Business Models: Innovation Landscape Essay

Question:

Discuss about the Business Models for Innovation Landscape.

Answer:

Introduction:

For this report, start-up plan for a new restaurant has been taken up. The business method of the company is based on current day ecommerce. The start-up plan which is been planned for past few years is starting a restaurant based on theme. The restaurant will focus on innovative contemporary foods and will be one, which will be counted among the best dining choices. The business further planned to reach out various cities all over the country.

Business Model:

The business method would be very usual for a restaurant. Very soon, the restaurant will open their branches in the city of Sydney, Australia. The business method will concentrate on building a good brand value of the restaurant and then opening other branches to various cities of Australia. The company’s focus would be to offer attractive and comfortable atmosphere, innovative preparation of foods and remarkable taste of service.

Details of operation:

The first outlet of the restaurant will start operating from 1st quarter of 2017. According to the plans the 2nd outlet will be opened in 6 months and then 3 in each year. The schedule of long-term business is a function for the type of cash that is generated from operations. If high amount of cash is generated from the initial segment of the business, it will be easier to expand the business.

Various challenges that a restaurant business may face at the start-up:

Starting a restaurant business may be a dream for various people. Autonomous owners of restaurant are able to design their restaurant based on their choice and preference, select the menu as per their wish while working in an industry they love. However, the independent restaurant business also comes with some limitations and problems that the owner has to face. These problems are:

Financial problem:

Most of the owners of restaurant cannot accurately estimate the initial capital they will be required to open and run the new restaurant. New proprietors are required huge amount of capital to pay for renting a building, hiring new waiter, decoration of restaurant and stocking the bar and kitchen areas (Prentice et al. 2014). Most of the new owners do not earn good amount of profit for months or even years after opening. The restaurant owners required sufficient capital to sustain in the business. Owners must plan to have sufficient capital to run for one year at least. In addition, they are required to have sufficient amount to manage with unpredicted increase and cost (Bor et al. 2013).

Raising capital from investors:

After developing the idea of opening a restaurant, the next big challenge for starting the business is raising capital. The owner is the only person who has the idea of the business to the core and the owner is the only person who can assess the future of the business. Convincing the investor is one of the biggest challenges the owner has to face. Trying to convince them and explaining them that they are also part of the task is not an easy job while building the first business (Yen et al. 2015). This is more than just asking for money as the owner must have the ability to sell his idea and and convince him about his vision to the potential investor. Most of the investors are willing to invest in established business with minimum risk and not in a new business, as they prefer to get regular return from their investment. To overcome the problem of raising capital, the owner must be able to explain his mission and vision in a well-shaped manner. it means the owner must improve his communication skill and manner of presentation. In the process of raising capital, the owner must have a good story to explain, supported by a well-built plan of business and good skill of persuasion (Wang, Tran and Nguyen 2014).

Valuation of business:

One of the most crucial issues in start-up is the appropriate valuation of business. This is required to raise capital from the investor. The method applied by one investor is different from other investor in the industry (Carter and Baghurst 2014). Few key aspects of valuation are as follows:

The industry: The valuation typically depends on the industry to which the business is related. Every industry has their own valuation method. A biotech business business may have higher valuation than a newly started restaurant business. For example, new restaurant business may be valued at 3-4*EBITDA that is earning before interest, tax, depreciation and amortisation while, an internet business with high rate of growth may valued at 5-10*EBITDA. Therefore, before approaching the investor the owner must study the valuation approach used by the recent M and A and financing transactions in the industry.

Method of start-up valuation: In terms of techniques used by the investor, the investor will study the records relating to:

Cash flow, revenue and net income from recent financial statement

Discounted cash flow analysis or forecasted cash flow of the business (French 2014).

These various ranges can be very broad and can be varied considerably within the industries.

Rule of thumb: Finally, the investor will have a very good knowledge about the value of the business, and their willingness to pay. So, collect a few terms and conditions sheets from various investors, and compare and contrast valuations and other terms, and play them off each other to get the best deal. As a rule of thumb, they expect to give up 25 to 35% of their equity, in every financing of equity they invest (Lane 2013).

Improve the spending and equity:

It is a complicated thing. Many people start the restaurant business as they have love for food and customers. If the owner is smart enough and takes a proactive strategy, he can successfully save money for the business and can have more resources for running the business.

