Park Bar

Confidential instructions for the Signature Hospitality representative

You’re a member of the five-person leadership team of Park Bar location might be. Signature has been under
privately-held Signature Hospitality, a New York- constant external pressure to expand quickly, but you
based company behind some of the most financially know what has made you successful: an unwavering
successful and critically celebrated restaurants in New focus on quality and execution. You’re not about to
York, San Francisco, Los Angeles, and other US cities. sacrifice these principles or grow just for the sake of
Most Signature restaurants are one-of-a-kind growth.
establishments known for an almost obsessive focus on
quality. Some of your chefs have gone on to become That said, you and the leadership team believe you can
“celebrities” but the leadership team is less focused on successfully grow in the United States and maintain
fame and more focused on incredible food and flawless your quality. Doing so will require care as well as a lot
execution. of capital. And it’s this last point—the need to fund
your growth—that has brought you into discussions
About five years ago, Signature opened a small with a company named the Amari Group. You are
restaurant adjacent to a park in New York City named pursuing a deal in which Amari would pay Signature
Park Bar that served simple fare, including burgers, for the rights to open a number of Park Bar restaurants
salads, and juice drinks. The concept was in the Middle East. You have no prior experience in
straightforward: comfort food made from incredibly that region and no intention to open your own locations
high quality ingredients, served at a fraction of the there. The idea is to do a one-time deal in which Amari
price of high-end restaurants. With limited seating, would pay Signature for the right to own and run these
most diners get their Park Bar food to go, making for restaurants (without creating any headaches or negative
enviable profit margins. publicity) and Signature could use these resulting funds
to fuel its larger ambitions for expanding in the US.
Park Bar has since slowly grown to a dozen locations
in the United States, capturing rave reviews and The Amari Group is an international team of
generating a tremendous amount of buzz. Food lovers entrepreneurs and investors with expertise in
and writers often publicly obsess about where the next hospitality and franchise management in the Middle

Copyright © 2014, Daniel Ames. All rights reserved. Not to be used without permission. 1
East. While only about a decade old, Amari has started has reliably exceeded initial estimates and you have
building a track record of successfully bringing global updated your forecasting methods accordingly.
brands into the region, with special focus on the
Persian Gulf Arab States, including Bahrain, Qatar, and You believe 700 customers a day per location would
the United Arab Emirates. Amari works behind the equate to a net present operating profit of about $6 to 8
scenes, partnering with brand name companies that million across the 10 sites. For each additional 100
have limited experience with the area. Typically, customers per day per location, you expect net present
Amari acquires the rights to use a particular brand in a operating profit would increase $500,000 to
given area and then builds out a presence with the same $1,500,000. Your team’s best estimate is for
standards and feel that the brand has around the world. approximately 1000 customers per day per location,
In recent years, Amari has opened a half-dozen luxury but you recognize there is some uncertainty. You see a
hotels and high-end restaurants in the Persian Gulf 20% chance for higher traffic, at 1100 customers per
region. Amari’s momentum is strong and growing. day. You see a 10% chance each that the number could
be 900, 800, or 700. You and Amari have already
Your discussions with Amari have revolved around agreed that you would have a third-party auditor assess
Amari acquiring the rights to open 10 Park Bar daily customer traffic a year after launch to gauge how
locations in the Persian Gulf Arab States, including the restaurants are faring and to refine your forecasting
sites such as Abu Dhabi in the United Arab Emirates models.
and Doha in Qatar. Signature has no experience in this
region and no intention of running sites there itself. Daily customers Estimated
Your conversations with Amari have moved quickly per location likelihood
and you feel that you may be on the verge of a deal. 700 10%
Today, you’re meeting with a member of Amari’s 800 10%
leadership team and hoping to finalize arrangements. If
900 10%
successful, this deal could provide much-needed capital
1,000 50%
for Signature’s domestic expansion.
1,100 20%
A critical final issue to resolve in today’s discussion is
the licensing fee. Both sides have signaled an objective Given your background work, the leadership team at
of finding a single price covering all 10 locations. Your Signature has concluded that it would accept no less
financial team at Signature has provided you with its than $3.5 million ($350,000 per location) for selling
analysis of the Middle East venture. Although Amari the rights to Amari. But you’re hoping to achieve
would own the restaurants, you have thought about the considerably more than that. Given your expectations
financials, which presumably would govern the price for customer traffic and profitability, you’re hoping
Amari is willing to pay. you might get double that, or more, for the licensing
fee.
Profitability is driven largely by customer headcount.
The more customers per day, the more profitability. Another matter to be finalized is the launch schedule
Based on your financial team’s research on the market, for the 10 sites. Amari has expressed hopes about
and Signature’s experience opening other Park Bar opening all 10 sites on the same day in a single
locations, your estimates for customers per day per “wave.” This raised concerns for Signature and you
location are shown below (your estimates also assume need to reach closure on this issue before finalizing a
each location would be open about 300 days a year, deal. You know how challenging these locations can be
abiding by local customs and laws). Your information to launch, with the timing of construction schedules,
gathering suggests there is already some brand the hiring and training of staff, and so forth. You
awareness in these markets and you have seen in prior anticipate that the media will be watching and would
openings how a well-staged debut—with media be certain to seize upon any mistakes. Your hope is that
coverage, crowds of customers, and so forth—can these locations will fly more or less “under the radar”
establish visibility and rapidly build a customer base. and not cause any negative press. You see potential for
You know from the past that eventual customer traffic unwanted attention in a wide-scale and risky launch.

