Question

In: Accounting

Let’s imagine a good friend of yours started a restaurant and wants you to invest a...

Let’s imagine a good friend of yours started a restaurant and wants you to invest a significant amount of money in his/her business.

1. Which financial statement(s) that were introduced in Chapter 1 Accounting and the Business Environment would be relevant to your decision making and why?

2.You are also given a chance to ask his/her accountant three questions to help you make the decision. What would you ask and why?

Solutions

Expert Solution

  • The creator of a start-up requires an innovative bent of mind to develop various aspects of the business including the menu, service style, ambience, value proposition, business model etc.
  • Managing the restaurant requires a different sort of skill, one more oriented towards the day to day activities of the restaurant, its people, and efficiency in its operational systems.
  • Financing the business requires an understanding of the monetary deployment of resources, their effective focus and potential return backed by an appetite for proportionate risk.
  • It’s not often that the first two abilities exist in one promoter and even more rare for one promoter to have all three. It is important to recognize the presence or absence of these skills within oneself and either collaborate with other promoters accordingly, or develop the missing abilities within oneself.

    If more than one promoter is involved, one needs to work out a fair allocation of shareholding that reflects their respective contributions to the business. There is no set norm for such allocation. It all depends on the individual needs and the value (real or perceived) that they bring to the business.

    For instance, in exchange for the time invested by a promoter, he may be compensated by way of sweat equity. This equity may be in addition to a basic salary or just by itself. The sweat equity earning partner may invest some money into the firm or he may not. It all depends on the agreement between the promoters. I have seen sweat equity compensation vary hugely and on occasion go up to as much as 50% of shareholding without any financial investment on the part of this partner.

    Regardless of whether it’s one promoter or more, everyone wants to know what kind of return they may expect on their investment. Unfortunately, here lies one of the biggest myths of the restaurant business.


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