appendix C, it is not unusual for a restaurant to have negative working
capital. While Exhibit C implies positive working capital, current assets just barely exceed
current liabilities. As such, it is curious to know how restaurateurs are able to cover their current
liabilities. In turn, the focus here is on short-term financing. “An estimated 80% of the fastest
growing companies have been financed solely by founders using personal savings, credit cards,
second mortgages, customer advances, extended terms from vendors, and other creative
bootstrap techniques” (qtd. Illinois Chamber of Commerce and Community Affairs and Illinois
Institute for Rural Affairs 14). This certainly holds true in the restaurant industry. The reason
many restaurateurs have come to depend on bootstrap financing is because many investors,
namely banks, have come to perceive investments in the restaurant industry as highly risky. As
previously mentioned, the success rates for restaurants, in particular start-ups, are poor. As such,
it is very difficult for restaurateurs to receive funds through traditional sources. In turn, it is not
uncommon for restaurateurs to take out short-term loans from family, friends, and colleagues in
lieu of bank financing.

While it is not common for banks to draw loans for start-up restaurants, some do. Such loans,
however, typically have extremely short maturities. Consequently, many restaurateurs turn to
the Small Business Administration for assistance. With an SBA guarantee, most banks are less
reluctant to lend to start-up restaurants and offer more reasonable terms. For example, through
its 7(a) Guaranty Loan Program, the SBA can help restaurateurs finance working capital. The
maximum loan maturity for working capital is generally seven years (SBA “Financing…7a”).
For small loans, deemed to be $150,000 or less by the SBA, the SBA can guarantee up to 85% of
the loan and will charge a guaranty fee equal to 1% of the portion guaranteed (SBA
“Financing…7a”). Additionally, the loan is subject to a 0.5% servicing fee, “which is applied to
the outstanding balance of the SBA‟s guaranteed portion of the loan” (SBA “Financing…7a”).
“Interest rates are negotiated between the borrower and the lender but are subject to SBA
maximums, which are pegged to the Prime Rate” (SBA “Financing…7a”). The table below
summarizes the maximum interest rates that can be charged by loan amount for fixed interest
rate loans with maturities of less than 7 years (SBA “Financing…7a). “Variable rate loans can
be pegged to either the lowest prime rate or the SBA option peg rate”, “which is a weighted
                                                                                       Brennan 13

average of rates the federal government pays for loans with maturities similar to the average
SBA loan” (SBA “Financing…7a”).

Loan Amount                                        Maximum Interest Rate
$25,000 or less                                    Prime + 4.25%
$25,000 - $50,000                                  Prime + 3.25%
$50,000 or more                                    Prime + 2.25%

Besides the 7(a) Guaranty Loan Program, the SBA also offers a LowDoc Loan Program that can
aid the restaurateur finance working capital. This program offers loans limited to $150,000 and a
guaranty of up to 85% (SBA “Financing…LowDoc”). The guaranty fee is 2% of the guaranteed
portion and interest rates follow the 7(a) loan program‟s structure (SBA “Financing…LowDoc”).
Applying for this type of loan over a 7(a), for example, requires significantly less paperwork and
the SBA will respond within 36 hours of receiving a complete application (SBA
“Financing…LowDoc”). To secure this type of loan, the restaurateur “must pledge available
business and personally owned assets” in addition to personally guaranteeing the loan (SBA
“Financing…LowDoc”). The maturity of the loan is determined by the business‟ “ability to
repay” and “the use of the loan proceeds,” but is “generally 5 to 10 years” (SBA

Outside of the restaurateur‟s own contribution, the most common source of short-term financing
for restaurants comes from their suppliers in the form of trade credit. For example, “inventory,
financed from normal trade credit, turns rapidly in the restaurant business. This is also one
reason why its debt levels are relatively low compared with other industries, especially those that
must support high levels of slow-moving inventory, such as retailers” (Standard & Poor‟s 17).
Moreover, “suppliers often give trade credit terms for inventory ranging from 30 to 60 days,
which means that total inventory can turn over as many as 12 times before the first check is sent
to the supplier. Likewise, accrued expenses, such as salaries, taxes, and royalty fees, can also be
6 to 12 times greater than inventory levels. For a typical restaurant operator with accruals and
payables up to 24 times the size of inventory, working capital tends to be negative. It is not
uncommon to see restaurant operators with current ratios of 0.4:1” (Volk 46).