The business can cut the expenditure in various ways. They are as follows:

  • Involve the staffs: The owner will never be able to save money until he involves his whole team in the planning process. However, simply asking them to save money will not be effective. The staff must have clear idea about how much they are spending on wasted foods and utilities.
  • Reward the employees: It will be a nice idea to appreciate the employees and rewarding them for meeting the objectives. If any employer is trying to cutting the cost, he must be ensured that the owner is noticing his approach and appreciating him
  • Social media: social media is a great and cost effective method to advertise for the business. For example, face book and twitter are the great platform for marketing the product with zero cost.
  • Cut on freebies: through cutting on freebies, the restaurant owner can save on unnecessary cost. This does not mean that they should stop giving freebies, but they should offer the freebies only when asked by the customer. This way they can avoid wasting the food.
  • Daily inventory: Doing the inventory on daily basis will assist the owner to keep track of inventories and the staff members will not be able to take home the items secretly (Bernstein and Sheen 2016).

Shareholder’s equity can be increased through the following ways:

  • Increase in Paid Capital: Shareholder may contribute in capital, for example, in property and equipment, cash to a incorporated restaurant industry. Paid-in capital that are excess of the par value of shares stated in the capital part of the shareholders equity segment of the financial statement (Liu et al. 2015).
  • Decrease in Liabilities: Equity states the offerings that the stockholders of a restaurant business contribute and their demand against the asset of the company. Stockholders’ equity is same to the difference between the company's total assets and total liabilities.
  • Increase in Outstanding Shares: Ordinary stock appears in the stockholders’ equity section of the financial statement. When a restaurant business makes a offering for new stock, it increases company's paid-in capital as well as the number of outstanding shares (Chang et al. 2013).

Cost of exit the business:

Various costs are involved in exiting the business. They are:

  • Cost of selling: if the company wishes to sell the business to third part or to any employee it involves cost such as cost of closing the business, cost of broker (Gurjar and Rathore 2013).
  • Payments: Before closing the business the owner must pay the dues to the staffs, suppliers, any revenue expenses like electric bills, payment of rent (Chesbrough 2013).

Conclusions:

It is concluded from the above discussions that if the company goes for the exit strategy, it will need money to pay off the various charges. Moreover, all the future options will be closed with the exit option. Gaining further investment from the investor will also not be a easy task for any start up business as the investor always prefer to invest in established business to get certain amount of return. The only option that is open to the owner is to improve the spending and shareholder’s equity. Therefore, the owner should implement the strategy in a proper way to improve the spending to sustain in the business.

Reference:

Bernstein, S. and Sheen, A., 2016. The operational consequences of private equity buyouts: Evidence from the restaurant industry. Review of Financial Studies, p.hhw037.

Bor, J., Herbst, A.J., Newell, M.L. and B?rnighausen, T., 2013. Increases in adult life expectancy in rural South Africa: valuing the scale-up of HIV treatment. Science, 339(6122), pp.961-965.

Carter, D. and Baghurst, T., 2014. The influence of servant leadership on restaurant employee engagement. Journal of Business Ethics, 124(3), pp.453-464.

Chang, C., Minkler, M., Salvatore, A.L., Lee, P.T., Gaydos, M. and San Liu, S., 2013. Studying and addressing urban immigrant restaurant worker health and safety in San Francisco’s Chinatown district: A CBPR case study. Journal of Urban Health, 90(6), pp.1026-1040.

Chesbrough, H., 2013. Open business models: How to thrive in the new innovation landscape. Harvard Business Press.

French, C.C., 2014. The aftermath of catastrophes: Valuing business interruption insurance losses. St. UL Rev, 461.

Gurjar, Y.S. and Rathore, V.S., 2013. Cloud business intelligence–is what business need today. International Journal of Recent Technology and Engineering, 1(6), pp.81-86.

Lane, C., 2013. Taste makers in the “fine-dining” restaurant industry: The attribution of aesthetic and economic value by gastronomic guides. Poetics, 41(4), pp.342-365.

Liu, C.R., Wu, T.C., Yeh, P.H. and Chen, S.P., 2015. Equity-based customer loyalty mode for the upscale hotels—Alternative models for leisure and business travels. Tourism Management Perspectives, 16, pp.139-147.

Prentice, I.C., Dong, N., Gleason, S.M., Maire, V. and Wright, I.J., 2014. Balancing the costs of carbon gain and water transport: testing a new theoretical framework for plant functional ecology. Ecology Letters, 17(1), pp.82-91.

Wang, L.W., Tran, T.T. and Nguyen, N.T., 2014. Analyzing Factors to Improve Service Quality of Local Specialties Restaurants: A Comparison with Fast Food Restaurants in Southern Vietnam. Asian Economic and Financial Review, 4(11), p.1592.

Yen, B.T., Burke, M., Ghafoor, M., Mulley, C. and Moutou, C., 2015, September. Do restaurant precincts need more parking? Differences in business perceptions and customer travel behaviour in Brisbane, Queensland, Australia. In Australasian Transport Research Forum (ATRF), 37th, 2015, Sydney, New South Wales, Australia.

How to cite this essay: