Starting a hotel | KRG Hospitality

AI-generated image of a closeup of a loan application and pen

October 4, 2024by David Klemt David Klemt No Comments

The Banks Have it Wrong

The Banks Have it Wrong

by Doug Radkey

It’s widely assumed that a well-written business plan will impress banks and SBA-type programs, and secure the funding required to launch a hospitality concept.

When starting a bar, restaurant, or hotel, most people are told exactly that: “You just need a business plan.”

The problem, however, lies in how these business plans are created. Too often, aspiring entrepreneurs turn to fill-in-the-blank templates provided by banks or online resources. They believe that simply completing the form will open the doors to financing, and start them on the path to building a successful business.

Unfortunately, this approach can do more harm than good. Let’s explore why the traditional reliance on business plan templates, including AI-generated business plans, can set both businesses and lenders up for failure.

In this article I dive into real-world examples, examine the success and failure rates of loans in the hospitality industry, and outline why banks and other programs need to rethink their loan approval processes to reduce risks for not only themselves but the entrepreneurs they serve.

The Problem with Business Plan Templates

Imagine this scenario: You’re excited to open a hospitality business, but you don’t know where to begin. You do some research, and learn quickly that you need a business plan to secure a loan. The bank or Small Business Administration (SBA) offers you a convenient template to complete, or you find one online that seems like it will do the job. You fill in the blanks, submit the plan, and, to your delight, the bank approves all or a portion of your loan.

However, the approval doesn’t mean your business plan is actually sound. Read that again.

It only means it meets the basic requirements of the bank’s loan approval checklist. A template provides a false sense of security, making entrepreneurs think they’ve covered all their bases when, in reality, crucial aspects of the business are left unaddressed.

For example, I recently reviewed a business plan for a client who had used a bank-provided template prior to our engagement. The plan was approved by the bank, but upon closer inspection, I found numerous errors: the start-up financial projections were unrealistic, the cash-flow analysis was incomplete, and crucial aspects of market analysis were missing.

The result? The project is on track to run out of money before it even opens its doors.

This example highlights a troubling issue: Templates don’t provide clarity, and they certainly don’t prompt critical thinking about the true costs to start, and the real challenges that the business will face once it’s operating.

The Risks of Using Templates

Business plan templates may seem like an easy solution, but they come with significant risks.

False Sense of Security: A completed template may look professional, but it doesn’t guarantee that the plan is sound or comprehensive. Key elements can be glossed over, copy and pasted, or simply misunderstood.
Lack of Critical Thinking: A template doesn’t ask tough or industry-specific questions. It doesn’t force you to analyze the competitive landscape, identify potential risks, or develop a clear financial strategy around a unique concept.
Inadequate Financial Analysis: Templates often provide a basic structure for financial projections but fail to help you understand the true costs of starting and running a business. A template won’t be specific to your concept, your revenue and cost channels, or industry benchmarks. The template won’t catch errors in your financials, leaving you and the bank exposed to significant risk.
Inability to Stand Out: In a crowded market such as the US, Canada, or Europe, differentiation is key. A cookie-cutter business plan won’t help you stand out from the competition. Despite handing them out, banks see thousands of these plans, and if you don’t demonstrate why your concept is unique and viable, you’re setting yourself up for denial.

The Dangers of AI-Generated Business Plans

As technology advances, AI-powered business plan generators are becoming more popular. I’ve seen a few ads for them over the past few months.

These tools claim to be able to create a business plan in minutes, promising efficiency and ease. However, relying on AI to write your business plan is just as dangerous as using a template. The same issues apply: lack of clarity, shallow financial analysis, and the absence of critical thinking.

AI-generated business plans may provide a surface-level solution, but they cannot replace the deep analysis required to make a business successful. Business plans need to be customized and thought out thoroughly, with insights drawn from real-world strategic planning.

Hospitality Industry Loans: Success and Failure Rates

The hospitality industry—particularly the accommodation and food service sectors—has one of the highest loan approval rates, but it also has some of the highest operator failure rates.

According to the U.S. Small Business Administration, in 2022 alone, 6,297 loans were approved for the accommodation and foodservice industry. These accounted for 13.2 percent of all small business loans, and 19.2 percent of total loan dollars. The average loan amount was US $784,768.

