Introduction to modelling

- Building a quick service

restaurant franchise model
Recap: What is a financial model

A numerical of some (or all) of an entity’s

representation financial aspects operations

Ø It is a data-driven planning tool for making a financial decision.

How is it made
Ø It is made with the help of a spreadsheet or a dedicated financial software

Simple example of a model to estimate

monthly savings of an entity
Recap: What a “good” model should aim for

• Assumptions behind the model should be realistic

Realistic • Else “Garbage in Garbage Out”

• Careless errors can lead to erroneous financial decisions

Error-free • Avoid “bad habits” when creating models

• Changes in assumptions are inevitable in todays world

Flexible • Model should allow any level of change to be factored

• Changing an input should visibly result in output change

Easy to use • Keep notes to prevent losing control over your model

• Others should also be able to use your model

Self-explanatory • Acid test is if they can do so without your guidance
Building a model for a Franchisee
Ø The Franchisee route is a very popular business model across the globe

Ø In this route, an investor chooses to partake of an existing brand rather than build
(or buy) a brand
Ø Franchisee gets rights to sell the products or services of the Franchisor (the Licensor)
Ø Popular sectors for franchises are fast-food, auto, petrol, fitness etc

Ø Acquiring a franchise requires upfront investment of money, time and talent

Ø On the plus side, sales usually starts almost immediately due to established brand

Ø Valuation plays a large role in understanding

Ø how attractive a new franchisee opportunity is for a new investor
Ø whether an existing franchise is undervalued
Ø and thus can be turned around by someone who better understands the sector operations
Build a financial model
Ø You have defined the following steps to build a model

Define
assumptions

4. BS, CFS
Get revenue and
Statement
cost data
Forecast

1. EBITDA
3. PAT Forecast
Forecast

2. EBIT Forecast
Build a financial model
Ø You have to take assumptions in the order as per the steps
Ø As the first step is EBITDA forecast

You will be required to take assumptions related to Revenue and Operating expenses

Consider a hypothetical scenario of a franchise

McDesi

This is a quick service restaurant. So think about the revenue.

(Check for revenue assumptions on the next slide)

Build a financial model
Ø Revenue Assumptions : Take it in your excel sheet and model revenue for first year

Estimate Of Business
Number of Units Sold /
Products Price Commission (%)
month

Mc Potato 30000 150 6%

Mc Bhajjia 20000 180 8%
Mc Nugget 15000 220 9%
Sides 45000 100 12%
Value meal 1 45000 250 6%
Value meal 2 28000 350 7%

Ø Take a growth rate of 10% yearly and find revenue for next 5 years
Build a financial model
Ø Opex Assumptions : Take it in your excel sheet and model operating expenses
Rental Costs

Rent for Restaurant 175 Rs./Sqft/Month

Rent for Parking 50 Rs./Sqft/Month

Staff
Staff No. Salaries
Manager 2 40,000 Rs./Month
Chefs 6 25,000 Rs./Month
Cashiers 6 20,000 Rs./Month
Housekeeping 4 12,000 Rs./Month
Increament in Salaries 10% per year

Operations & Maintenance 15% As % of Revenues

Requirements
Restaurant premises 6,000 sqft
Parking 1,000 sqft

Ø Go ahead and complete the first step – i.e. EBITDA Forecast!!!

Build a financial model
Ø EBIT Forecast is the second step – in this model we are skipping this step as we
don’t have any fixed assets which will be depreciated!!

Ø So no depreciation means EBIT = EBITDA

Build a financial model
Ø PAT Forecast is the third step – for this you need debt assumptions and tax
assumptions
Build a financial model
Ø PAT Forecast is the third step – for this you need debt assumptions and tax
assumptions

Ø Debt assumptions will help you find interest costs and tax assumptions will help
you find tax values
Build a financial model
Ø PAT Forecast is the third step – for this you need debt assumptions and tax
assumptions

Ø Debt assumptions will help you find interest costs and tax assumptions will help
you find tax values
Initial Costs
Initial Renovation 65,00,000 Rs.
Deposit for Restaurant (6 months rental)

Ø Deposit is to be calculated based on 6 months rental

Initial Funding
Debt - For 5 years 50%
Interest Rate - Commercial Loan 13% per year

Ø Debt will be repaid at the end of 5 years.

Ø So, the interest cost will be constant for all 5 years.
Ø Tax will be 0 if EBT is negative and the loss will not be carried forward.