Additionally, “some commercial finance companies…may provide capital because they are
asset-based and focus on a restaurant‟s worth instead of profits. Such finance may include
working capital or even finance equipment purchases and other accounts payable necessities
ranging from glassware to cutting boards” (Letwin 48).

Long-term Financing.

While short-term financing is important, long-term financing is more critical to the restaurant
industry. The principal fact that supports this is the tendency for financiers to match the term of
a loan to the life of the assets for which funds will be used. Since restaurants are heavily
invested in long-term, fixed assets, the bulk of their financing will also be long-term.

Despite their love/hate relationship with the restaurant industry, “banks are the single largest
suppliers of credit” to the industry (Volk 45). Most banks that finance restaurants‟ long-term
                                                                                                        Brennan 14

assets usually require collateral, usually 50% to 80% of the total value of the underlying assets,
or personal guarantees (Gasper, ed. 157). As previously mentioned, a restaurateur who has been
rejected for a traditional commercial bank loan may apply for assistance from the SBA.

As aforementioned, one of the more popular loan programs among restaurateurs offered by the
SBA is its 7(a) Loan Guaranty Program. While “the maximum SBA guarantee to a bank is
limited to $750,000, SBA loan sizes can vary widely from $5,000 to $2 million” (Hedden). In
fact, in 1995, “the SBA guaranteed in excess of 6,000 foodservice loans worth more than $940
million,” with an average loan size of $152,000 (Hedden). It is also the most popular program
for start-up businesses, including franchises (Hedden). Note, however, that just because a loan is
guaranteed by the SBA, the lending bank does not drop collateral and personal guarantee
requirements (Hedden). What a SBA guaranteed loan does allow for is more money to be lent
by the bank, longer terms and approval to less-mature businesses that would otherwise be
rejected (Hedden). SBA guaranteed loans‟ maturities are often determined by the useful life of
the assets financed and are subject to a maximum of 25 years for real estate and equipment (SBA
“Financing…7a”). The guaranty fee4 charged to the borrower is 3% for loans of $150,000 up to
and including $700,000 and 3.5% for loans greater than $700,000 (SBA “Financing…7a”).
These loans are also subject to the same servicing fee previously mentioned. The SBA also has
determined maximum interest rates that can be charged for these loans that mature in 7 years or
longer. The table below summarizes the maximum interest rates that can be charged by loan
amount for fixed interest rate loans with maturities of 7 years or longer (SBA “Financing…7a).
Borrowers may also opt for a variable rate loan as aforementioned.

Loan Amount                                                  Maximum Interest Rate
$25,000 or less                                              Prime + 4.75%
$25,000 - $50,000                                            Prime + 3.75%
$50,000 or more                                              Prime + 2.75%

Aside from its 7(a) program, the SBA also offers a 504 Certified Development Company (CDC)
Loan Program. “This program provides long-term, fixed-rate financing for major fixed assets,
such as purchasing land or buildings, renovating existing facilities, or purchasing long-term
machinery and equipment. The 504 program cannot be used for working capital or inventory,
consolidating or repaying debt, or refinancing” (Panitz).

Some specialty finance companies are also willing to fund long-term restaurant assets, especially
equipment. They also offer lease financing that tends to be capitalized rather than operating
leases as well as real estate financing (Volk 47). Other companies provide sale-leaseback
financing specifically for the restaurant industry (Volk 47).

