From the July 2001 issue of Entrepreneur

To grow HeartWise, her Chicago restaurant, into a nationally recognized chain, Rosemary Deahl must first deal with the sad memories of once-hopeful restaurateurs who tried and failed to turn their concepts into nationwide success. Deahl's goals may be lofty, but she's certain her restaurant's healthy, high-quality fast food has the right combination to avoid the fate of similarly structured concepts hurt by rapid growth and weak corporate infrastructure.

When Deahl and her management team first sought financing, they approached angel investors and noted Chicago restaurant consultants, who liked the concept but questioned its national appeal. Undaunted, Deahl is now trying her luck with the venture capital market, but she's finding the going is tough there, too.

To attract the funding that's eluded her so far, Deahl's business needs to be in tip-top shape. So we at Entrepreneur sought the advice of two experts who pointed out those stubborn areas that need help. Izzy Kharasch owns Hospitality Works, a restaurant consulting firm in Lincolnwood, Illinois. Rod Guinn is a senior banker for the Restaurant Group with FleetBoston Financial in Boston. While both agree Deahl's concept has significant growth potential and say HeartWise's profitable operating model is especially inviting, their trained eyes have found a few trouble spots.

What's Wrong

The area both consultants explored was profitability. "[Deahl's] $50,000 profit represents about 4.7 percent profitability," says Kharasch. "It's possible with the current numbers and operations to double [that figure]."

Unfortunately, the company faces three cash-flow constraints. First, rent eats up 16 to 17 percent of profits. That's a big cut of the take, but nothing can be done about the high cost of commercial space except move, and that would cost customer loyalty. Luckily, the other problems have workable solutions.

The second obstacle is HeartWise's operating hours: weekdays 6 a.m. to 5 p.m. At Guinn's suggestion that she try to capture dinner takeout business, Deahl says she tried staying open an hour later, but it wasn't cost-effective. Now she and her team are exploring the possibility of prepackaged meals.

Third, the restaurant is at capacity in terms of the number of customers it can efficiently serve. But that doesn't mean it's at capacity in terms of how many sales it can make. Kharasch felt cashiers weren't upselling enough and confusing customer traffic patterns might be costing Deahl potential return customers. "You had a great chocolate cupcake but nobody offered it, and we were out of line by the time I saw it," he comments, "but if you could increase each order 25 cents a day, it would add $9,000 profit annually."

Righting It

Even if HeartWise manages to gather a bigger helping of profits, is approaching VCs the best way to look for funding? "There are advantages to going to venture capitalists," says Kharasch, noting that VCs are willing to take bigger risks-a plus in an industry considered high risk by any standard. "But often, they'll take more than 51 percent ownership." VCs could conceivably fire all the partners, leaving Deahl without a business or the opportunity to recoup her investment. She would have to seriously ask herself whether she's willing to give up that much ownership in an opportunity that she's already put so much of her life and money into.

Deahl is also caught in the Catch 22 of needing funding to grow in an industry where the money goes to those who already have some experience with expansion. "Venture capitalists have a different take on restaurant and retail investments," says Guinn. "For technology and products, they tend to believe the appropriate time for investment is at the drawing-board stage. For retail and restaurants, [they] prefer more of a track record, [which] can range from five to 30 stores to operations in three different geographic locations."

So how can Deahl get the money to build HeartWise to the five stores she needs to attract venture capitalists? Guinn suggests she hit up angels again, but he adds one tip: Go to people who know the business. Investors not familiar with typical restaurant profit margins may not discern the potential in HeartWise's model. Guinn says, "[Approach] somebody successful in the restaurant industry, whether they're retired and wishing they had a new brand to play with or still operating a restaurant chain but looking for another place to play."

Guinn suggests that Deahl look for angels at restaurant conferences. "Walk around, shake hands, and carry a one-pager about your business," he says. "The goal is, for every 15 people you annoy, one will take you seriously." He points to investor funds as another option. Capital Across America and Isabella Capital help women-owned firms.

Kharasch told Deahl one possible angel is sitting right in HeartWise's store. "You have Seattle's Best signage in the store," he says. "I [might] approach them about some type of partnership or being a participant in opening other stores, once the concept is where you want it. Look at them as a potential investor."

Regardless of where Deahl looks for money, what's most important is proving investors can get a good return from her company. "If you were my client," Kharasch advises her, "our goal would be to have a well-oiled machine."

Who: Rosemary Deahl, 47, founder and CEO
What: HeartWise Express, a Chicago restaurant that touts high-quality fast food, opened in 1996.
Money Matters: Deahl wants to expand from a single restaurant into a national chain. She seeks $5 million to develop up to eight stores that will serve as a springboard for future growth.
The Numbers: 2000 revenues: $1 million. 2000 profit: $50,000. Projected annual growth: 4 percent. Deahl and her husband, David, have invested $2.5 million of their own money in HeartWise.


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