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Frank Farwell

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A Restaurant Closes, and a Community Mourns

Posted: 01/05/12 07:04 PM ET

On New Year's Eve, the much-admired Rubaiyat restaurant in scenic Marquette, Michigan held its last supper, complete with live music and a custom menu to commemorate the closing. The establishment had been open for about three years, was well reviewed, and was a classic family business--with mom cooking splendidly in the kitchen, and her partner, kids and some of their friends waiting on tables and washing dishes. The Middle-Eastern fare was top-notch, the ambiance was warm and comfortable, and prices were modest. So, why did the lights go out January 1st, leaving hundreds of devoted but disappointed customers?

It was another case of first-time entrepreneurs going too far too fast. The founders bought a building in a good location--with perhaps too much encouragement from a local bank in the pre-2009 days--poured a fortune into renovating the space and equipping a new kitchen, and in the process built a mountain of insurmountable debt. Scuttlebutt around town has the mortgage and other debt pegged at more than $600,000. Even if this widely admired establishment was in the high-density, high-dollar nightlife of New York's swank Upper East Side, its modest prices and limited seating capacity would have made breaking even very difficult.

Sad to say, but the Rubaiyat's demise was perhaps etched in stone before it opened its doors, due to the size of its debt load. That's a heart-breaking thought after their years of hard work. Let's turn back the clock and see what could have been done differently to maximize chances for success:

-If the founders had rented existing, empty restaurant space short-term, with renewal options, they could have minimized their occupancy costs and upside risk. A deal could have been struck to rent at a favorable "because-it's-empty" price. That way if sales and/or profits were soft after a year, they could turn off the tap and walk away with minimal damage and no mortgage payments darkening their future. (Remember, this is semi-imploded Michigan we're talking about; any new business is welcomed by most landlords with open arms and a willingness to deal.) The founders were so excited about their new enterprise they forgot to ask a key question: Why buy the building until you know whether or not the business is a winner?

- The founders could have negotiated an option to buy another finished restaurant building at a favorable fixed price, with a portion of their rental payments going towards that amount. Buying the building once the business proved itself would more comfortably sequence higher occupancy costs with increased cash flow. Once the building was purchased, occupancy costs would be then be within their control. And once the mortgage was paid off in 10-20 years, cash flow would be considerably freed up to finance bigger take-home pay for owners and employees.

-If the business turned out to be a "Go," then investment could be made in better kitchen equipment and nicer seating décor later on. Doing this in advance was an unnecessary roll of the dice and risk of precious capital. Fancy décor is not what brings restaurant customers back; it's the food, service, convenience and value.

-The menu was priced $1-$3 too low per entrée. Every time my wife and I ate there I couldn't help asking myself, "How are they going to make a profit with prices like this?" Well, now we know the unfortunate answer.

-Personal savings and trade credit from food vendors could finance minimized start-up costs, and then, once things got going, a line of credit could be secured from a local bank at a more favorable, already-established-small-business rate.

-The proprietress confided to me the last time I ate there that dealing with employees was the toughest part. I told her I shared her sentiments exactly. To navigate this challenge, an operations pro with experience from a national food chain like The Olive Garden or Red Lobster could have coached her on how to hire, train and supervise a food service staff. Some advisory expenditure made up front would have avoided a lot of heartache and absentee cost later.

-Top-notch point-of-sale software could have made life easier right at the beginning. This could be bought for a song from a shuttered restaurant seeking a new owner.

-An ATM machine discreetly placed between plants in the lobby and a "Cash or local checks only" notice on the menu and entry way would have shaved considerable cost off credit card processing fees.

-Renting space with an option to buy in a shuttered restaurant would also enable the acquisition of handicapped access at close to zero cost. Building that state-required access at 2008-2009 materials prices no doubt proved to be very costly at Rubaiyat's rear entrance. Renting space with an option to buy also could have led to taking over a fully equipped kitchen, table and chairs, cooking utensils, silverware, and so forth.

The list goes on, but you get the idea: Unless you have capital to burn, and delight in burning it, taking over a shuttered restaurant offers many, many benefits over building from scratch.

In Chapter 21 of my book, Chicken Lips, Wheeler-Dealer and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventure on the New Silk Road, I tell my own rocky road story of discovering the harshest of business truths: In the end, after all the blood, sweat and tears and individual sacrifice, numbers are what really matter. They're either positive, with profits, or negative--with your bank eventually calling in your loan.

That's why starting slow, and spending time understanding the profit-and-loss spreadsheet numbers at the beginning, before your first customer walks in the door, can make all the difference. It will show you the true cost to the bottom line of taking on too much debt relative to the expected volume, net profit, and free cash flow of your new business. It's like trying on a pair of shoes before buying them. Not doing so is simply asking for trouble.

Taking time to build pro-forma profit-and-loss spreadsheets before you acquire space for your business, before the demands of customers vacuum up your time and energy, can put the odds in your favor--instead of fatally, financially speaking, against you.

Frank Farwell is founder and past president of the WinterSilks catalog. His book, "Chicken Lips, Wheeler-Dealer, and the Beady-Eyed M.B.A.: An Entrepreneur's Wild Adventures on the New Silk Road," details his experiences as a start-up entrepreneur, and was nominated for the Financial Times/Goldman Sachs Best Business Book of the Year Award. Its Appendix lists the attributes of an ideal product; the book is available from Amazon, or frankfarwell.com.