Irrespective of the external source of funds, borrowers are expected to put a certain amount of
equity into their business. For example, the Vice President of the National Restaurant brokers in
Atlanta, Patrick Silvia, indicates that borrowers must put “a minimum of 10-20% cash” into any
deal in addition to “some kind of personal recourse” (Brooks 28). Mr. Bob Min, second Vice
President of Small Business Banking at First National Bank of Omaha and professor of Small
 Note that the guaranty fee percentage is applied to the outstanding portion of the loan that is guaranteed by the
SBA, just as it is in the case of shorter-term, smaller SBA-guaranteed loans.
                                                                                       Brennan 15

Business Management at Creighton University, indicates that when he considers lending to small
businesses, he likes to see at least 20% of strings-free cash upfront from the owner(s). In turn,
restaurateurs must be able to make a good-sized monetary contribution to the business before he
can seek out external sources of capital.

                              Common Exit Strategies

Unfortunately, the most common exit strategy for restaurateurs is bankruptcy. As reiterated
throughout this paper, the prospects of success in the restaurant industry are not bright. As such,
many restaurateurs find themselves unable to service their large debts and determine that their
only way out is to seek bankruptcy protection. This tendency reinforces banks‟ reluctance to
lend to restaurants at all, let alone on unfavorable terms. For example, consider the table below,
which summarizes the cumulative defaults of the restaurant industry by segment (Brooks 29).

Restaurant Industry Segment                        Cumulative Defaults
Quick service                                      41%
Convenience & Gas                                  27%
Other                                              19%
Casual Dining                                      7%
Independents                                       4%
Other                                              2%

When a restaurant proves to be successful, however, the restaurateur may want to expand. To
finance such expansion, the restaurateur‟s financing options grow. For example, the restaurateur
may possibly attract business angels or venture capitalists to make capital investments into his
business. However, as some restaurateurs have come to dub such investors as “vulture
capitalists,” a private placement or public offering might be a more attractive option (Belman).
One restaurant analyst states that there are only two strong reasons for a restaurant company to
go public: to raise capital or for liquidity reasons (Belman). In the early 1990s, restaurant IPOs
surged and included such companies as Boston Chicken, Schlotzsky‟s, Lone Star, and Outback
Steakhouse (Belman). However, “the weak performance of restaurant stocks in 1994 and 1995
curtailed recent IPO activity in the industry” (qtd. Belman). Even still, it is often the case that
business angels or venture capitalists are necessary to finance the preparation of either a private
placement or public offering and, in turn, are virtually unavoidable.

One restaurateur, on the other hand, discussed his experience putting together his own stock
offering (Belman). “He spent three years researching a little-known program called the
Securities Corporate Offering Registration (SCOR), which is designed to help small companies
raise capital through small, public securities sale” (Belman). So, “between the hot sauce and the
sugar packets,” he put out “table tents offering $1 million worth of class A common stock to
finance a second restaurant” and “to make the stock more attractive,” he “offered dividends in
kind to any investor” (Belman). That is, he offered a 4% discount on a customer‟s check if
he/she bought $500 worth of shares and an 8% discount if he/she bought $1,000 worth (qtd.
Belman). Additionally, “shareholders got preferential seating, their name on the front door,
[and] all those little ego things that go along with owning part of a restaurant” (qtd. Belman).
Initially, the restaurateur had almost 1,000 people ask for prospectuses, but he only ended up
                                                                                       Brennan 16

raising $50,000 (Belman). The biggest drawback of a SCOR is the absence of a secondary
market and some investors require some liquidity (Belman).

Moreover, as a result of the SEC‟s relaxation of regulations that restricted companies from
selling stock directly customers, the practice has grown. For example, Bob Evans Farms was
one of the first restaurants to offer the option (Belman). In the first year that the option was
offered, 9,000 to 10,000 people bought the company‟s stock through the plan (Belman).
McDonald‟s, too, has a similar direct stock purchase program called McDirect Shares (Belman).
While “no more than 80 companies currently offer a no-fee direct stock-purchase plan,” the
number is expected to grow (qtd. Belman).

