Good Morning Asheesh,

I have a successful 3 year old restaurant business with 5 locations and a management company; gross sales between $5M and $5.5M and growing 8 to 12 % annually. I am carrying about $740,000 in debt on (2) 7 year SBA 7a loans at 2.5 over prime and a private finance deal at 6% for about $160k.

Net cash flow is about $500,000. So far I have opened a new location every year at a cost of ~$400K.

What do you think about my debt structure. Should I start paying down aggressively and slow down growth for a couple of years or is the debt load acceptable and I should concentrate on accumulating assets using moderate debt financing?

I am 46 with no retirement plans and only very moderate mortgage debt.

• aadvani (Apr 9, 2007 8:12 am)

I look forward to answering your questions this week. Start-up financing is a topic that is near and dear to me, having raised money to launch CircleLending (www.circlelending.com) from almost every type of investor under the sun! I have been so engrossed in this topic that I ended up writing a book of topic of raising capital, entitled Investors in Your Backyard (Nolo Press, www.nolo.com). I hope that I can share some useful information with you this week that will be help you succeed.

Your question is best answered by assessing your risk profile. Your debt servicing costs are low enough that your cash flow apparently gives you sufficient cushion to make your payments and leave enough left over to finance your expansion. But the restaurant business is notoriously fickle. If your risk profile makes you want to hedge your bets, pay down your debt and lower your payments to weather a future downturn. Since you have been successful in growing your business to 5 locations in 3 years, you appear to have the skills and ambition to grow rapidly. If your tolerance for risk is as aggressive as your recent growth, then I see know reason to pay down your debt unless your next few locations are more capital intensive or less attractive than your previous locations.

Hi Asheesh I was wondering, are there advantages/disadvantages to using a home equity loan account to help manage cash flow for a very small 1-person LLC run out of the home?

It seems the loan, if used for and paid for exclusively by the business, can be attributed to the business for tax purposes per a certain tax fed loophole.

The disadvantages I can see are obviously putting the home at risk if the business fails and lack of use of that home equity for other purposes.

Any thoughts/opinions on this cash flow assistance method?

• aadvani (Apr 10, 2007 9:29 am)

Using a HELOC is not at all uncommon as a way to smooth the bumpy road of small business cash flow. Along with loans from relative and friends, and credit card debt, a HELOC is a frequent solution to a cash flow problem.

Pros
-Great flexibility, you get what you need, when you need it and repay the line according to your business’ cash flow.
-Quick and cheap to get, with low set-up costs/application fees.
-Interest rate may be lower than other forms of consumer and small business credit, like credit cards or microloans.
-Interest paid may be tax deductible.

Cons
-Your home could be in jeopardy if things don’t go well with your business. Make sure you (and your family) are comfortable with the risk.
-The rate is pegged to prime. HELOC rates are about 7-8% now, pretty good for small business credit, but unless you find a hybrid with a fixed rate, you’re at the mercy of the Fed.

Good morning,
I own a small screen printing company. There is a golden opportunity for me to purchase a year-old apparel company that has so far, sold exclusively online. The owner has had dozens of requests from retail stores wanting to carry his clothing, including national chains, but he is too busy with other projects and wants someone to buy and expand it.

The problem is finding an investor for startup costs. I can't qualify for a large enough loan, and if an investor wants to valuate this business according to a P&L sheet, the asking price seems too high. They have made money, but little more than their startup costs. It's real value is how celebrity endorsements have created a huge market demand. The current owner knows many famous musicians, comedians and artists who all wear his clothes on stage and TV. We share the same vision and agree that I'm the right person to take this brand national, but I can't afford both his asking price nor startup/expansion costs.

How can I show an investor how valuable this opportunity is when "the numbers" don't necessarily add up? How do you put a value on an endorsement?
Thank you,
Tom

• aadvani (Apr 10, 2007 2:33 pm)

The accounting term for what you’re talking about is “goodwill.” When intangible assets like reputation, personal contacts, endorsements or a strong brand provide a company a competitive advantage, the difference between the tangible assets and the valuation shows up on the company balance sheet as goodwill.

Typically the only time goodwill is really valued is during an acquisition, as the difference between the tangible assets and the purchase price of the company.

To get potential business angels or family investors to adequately value the owner’s personal contacts and endorsement will probably take significant selling and strong personal relationships on your part. One thing you can do is to get letters of intent or even contracts from some of the prospective buyers to prove the “huge market demand” and “dozens of requests”.