Despite these impressive loan numbers, the success rate of a business in this industry tells a different story. Only about 20 percent of hospitality businesses make it to their fifth year, and the average time to pay off a business loan ranges from five to ten years. The failure rates are driven by various factors, including cash-flow problems, a lack of market understanding, and poor financial planning.

So, why do banks continue to approve business loans based on inadequate business plans?

The Need for More than a Business Plan

Each reason for a business failing points to one underlying cause: lack of strategic clarity. In many cases, these businesses began with a standard business plan but skipped the other non-negotiable playbooks truly needed to be successful.

A well-rounded approach to strategic planning includes much more than a business plan.

Aspiring or seasoned bar, restaurant, and hotel operators need to develop feasibility studies to determine whether their business models can succeed in their target market. They also need concept development plans, prototype drawings, brand strategy plans, tech-stack plans, marketing plans, and financial playbooks.

Only after these steps are completed should the final business plan be written.

How Banks Can Improve Loan Success Rates

Banks have an opportunity to reduce their risks significantly—and increase the success rates of the businesses they fund—by requiring more than the completion of a business plan template during the loan approval process.

Instead, they should request detailed feasibility studies, along with the other playbooks, that go beyond the basics.

By working with entrepreneurs to ensure they have true clarity about their business model, market conditions, and financial outlook, banks can reduce default rates, and build stronger partnerships with their clients.

In addition, by encouraging the use of customized plans over templates or AI-generated plans, banks can ensure that they are investing in businesses with a clear path to success.

My Final Thoughts

Yes, a business plan is a vital tool for any entrepreneur, but it must be more than just a template, and lenders need to stop relying on these fill-in-the-blank approaches.

To build a successful business, you need more than a plan on paper; you need clarity, strategy, and a deep understanding of your market and financials. It’s time for banks, financing programs, and even angel investors to get it right and demand more than a standard business plan template. Only then will both the business and the lender see the long-term success they’re striving for.

Perhaps they, too, can then achieve success rates in the 90th percentile.

Image: Canva

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The John A. Roebling Suspension Bridge over the Ohio River, heading toward Over-the-Rhine in Cincinnati, Ohio

July 5, 2024by David Klemt David Klemt No Comments

Cheers to the Flyover Conference!

Cheers to the Flyover Conference and Cincy!

by David Klemt

Just pretend the temporary SkyStar Wheel isn’t in this picture.

The successful and exciting launch of the Flyover Conference makes it clear that co-founders Sarah Engstrand and Greg Newman are onto something big.

Big, yet intimate. There’s a real feeling of community when a small-but-driven group gathers with purpose. That’s exactly what Flyover embodies.

Now, I know some people who live between the east and west coasts in the US find the term “flyover” irritating, if not outright offensive. As someone born and raised in the Midwest, I understand the frustration. However, I can assure anyone raising a skeptical eyebrow or frowning at the name of the conference that it isn’t meant as a pejorative.

Rather, Engstrand and Newman are giving a cheeky middle finger (likely two, really) to those who dismiss “secondary” and “tertiary” markets. In fact, their intention is to shine a spotlight on—and serve—cities that don’t receive the same attention as “primary” markets.

By primary, I think you know main culprits: New York, Los Angeles, Chicago, Boston, and Miami. In contrast, Las Vegas, Phoenix, Cincinnati, and Detroit carry the “secondary” label (as do many other cities).

So, a core element of the conference is featuring speakers who have, up until now, mostly spoken at highly visible trade shows that take place in major host cities. For example, the National Restaurant Association in Chicago.

For the inaugural Flyover, the co-founders put in the work to provide Cincinnati with a powerhouse lineup of hospitality industry speakers. Additionally, this year’s F&B sponsors delivered an awesome array of sips and bites.

Killer Kickoff Keynote

Truly, Flyover’s mission is to deliver maximum impact over the course of just two days. The 2024 speaker lineup serves as a testament to their dedication.

So, too, is how the 2024 show utilized the two speaker stages, provided by Rhinegeist Brewery. Flyover attendees and speakers were close to one another, not separated by the vast expanse of a ballroom or elevation of a platform.

David Kaplan, CEO of Gin & Luck, the parent company of the world’s first cocktail bar chain (for lack of a better term, really) kicked off the event. Perhaps multi-location craft concept is a better phrase to explain Death & Co. in five words or less.