While an array of topics has been addressed here, this discussion has merely scraped the surface
of what a restaurateur needs to know in order to start-up and manage a successful restaurant. It
would be in the best interests of the restaurateur to obtain additional, detailed information from
the trade publications and professional associations tied to the industry, as indicated at the onset
of this paper. While starting up a restaurant can be costly, typically ranging from $250,000 to
$500,000, certain trends that prevail in the industry indicate that many opportunities exist for the
restaurateur. The restaurateur, however, can expect some challenges, like recruiting, training and
retaining employees, offsetting the effects of current economic slowdown, obtaining reasonably-
termed external financing, and beating the odds of the high failure rates that characterize the
industry. The restaurateur will also be called upon to make critical decisions that have ethical
implications, manage the risk structure of his business, and establish effective inventory controls.
Financial analysis of the industry has revealed that it is a cash business that is highly dependent
on trade credit from suppliers as well as bootstrapping for short-term financing. Additionally, it
is a capital-intensive business that requires large dollar investments in property, building and
equipment, for which debt financing is needed. Since a restaurant has mostly fixed assets, as
aforementioned, the bulk of its debt is long-term. While banks and other traditional sources of
financing are weary about lending to restaurants because of their marked failure rates, they
nonetheless provide financing to restaurants under the condition that loans are secured with a
large percentage of the underlying assets, the restaurateurs personally guarantee the loans and,
often times, are guaranteed by the Small Business Administration. If the restaurateur is
successful in his entrepreneurial venture, he may seek to expand his operations. To finance such
expansion, he can consider investments from business angels or venture capitalists, or can raise
capital through a private placement or public offering. Unfortunately, the majority of
restaurateurs are unsuccessful and accumulate so much debt that it becomes unserviceable,
forcing the business to exit via bankruptcy.
                                                                      Brennan 17

                                        Appendix A
            Professional Restaurant Associations’ Website Addresses

National Restaurant Association (NRA)

National Restaurant Association Educational Foundation (NRAEF)

State Restaurant Associations

Nebraska Restaurant Association

American Culinary Federation (ACF)

International Association of Culinary Professionals (IACP)

National Bar & Restaurant Association

American Institute of Wine and Food (AIWF)

International Hotel & Restaurant Association (IH&RA)

Links to Specialty Organizations & Associations
                                                                     Brennan 18

                                     Appendix B
                  On-line Trade Publications’ Website Addresses

Restaurants USA

Nation’s Restaurant News

Restaurant Hospitality

Restaurants & Institutions

Cornell Hotel & Restaurant Administration Quarterly

Food Review

Legal Monitor

Links to Specialty Publications
                                                                                               Brennan 19

                                                                Appendix C
                                                           Supporting Materials

                                                                  Figure 1

                                    Total Spending on Food Away from Home by Household
                                                  Income Before Taxes, 2000

                                  Less than $5,000         2%
         Pre-Tax Income Bracket

                                    $5,000 - $9,999        3%
                                  $10,000 - $14,999         4%
                                  $15,000 - $19,999         4%
                                  $20,000 - $29,999                   11%
                                  $30,000 - $39,999               11%
                                  $40,000 - $49,999               11%
                                  $50,000 - $69,999                         18%
                                         $70,000 +                                      36%

                                                      0%        10%         20%   30%   40%
                                               % of Total Spending on Food Away from Food

Source: Ebbin, Robert. “Midwest Tops in Restaurant Spending.” Restaurants USA. July 11, 2002. Available: Last Accessed: October 7, 2002.
                                                                                                    Brennan 20

                                                    Table 1

                              Top Challenges Expected by Operators in 2002

   Top Challenges                                  Quick                Full Service Operators
                                                  Service                 Average Check Size
                                                Operators            <$8      $8-$14 $15-$24             $25+
    The Economy/Recession                               12%         16%         21%        27%           36%
    Maintaining Volume of Business                      14%         16%         17%        16%           22%
    Recruiting and Retaining Employees                  33%         23%         14%        13%           14%
    Competition                                          5%         11%          9%        11%            9%
    Higher Cost of Doing Business                        3%         11%         13%         8%            2%
    Other                                               33%         23%         26%        25%           17%
Source: National Restaurant Association. “2002 Restaurant Industry Forecast: Overview.” Available: Last Accessed: October 7, 2002.

