Fergus and Freya Eneas have owned Gregory’s Greek Restaurant for over thirty years in Gregory town, a small scenic town in the country. The restaurant overlooks a river and offers visitors a lovely view of the countryside. Over the years, the restaurant’s popularity has grown through word-of-mouth advertising, and now guests often wait up to two hours on the weekend before being seated. Fergus and Freya have been approached by Divina Developers, which wants to use the Gregory’s Greek Restaurant concept in a mixed-use development it is putting together. It seems that one of Divina’s managers ate at Gregory’s and loved the concept. Divina Developers put together an investment proposal for Fergus and Freya requesting to use their concept and cash equity for the deal. The following are excerpts from the offer sent by Divina: ■ Use of the Gregory’s Greek Restaurant name in exchange for limited partnership units in the new restaurant. ■ A request for a 45% equity investment from Fergus and Freya on the total project cost of $3,000,000. In return for their investment, they will receive 25% ownership and 25% of all cash flows, with Divina reserving 75%. ■ With an estimated $175,000 in cash flows in Year 1 and a 10% growth rate over the next decade, the return on equity looks very promising. ■ Divina Developers, as the general partner, will retain all operating rights, including the right to decide when the restaurant and property will be sold. 1. Identify and explain the positive and negative aspects of the proposed business entity for Fergus and Freya. 2. Calculate the IRR for this project based on a sale in Year 6 with a 10% cap rate. 3. Analyze the structure of the equity proposal. If you were Fergus and Freya, would you accept this offer as it stands? If not, what would you negotiate?

 

Your investment package should answer the following questions that lenders are most interested in: 1. How strong is the project, and is it really feasible? ■ Your business plan, story, and feasibility study must be persuasive and confirmed by a credible third-party source. 2. Is the project team really qualified? ■ The credentials of your team must be outstanding. If you are attempting to finance a start-up business and your management team lacks experience, make sure you surround yourself with seasoned professionals and reward them well. Your investment in their talents will serve you well on later deals and help you establish a favorable track record for your company. 3. What is the risk of the venture failing? ■ Lending is all about risk, so don’t ignore it. You must clearly state what the risks of the proposed project are and how you plan to minimize them. ■ Risk can be minimized by providing additional collateral, personal guarantees, or, more preferably, by showing the lender that it is a conservative loan with low loan-to-cost and loan-to-value ratios, a high debt service coverage ratio, and that the loan can easily be paid back out of future cash flows.