Copyright © 2014, Daniel Ames. All rights reserved. Not to be used without permission. 2
As such, you have urged Amari to consider other Your financial team has identified the following way to
scenarios, ranging from launching in a single wave compute the value of Amari’s payments to Signature:
(with every location opening on the same day) up to
launching different locations across five different days Timing You discount …
(i.e., 5 waves). Year 0 0% (i.e., money paid up front
counts at face value)
In your recent internal discussions with the Signature Year 1 20% (i.e., reduce amount
leadership team, you saw value in going even further received in Year 1 by 20%)
and having a completely staggered opening, with each Year 2 35% (i.e., reduce amount
location launching on a different day (i.e., 10 waves). received in Year 2 by 35%)
This would allow the most control over openings with Year 3 50% (i.e., reduce amount
the least risk. You’re hoping you can convince Amari received in Year 3 by 50%)
to take this approach. Your team has attached values to
each of these outcomes, as shown in the table below: For example, an Amari payment of $2,000,000 in Year
1 would be worth $1,600,000 to you now (a 20%
Adjustment to discount). An Amari payment of $2,000,000 in Year 3
Launch timing
total valuation would be worth $1,000,000 to you now (a 50%
10 waves $500,000 discount). The leadership team has agreed: you cannot
5 waves $250,000 accept a deal that features payments beyond Year 3.
3 waves $0
Amari may press for deferred payments in part because
2 waves ($250,000)
it will need to pay other start up costs for these
1 wave ($500,000) locations, including branded items (signage, fixtures,
uniforms, and serving ware). Having ramped up a
Launching each location on its own day (10 waves) number of locations, you’ve got sympathy for how
would minimize risk for problems and embarrassment, hard this can be and how much it can cost. As you
leading your team to value that at $500,000 (a single prepare to expand domestically, you’ve partnered with
sum you can add to the overall value of the deal for vendors and now have this cost down to roughly
Signature). Five waves would reduce risks as well, $100,000 per location. You’d consider selling startup
adding $250,000 to your deal value. Two waves or a packages of branded materials to Amari at that cost in a
single wave would involve real risks. You would one-off arrangement, though any arrangement above
obviously prefer not to, but you could live with these this cost would be an additional gain for Signature.
outcomes if you had to. Your team has agreed that
these would reduce the value of the deal to Signature, You also know that you can pursue a deal with another
as noted above. partner in the Gulf region to which your financial team
attaches a net value of $2.5 million. This deal is not
You do not expect that launch timing would have any exactly comparable to the arrangement you hope to
effect on the eventual “running rate” of daily customers strike with Amari, but it has helped your team set a
per location. hurdle for this project. The Signature leadership will
evaluate the Amari deal by the extent to which its value
Another issue concerns payment timing. Although the exceeds a $2.5 million hurdle. If the net value is not
licensing agreement is for a one-time fee, it’s possible positive (i.e., if the value is not over $2.5 million), you
that the payments could be spread out over multiple cannot agree to the deal.
years. The underlying motivation that has brought you
into conversations with Amari is the potential for
raising capital that can promote your US expansion.
You’re eager to move ahead and you’d like to get this
income as quickly as possible so that you can put it to
work.

Copyright © 2014, Daniel Ames. All rights reserved. Not to be used without permission. 3
You will soon meet with a member of the Amari Group
leadership team to see if you can fashion a final
agreement. Be prepared to assess the value of any
given deal. One approach would be to prepare a
worksheet or computer model that you could consult
during the conversation.

Regardless of how you structure your assessment, your

computation of the deal’s value should include the
following:

1. Licensing income. The amount Amari will pay for

the rights to the 10 Park Bar locations.

2. Financing cost. Discount any payments received

in Years 1, 2, and 3 according to the table shown
above. This should be subtracted from the income.

3. Other aspects of the deal. Add the net value

(positive or negative) of any other components you
have agreed to, including launch timing.

4. Evaluate compared to hurdle. Compute the

value of this deal above and beyond the value of
the hurdle, which is $2.5 million. That is, take the
raw value of the deal, as computed in items 1-3
above, and then subtract off $2.5 million to get the
value of the deal above the hurdle rate.

Copyright © 2014, Daniel Ames. All rights reserved. Not to be used without permission. 4