                                                   Exhibit A

                                          Restaurant Start-up Costs

                         Rent                                   Low          High
                         Initial Inventory                      $ 4,250      $ 102,000
                         Equipment/Fixtures                        10,648       76,395
                         Leasehold Improvements                    55,749      138,511
                         Licenses/Tax Deposits                     16,700       31,250
                         Phone/Utilities Deposits                     150          300
                         Owner/Manager                                  50         350
                         Employees                                  4,200        5,000
                         Grand Opening Advertising                  7,600       77,500
                         Legal Services                             1,800       16,169
                         Accounting                                   672          300
                         Insurance                                    -          1,500
                         Miscellaneous                              1,794        5,100
                         Total Costs                                  300          500
                                                                $ 103,913    $ 454,875

                          Suggested Operating Capital             $ 47,782 $ 477,468
Source: Illinois Chamber of Commerce and Community Affairs and Illinois Institute for Rural Affairs. “Restaurant
Start-up Profile.” p. 10. Available: Last Accessed:
November 21, 2002.
                                                                                                Brennan 21

                                                 Exhibit B

                                                 SIC 58
                                        Eating & Drinking Places
                                               Year 2000
                                          689 Establishments
                                      Common-Size Balance Sheet

                       Cash                                         $167,790       12.8%
                       Accounts Receivable                           64,232            4.9
                       Notes Receivable                               9,176            0.7
                       Inventory                                     87,827            6.7
                       Other Current Assets                          78,652            6.0
                       Total Current Assets                         407,677           31.1
                       Fixed Assets                                 713,106           54.4
                       Other Non-Current Assets                     190,074           14.5
                       Total Assets                               1,310,857         100.0
                       Accounts Payable                             142,883           10.9
                       Bank Loans                                     5,243            0.4
                       Notes Payable                                 78,651            6.0
                       Other Current Liabilities                    291,012           22.2
                       Total Current Liabilities                    517,789           39.5
                       Other Long-Term Debt                         437,825           33.4
                       Deferred Credits                               2,622            0.2
                       Net Worth                                    352,621           26.9
                       Total Liabilities & Net Worth              1,310,857         100.0
                       Net Sales                                  3,562,111         100.0
                       Gross Profit                               2,055,338           57.7
                       Net Profit After Tax                         117,550            3.3
                       Working Capital                             (110,112)       ---
Source: Industry and Financial Consulting Services. “SIC 58 Eating & Drinking Places.” Industry Norms & Key
Business Ratios. Desktop Ed. 2000-2001. New Jersey: Dun and Bradstreet, 2001, p. 146.
                                                                                                    Brennan 22

                                                   Exhibit C

                    Balance Sheet Data for Eating and Drinking Places--SIC No. 5812S

                                                                 Average Dollars As Percent of Total Assets
     Cash and Equivalents                                                  31,377                           9.50%
     A/R--Trade                                                             5,651                           1.70%
     Inventory                                                             20,343                           6.20%
     All Other Current                                                     30,243                           9.20%
 Total Current                                                             87,614                          26.60%
     Fixed Assets (net)                                                   214,214                          65.10%
     Joint Ventures and Investment                                          1,505                           0.50%
     Intangibles (net)                                                      9,050                           2.70%
     All Other Non-Current                                                 16,832                           5.10%
Total Assets                                                              329,215                         100.00%

