Funny how things work.
Last week we received a call at Restaurant 213 from the owners of a hotel and restaurant in Berlin, MD. The company which had been managing the business had failed (more on that later) and the owners asked us if we were interested in taking over the business.
Essentially we were being offered the opportunity to assume management of an on-going enterprise consisting of the following:
- 16 room hotel ($360,000 revenue 2008)
- Restaurant ($1.4M revenue 2008)
- Wine shop ($120,000 revenue 2008)
Their initial negotiation position was $50,000 up front and $10,000 per month rent. The lessee would be responsible for all building costs - "triple net" is the term.
I ran the numbers and it was interesting to see where the business went bad. Here are some quick observations:
* Beginning in 2006, the cost of goods sold (wine, food, beer) went from 34% to 44%. On sales of $1.4 million, that means that $140,000 of unnecessary cost growth. There are lots of ways this can happen: too large of portions, careless buying, too small of margins or (most likely) crooked vendors.
* Employee costs as a percentage of sales increased from 36% to 41%. On total sales of approximately $2 million, that means that $200,000 of inefficiency. Likely reasons for this inefficiency: failure to "right size" with declining sales, too aggressive of hiring, not firing the right people.
My opinion is that this is a good opportunity and we are speaking with people to raise $100,000 by next Friday. Have been working on Term Sheets (the agreements between us and those who invest in the company - defines the benefits they get and the obligations we get).
I think we have about a 25% chance of closing the deal. If we do: I get to buy more wine. More to come on this...