Private Equity firms are continuing to invest in the restaurant sector at a very high rate. With concerns still lingering in other consumer sectors, investors see restaurants as an attractive option due to less of a concern that the internet will drastically affect business. Basically, people either decide to eat-in or go out.
Pools of private investors’ money are still deep and growing, and restaurants have emerged as a favorite target. But they cautioned that there is intense competition to find the right match-ups.
Determining Financial Heath: Fixed Asset to Equity Capital Ratio
Businesses can rely on many measures to determine how financially healthy they are. Calculating their fixed-asset-to-equity-capital ratio is one way. This ratio determines whether a company's fixed assets are worth more than the amount of money that investors have sunk into it. Stronger companies have positive fixed-asset-to-equity-capital ratios. They might also have an easier time attracting the dollars of future investors.
Businesses have many methods of determining their financial strength. But the fixed-asset-to-equity-capital ratio provides a snapshot of how financially strong a company would be if its revenues, for whatever reason, slowed or dried up. Companies with a high ratio know that they at least have valuable fixed assets that they can turn into cash if needed.
What is a Fixed Asset?
A fixed asset is a long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time. A fixed asset is bought for production or supply of goods or services, for rental to third parties, or for use in the organization.
Information about a corporation's fixed assets helps create accurate financial reporting, business valuation and thorough financial analysis. Investors use these reports to determine a company's financial health and decide whether to buy shares in or lend money to the business.
Why Asset Management is So Important
It's relatively simple for businesses to calculate their fixed-asset-to-equity-capital ratios: They only have to divide the total value of their fixed assets by the total value of equity capital. The main issue is that many restaurant and retail organizations really have no idea what their fixed assets value is. Why? Because they don’t manage their assets effectively!
As an industry professional, you have to ask yourself this: How many fixed assets do I have and what are they worth? What is there depreciation value? How much does it cost to operate, repair and maintain these assets? These are crucial questions that must be answered to provide a more accurate depiction of a company’s financial health.
So Where Do I Start?
The first step is realizing you have an asset intensive business and these assets have a value to your company. Great companies and leaders think from the “inside out”. You have to effectively determine “Why” this is important to you and your company. “How” you do it are the specific actions you will take to bring the “Why” to realization. “What” you do is the result of these efforts.
Start with “Why”
What’s your purpose?
What is your motivation?
What do you believe?
How will we do it?
How will we obtain the data?
How will we support it?
How will we collect and report on it?
How will we make decisions based on this data?
What do we do?
Provide fixed asset value to the company
Provide predictable inputs to realize overall goals and profitability
Contribute to defining the financial health of the company
Acquiring existing asset data, values and inventories is difficult and could be costly upfront. However, these costs must be balanced against the valuable data and financial information that will be provided once the assets are cataloged and capable of being monitored.