       Notes Payable--Short Term                                           18,938                           5.80%
       Current Matured Long Term Debt                                      14,832                           4.50%
       A/P--Trade                                                          24,329                           7.40%
       Income Taxes Payable                                                 1,508                           0.50%
       All Other Current                                                   21,638                           6.60%
  Total Current                                                            81,245                          24.70%
       Long Term Debt                                                     162,679                          49.40%
       Deferred Taxes                                                       2,585                           0.80%
       All Other Non-Current                                                9,793                           3.00%
       Net Worth                                                           72,913                          22.10%
Total Liablilities and Net Worth                                          329,215                         100.00%

Source: Illinois Chamber of Commerce and Community Affairs and Illinois Institute for Rural Affairs. “Restaurant
Start-up Profile.” p. 39. Available: Last Accessed:
November 21, 2002.

                                                   Exhibit D
                                       The Restaurant Industry Dollar

                                                     Full Service          Limited Service
                  Where It Came From
                    Sales                                           100%             100%

                   Where It Went
                       Cost of Food Sold              $             0.27 $               0.32
                       Cost of Beverages Sold         $             0.07 $               0.03
                       Salaries and Wages             $             0.31 $               0.29
                       Employee Benefits              $             0.04 $               0.02
                       Restaurant Occupancy Costs $                 0.06 $               0.06
                       Other                          $             0.19 $               0.23
                           Pre-Tax Income             $             0.06 $               0.05
Source: National Restaurant Association. “Operating Ratios: The Restaurant Industry Dollar.” Available: Last Accessed: November 25, 2002.
                                                                                                   Brennan 23

                                                   Exhibit E

                       Income Data for Eating and Drinking Places--SIC No. 5812S

                                                                          As Percent of
                                                          Average Dollars Total Sales

                  Sales/Revenue                                    855,908           100.00%

                  Variable Disbursements
                  COGS                                             311,139             36.40%
                  Advertising                                       21,474              2.50%
                  Bad Debts                                            122              0.00%
                  Car/Delivery                                       2,057              0.20%
                  Commissions                                          863              0.10%
                  Freight                                               48              0.00%
                  Taxes/Licenses                                    14,395              1.70%
                  Travel and Entertainment                           3,346              0.40%
                  Total Variable Disbursements                     353,445             41.30%

                  Contribution                                     502,463             58.70%

                  Fixed Disbursements
                  Bank Services Charges                              1,220              0.10%
                  Amortization of Intangibles                        4,657              0.50%
                  Depreciation/Depletion                            24,829              2.90%
                  Dues and Publications                                445              0.10%
                  Employee Benefit Program                           4,661              0.50%
                  Insurance                                         12,444              1.50%
                  Laundry and Cleaning                               3,757              0.40%
                  Leased Equipment                                   2,618              0.30%
                  Legal/Professional                                 5,519              0.60%
                  Office Expenses                                    1,895              0.20%
                  Outside Labor                                      2,075              0.20%
                  Pension/P.S./Payroll Taxes                        20,295              2.40%
                  Rent                                              36,971              4.30%
                  Repairs and Maitenance                            14,234              1.70%
                  Supplies, Operating                               12,005              1.40%
                  Utilities                                         29,710              3.50%
                  Salaries--Officers                                32,400              3.80%
                  Payroll                                          206,050             24.10%
                  Interest                                          13,696              1.60%
                  Miscellaneous Expenses/Income                     59,602              7.00%
                  Total Fixed Disbursements                        489,082             57.10%
                  Pretax Profit                                     13,381              1.60%

                   Dollar Sales Breakeven                            833,113
Source: Illinois Chamber of Commerce and Community Affairs and Illinois Institute for Rural Affairs. “Restaurant
Start-up Profile.” p. 41. Available: Last Accessed:
November 21, 2002.
                                                                                                Brennan 24

                                                 Exhibit F

                                                   SIC 58
                                          Eating & Drinking Places
                                                 Year 2000
                                            689 Establishments

