Monday, January 29, 2007

Catch-22

Tom says:
Tonight I read John Foley's latest post on The Restaurant Blog and found myself alternately nodding in agreement, laughing and experiencing a slight case of nausea. In his post, Foley outlines a two-tier skill set one needs to possess in order to be a successful restaurateur. Go on, click here to read it. I'll wait.

At the risk of being overly reductive, Foley's saying, albeit in a different way and in a slightly different context, what I said a few days ago: You have to wear a lot of hats. You have to be, as Foley says, more rounded than the head of Exxon.

I'd like to add to that list that you also need to have a thick skin. Even if your business plan is solid, your budget's tighter than a cork in a wine bottle and you've got twenty years' experience in the industry and the majority of them are in the market where you plan to open, certain organizations aren't going to want to do business with you. What at first seems like just hesitancy, but is really refusal cloaked in well-developed people skills is going to make you question not only how the hell you're going to pull off your venture, but why, in the first place, it ever seemed like a good idea.

Okay--I get it: restaurants are a high-risk proposition. It's not a secret. Even if you've never really thought about it, chances are that at one time or another, you said, "Hey, let's go to that little place on Such-and-Such Street," only to find out, once you arrived, that it was no longer in business.

Here's what I don't get: the most common reason that most first/new restaurants fail is undercapitalization. I'm willing to bet that a small portion of undercapitalized restaurants simply didn't borrow enough money. More likely though, they couldn't find a traditional bank or commercial lender who was willing to write the loan for the amount they'd need to succeed. Or any loan at all (enter bootstrapping).

Restaurants are risky, they say. Ironically, the majority of these lenders focus their local ad campaigns on their support of small business.

Anyway, the Catch-22 nature of it all is enough to drive me to drink. Think about it. Failure rates for first/new restaurants are most often tied to undercapitalization. I'm going out on a limb here, but maybe, just maybe, if lenders helped restaurateurs achieve a solid capital position the failure rate might not be so high and that market sector might become less risky. I'm just thinking out loud here, because--get ready for more irony--two years down the road when we have a track record we created without their support? They'll be knocking on our door with a check in hand.

Now, I'm not balking at the idea of opening a second location someday, whether the same concept or a different one. That's what money two years down the road would mean. What I am balking at is the idea that a second restaurant automatically has as much or greater chance of success than the first. I've seen first restaurants open on a shoestring and grow into amazingly successful businesses and then I've watched second restaurants, with more funding than they knew what to do with, flail or even fail for reasons that are much harder to identify.

This can't be news to the banks. And that makes it even more difficult to understand.

[Note: that isn't always the case. Michael Buckley's triumvirate--Michael Timothy's, Surf, and Buckley's Great Steaks--is a shining, regional example, all the more notable for Michael Timothy's and Surf being across the street from each other. ]

We found private financing with a small, independent lender who's taking a chance on us. And we've connected with small, independent vendors who are willing to work with us partly in trade--everything from signange to consulting to electrical. If I wasn't already a stalwart supporter of independent business, I would be now. This is how you answer the cry that downtowns everywhere are being taken over chains and box stores and corporate logos. You hang out our own shingle and you frequent places with shingles like yours.

2 comments:

Jeffrey Summers said...

Sorry, but under capitalization isn't the biggest reason Independent Restaurants fail. It's "sameness". The inability to provide something different and unique. I coach hundreds of Independent Restaurant Owners, Operators and Managers all over the country who operate businesses that have plenty of money but have no clue how to differentiate themselves from the other 16 restaurants in their area which basically look, smell, feel and operate just like their own.

Jeffrey Summers
IndependentRestaurantOwner.com

Tom said...

Thank you for your comment Jeff. I happen to agree with you that lack of market differentiation is a key factor in restaurant failures. It's been my experience over the last 20 years that undercapitalization resulting in too-tight cashflow causes operators and managers to make reactive versus proactive decisions. Once reactive, it's almost impossible to revert to being proactive unless you have the funds. The restaurant then deviates from concept, delivers a message of inconsistency to its market and voila, it's out of business. But as you know, we're both right: there are LOTS of reasons why restaurants fail. Thanks for reading.