Kelly Has Started the Process

Kelly has started the process of thinking out this investment, but she is still a long way from having given this full consideration. She has a sense of some spaces and what those spaces cost. There is no indication, however, that she has considered the other costs involved (staff, food, etc.). She does not have a sense of what sort of restaurant she wants to run, which does not bode well for her ability to put together a solid menu. Kelly also needs some more ideas about the sort of decor she wants. In short, Kelly has thought a little bit about the costs associated with entering the restaurant business, but has not given significant consideration to what she actually wants to do with a restaurant. She has no experience, and it seems like she would be in a lot of trouble were she to sign a lease, the possible exception being the lunch cafe, if the current staff is retained. Also, if Kelly thinks she will have more time to be with her family as an entrepreneur, she really needs to talk to some restaurant owners about that, because she is very much mistaken.

2. Insomuch as a decision cannot actually be made without a lot of additional information, the evaluation to be made here is the cost of entering the business, assuming that revenues and costs will be otherwise equal, and that she can obtain financing. To estimate revenues, an assumed market share of 1% will be used. The total Kingston market is $2.24 million per month (28,000 families at $80 per month). The basic calculations are in Appendix a.

Possibility a barely makes money ($944 pre-tax income). She would need to win around double the market share just to pay herself her current salary. With the extra size of the restaurant, this is a possibility, but with her lack of experience running a large restaurant in an unproven location makes it unlikely that Kelly would reach this target much less exceed it.

Possibility B. is the best strategically, given Kelly's lack of experience. This only requires $5,000 in financing from the bank, and the remainder is part of the purchase price. The math works out for the ongoing business as well, with pre-tax profit of $17,820 at 1% market share. This is not enough for Kelly to earn a salary superior to what she does now, but she may be able to improve the restaurant's business in order to make that happen. Doubling the market share -- by driving a good dinner service, for example, or breakfast -- would allow Kelly to have a pre-tax profit in excess of $58,000.

Possibility C. is interesting. Initially, there appears to be a profit of at least $20,000 per year ($44,384 with double market share), but this does not include rent because there is no site for this option yet. Also, this profit level does not include principle repayments on the loan. Additionally, this is a pre-tax number, so again Kelly would make more money in her current position.