                                                    Upper Quotient Median         Lower Quotient
          Quick Ratio (times)                                     1.1       0.5                0.2
          Current Ratio (times)                                   2.0       1.0                0.5
          Current Liabilities to Net Worth (%)                   24.5      50.2              117.8
          Current Liabilities to Inventory (%)                  274.9     669.9              999.9
          Total Liabilities to Net Worth (%)                     44.1     112.3              291.4
          Fixed Assets to Net Worth (%)                          63.3     116.6              205.3

          Collection Period (days)                                0.7       2.9                11.0
          Sales to Inventory (times)                            113.4      81.6                42.5
          Assets to Sales (%)                                    22.5      36.8                62.5
          Sales to Net Working Capital (times)                   41.8      18.5                 9.4
          Accounts Payable to Sales (%)                           1.9       3.1                 4.8

          Return on Sales (%)                                       6.5       2.6                 0.3
          Return on Assets (%)                                     18.0       5.9                 0.5
          Return on Net Worth (%)                                  51.4      15.7                 4.0
Source: Industry and Financial Consulting Services. “SIC 58 Eating & Drinking Places.” Industry Norms & Key
Business Ratios. Desktop Ed. 2000-2001. New Jersey: Dun and Bradstreet, 2001, p. 146.
                                                                                                   Brennan 25

                                                  Exhibit G

                          Ratios for Eating and Drinking Places--SIC No. 5812S

                       Liquidity Ratios
                       Current Ratio                                                  1.1
                       Quick Ratio                                                    0.5
                       Sales/Receivables                                            151.5
                          Days' Receivables                                           2.4
                       Cost of Sales/Inventory                                       15.3
                          Days' Inventory                                            23.9
                       Cost of Sales/Payables                                        12.8
                          Days' Payables                                             28.5
                       Sales/Working Capital                                        134.4
                          Days' Working Capital                                       2.7

                       Coverage Ratios
                       Earnings Before Interest and Taxes/Interest                     2.0
                       Cash Flow/Current Maturity Long Term Debt                       2.9

                       Leverage Ratios
                       Fixed Assets/Tangible Net Worth                                 3.4
                       Total Liabilities/Tangible Net Worth                            4.0

                        Operating Ratios
                        Percent Profit Before Taxes/Tangible Net Worth                  21.0
                        Percent Profit Before Taxes/Total Assets                         4.1
                        Sales/Net Fixed Assets                                           4.0
                        Sales/Total Assets                                               2.6
Source: Illinois Chamber of Commerce and Community Affairs and Illinois Institute for Rural Affairs. “Restaurant
Start-up Profile.” p. 40. Available: Last Accessed:
November 21, 2002.
                                                                                                                  Brennan 26

                                                  Appendix D
                                       Comparison of Legal Structures

              Sole             General          Limited Partnership    LLC                S-Corp             C-Corp
              Proprietorship   Partnership
Creation      No legal         Informal or     Must be permitted       Must be            Must be            Must be
              formalities.     formal          by state law. Must      permitted by       permitted by       permitted by
                               agreement       file a certificate of   state law. Must    state law. Must    state law. Must
                               between 2 or    limited partnership.    file Articles of   file Articles of   file Articles of
                               more people.    Requires an             Organization       Incorporation.     Organization
                                               agreement between                          Must file form
                                               2 or more people                           2553 w/ IRS.
                                               (must have a least
                                               one limited partner
                                               and one general
Profits and   Owner entitled   Determined by General partners          Determined by      Shareholders       Shareholders not
Losses        to all.          agreement. In share by agreement.       Operating          entitled to        entitled to use
                               absence of an Limited partners          Agreement.         proportionate      corporate losses.
                               agreement,      share profits by                           share of losses
                               partners share agreement and                               but limited to the
                               profits and     share losses only up                       extent of the
                               losses equally. to their capital                           shareholder‟s
                                               contribution.                              basis in the
                                                                                                                   Brennan 27

