Thursday, January 15, 2009

New Business

Terry post:

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...

~ Terry


  1. Well....what is the outcome on this project?


  2. Have met with four potential investors and all have expressed strong support yet none has been forthcoming with a check.

    I have no doubt we have the best chef/mgt team. We are however not strong on cash. And, cash is king.

    I think our likelihood of success is now 10% - 15% as we are running out of time.

  3. Update #1.

    Have gotten verbal committments from investors to $110,000 and $20,000 of that in the form of checks to an escrow account held by our attny.

    We are presenting a letter of intent to the property owner tomorrow (friday) afternoon. The purpose of the LOI is to get some breathing room as it takes time to get everything together. Aside from the obvious financial issues, I am concerned with vetting the following:
    - Building violations. Is the building up to code or are there things that need to be fixed.
    - Sanitation. Is the kitchen clean enough to meet inspection standards.
    - Leins. Any claims against the former operators? If so, that could be an issue for us. Hope to mitigate that with an agreement with the property owners to get lease credit for any un liquidated leins that we suffer.

    Finished the business plan.
    Finished the proforma P&L.
    Still working the LOI.
    Still working the lease terms.

  4. Update #2.

    The karma continues to be positive.

    Faxed the revised proposed lease terms to our attny this morning. The recession provides potential lessees an opportunity to push really hard in terms: in our case, we are demanding 6 months free, significant reduction in monthly rent as compared with the former tenant, shorter base term (reduces our risk). It will be interesting what we hear when our attny talks with their attny.

    Other matters: Will need to find a FT Sous Chef, FT hotel manager, and FT business person for the day-to-day stuff. Planning on 4 FT for kitchen staff, 6 FT for dining room wait staff, 3 FT for "bar" wait staff, 2 FT bar tenders, and 8 PT staff to fill in where needed. We are going to negotiate with a sharp pencil when filling these positions.

    The first year is going to be all about CASH MANAGEMENT. My proformas all look good - but, there are so many unknown unknowns that not everything can be accounted for.

    That is it for now.

  5. Sounds like exciting times! Let us know how it finally is resolved.