During his informative and inspiring keynote, he detailed he and his team’s approach to entrepreneurship. As Kaplan explains, when someone understands their purpose (why), they come to an understanding that helps develop their process (how). In turn, that gives an entrepreneur an understanding of the outcome they’re working toward, or their “what.”

I’ll dive much deeper into his keynote in a future article, because Kaplan’s approach goes much further than why, how, and what. In fact, in keeping with his status as one of the most transparent people in hospitality, Kaplan shares his personal core values, along with those of Death & Co.

Engaging Education

Bartender-cum-licensed psychotherapist (and soon-to-be organizational psychologist) Laura Louise Green took on a topic afflicting all of hospitality: burnout. The founder of Healthy Pour, Green explained that burnout is not only different than stress, it’s certainly not a sign of weakness to take the time to address it.

One of my favorites, Chef Brian Duffy, took a different approach to the topic of menus. Instead of reviewing a handful of submissions, Duffy took questions and addressed issues with food purveyors directly in a frank and open discussion.

Encouraging operators to take greater risks, Michael Tipps, co-founder of Maverick Theory, drove home a compelling point. Oftentimes, operators are fearless when developing their concepts. However, something curious often happens when it’s time to welcome the public into the space: second guessing, and blunting the sharpness of the original vision.

Oh, and I shared the KRG Hospitality approach to systems, starting, stabilizing, and scaling, my second time every presenting at a conference. Most people assume that because I host a podcast I’m comfortable talking to anyone, anywhere. That’s mostly true. However, I, like millions of other people, find public speaking anxiety-inducing. So, a huge thanks to the Flyover team, fellow speakers, and mostly the attendees for setting me at ease.

The above are but a handful of the education sessions that Flyover provided for attendees. Other topics ranged from the need for fully realized non-alcohol bar programs, building events in house, and operators handling their own PR campaigns, to leadership skills and leveraging the power of an effective door team.

Bang for Buck

Anyone who has attended one of the big hospitality industry conferences has probably been subjected to the experience below.

You file into a session featuring a topic of particular interest to you and your business. Even better, the speaker is someone you’re excited to see and hear. The presentation ends and…awkward silence. Almost everyone is too afraid to ask a question that they feel may make them look “stupid,” or like they’re not a good operator. Finally, someone asks a question, and that leads to a few more questions.

Unfortunately, the presentation was 45 to 50 minutes long, and with the awkward pause after its conclusion, there are barely ten minutes left for the speaker to answer questions. When they’re shooed off the stage, they’re swarmed in the hallway. You think they may be overwhelmed, you don’t want to add to that or inconvenience someone you admire, and you never get to meet them, ask them an important question, and exchange business cards.

That’s not an indictment of the large, more mainstream conferences. It’s just how it is when you pack dozens upon dozens of speakers, and thousands of attendees, into a conference hall. Further, schedules tend to be so loaded in order to attract attendees and boost ticket sales that people are forced to make difficult choices and miss out on some awesome sessions.

In contrast, Flyover intends to limit their ticket sales. And while there will always be a choice to make at a conference, they seek to mitigate that prevalent issue. Was this year’s show perfect? No, there were growing pains, as expected. Will this team learn and improve the show to maximize the impact for attendees? I have every confidence that the answer is a resounding “yes.”

Future Flyovers

I have to say, I’m deeply interested in the future of Flyover Conference. In fact, schedule permitting, I would attend even if I weren’t asked to speak at future shows.

It was an honor to be part of something of so impactful.

The entire point of this industry—hospitality—can sometimes fall to the wayside at conferences, trade shows, and expos. Another way of saying that is that while we all speak the same language, we often forget to take the time to connect with one another.

While there’s work to do, Flyover addresses this issue. The show is set up so that attendees, speakers, and sponsors are sharing the same spaces; there’s an actual sense of community. When it comes the host city, there’s a real sense of place, and that’s important.

Speaking of the host city…the next Flyover will take place in a city I mentioned at the top of this article. The most populous city in Michigan, Detroit—Motor City itself—will host the second Flyover Conference. Looking forward to it, Hockeytown.

Be sure to connect with Flyover for updates and announcements.

Cheers!

Image: Jake Blucker on Unsplash