Liability   Unlimited.         Unlimited.        General partners       Liable up to the  Shareholders        Shareholders
                                                 have unlimited.        amount of their   liable up to the    liable up to the
                                                 Limited partners are   investment in the amount of their     amount of their
                                                 liable up to the       company.          investment in the   investment in the
                                                 amount of their        Members and       company.            company.
                                                 investment in the      managers have     Shareholders        Shareholders
                                                 company.               NO personal       have NO             have NO
                                                                        liability.        personal            personal
                                                                                          liability. Must     liability.
                                                                                          file form 2553
                                                                                          with IRS.
Capital &   Capital belongs    Contributions     Set by agreement       Set by            Issuance of         Issuance of
Financing   to sole            set by            (may be cash,          agreement (may stocks; personal       equity securities
            proprietor and     agreement         property or            be cash, property loans, bank         (stocks);
            all loans are      (may be cash,     services); personal    or services);     loans.              issuance of debt
            obtained on the    property or       loans, bank loans.     personal loans,                       securities
            creditworthiness   services);                               bank loans.                           (bonds);
            of owner.          personal loans,                                                                personal loans,
                               bank loans.                                                                    bank loans.
Duration    Ends when          By agreement;     General partners: by   By Articles of    May be              May be
            owner dies or      can be            agreement and by       Organization (set perpetual.          perpetual.
            retires.           dissolved by:     withdrawal, death      date, set
                               1. action of a    or insanity of         dissolution
                               partner (e.g.     general partner.       dates). In some
                               withdrawal)       Limited partners‟      states, duration
                               2. operation of   death or withdrawal    may now be
                               law (e.g. death   does not end the       perpetual.
                               or bankruptcy)    partnership unless
                               3. court decree   he/she is the only
                                                 limited partner.
                                                                                                                                              Brennan 28

Transfer of           Asset may be          Partnership         Partnership interest       Members must          Ownership              Ownership
Ownership             sold in entirety      interest (with      (with full rights)         consent to            interests are          interests are
                      of in part, but       full rights)        may only be                transfer              freely                 freely
                      either result in a    may only be         transferred upon           ownership             transferable but       transferable.
                      new entity.           transferred         consent of all             interests.            must keep in           Subject to
                                            upon consent        partners.                  Subject to            mind IRS               restrictions in
                                            of all partners.    Partnership interest       restriction in the    requirements for       Articles of
                                                                of limited partner         Articles of           retaining S-Corp       Incorporation
                                                                can be freely              Organization and      status. Subject        and Bylaws.
                                                                transferable but           Operating             to restrictions in
                                                                usually is restricted.     Agreement.            Articles of
                                                                                                                 and Bylaws.
Management and Vested in                    Each partner        Mgmt is centralized        Mgmt may be           Mgmt is vested         Mgmt is vested
Control        proprietor.                  has a right of      in the general             vested in the         in the board of        in the board of
                                            mgmt which          partner. Limited           members or the        directors and in       directors and in
                                            can be waived       partners may not           managers.             corporate              corporate
                                            or limited by       participate in mgmt                              officers.              officers.
                                            agreement of        and risk loss of
                                            the partners.       liability protection
                                                                if they do.
Taxation              Business              An                  An informational           An informational      An informational       The corporation
                      doesn‟t file or       informational       tax return must be         tax return must       tax return must        must file a return
                      pay taxes.            tax return          filed, but the entity      be filed, but the     be filed, but the      and must pay
                                            must be filed,      itself does not pay        entity itself does    entity itself does     taxes on
                                            but the entity      taxes.                     not pay taxes.        not pay taxes.         corporate
                                            itself does not                                                                             income. The
                                            pay taxes.                                                                                  individual
                                                                                                                                        shareholders also
                                                                                                                                        pay taxes on
Source: Business Nation. “Business Structure and Entity Comparison Tables.” Available:
finder_html.cgi?query=101-entitycompare.html&title=business%20structure%20and%20entity%20comparison%20tables&ID=122&keyword=llc. Last
Accessed: October 5, 2002.
                                                                                   Brennan 29

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