Buying a restaurant

[Response to article by Mark Abernathy]

Reference: Article written by Mark Abernethy in the November – December Restaurant and Catering Australia magazine titled, ‘Sale Away’.
“Jon Langevad specialises in the hospitality industry having spent some 30 plus years advising to and working within businesses to build strategic directions, re-establish spatial orientation, build marketing plans, develop financial imperatives, set customer service initiatives and put in place staff training. Currently he and partner Ulla Hiltula acquire restaurants in trouble and turn them around before on-selling. Their current business is Mon Ami in Fitzroy. They practice what they say in buying and selling businesses, owning and working in restaurants as well as advising others through a consulting approach.”

There are many very high profile Chefs who have managed their businesses to closure [and continue to do it again and again seemingly with the medias blessing], just as there are many dreamers who know little about the restaurant industry but also take many innocent people with them into bankruptcy. With so many restaurants and so little average margin to play with, it takes a great deal of expertise to make a profit. Sure, there are always exceptions but exceptions do not create a trend.
Therefore the NUMBER ONE thing a person contemplating buying a restaurant business should consider is whether or not they have the expertise in all areas of the business. It is not good enough just to be able to cook or just be nice to customers or just to be good with numbers. Most of the time restaurants are very small businesses and demand of the owner a high level of multi-skilling. Generally the businesses are too small to buy the expertise needed thereby requiring a hands-on approach. Obviously being able to commercially recognise and/or cook something edible is pretty important for a restaurant as is the ability to provide the environment where people will want to eat that less than burnt offering as is the ability to continually control cash flow. So, given these critical predetermining factors, what’s next?
There is always a balance between the cold hard accountants view of a business and the wildly optimistic ‘lifestyle’ view. In short, if you focus exclusively on the financial building blocks of a business then you will not succeed. If you focus on the lifestyle a business may provide, you will not succeed. Mr Abernethy’s article seemed to focus on the ‘building block approach’ as key to success. I personally do not believe this to be the best way.
Firstly, do not focus on the bottom line! Sounds strange doesn’t it, but it’s true nevertheless! Instead, focus needs to be on the things, which create the bottom line. Good systems do the rest. We are not computers; we are people capable of much greater things than continually focussing on individual financial components. Sometimes it’s comfortable to discuss minutia but discussing the qualities of a raisin does not make a good fruit cake.
Secondly, do not focus on the lifestyle things, which a prospective business may provide to the owner if successful. Although obvious it’s hard not to and is as bad as the ‘block people’ approach. You know what you want out of life and what that will cost. Figure it out then leave it in some accessible corner of your mind until the things, which will create the opportunity to realise your desires, are in place and working.
Thirdly, accept that life is too short to do anything, which creates little passion. So yes, buying and running a restaurant business is about passion and desire and making mistakes and enjoying life. But doing it with one’s feet absolutely grounded in reality.
A restaurant is one of the trickiest businesses to establish, run, buy or indeed sell because nearly one hundred percent of the time it’s personality driven. The personality of the owner [even if the business is managed], the personality of the manager, the personality of the sommelier or indeed the personalities of anyone with whom clients interact. People go out to enjoy the experience of dining, it is not a personality free retail purchase and this makes the value of the business directly linked to people. Indeed, personality can also be extrapolated to a physical environment as when we take over a restaurant we tend to change it to reflect us and what we think will be more successful.
Therefore, the fourth decision to be made is, ‘If I buy this business will it be successful with my personality stamped all over it?’ Instinct is a marvellous thing, it must feel right. The challenge must be palpable.
Now comes a little broad but telling number crunching albeit we are yet to delve into any number nitty gritty; this will come later. Fifthly therefore, figure out what you think the business can do with you at the helm. Be realistic if not a trifle pessimistic. Here, you are planning for success, not failure nor wishy washy I’m not sure or maybe thinking. At this point ignore what the business is currently doing albeit basic costs, style of menu, client numbers, pricing structure and opening times are important. [A customer buys once whereas a client is loyal and buys many times. Always focus on clients.] Be prepared to walk away if the results dont feel right or wont enable your chosen lifestyle.
Now, sixthly, establish what the business is currently doing. If there is not a significant gap between what you believe the business can do and what it is currently doing, walk away. The risks are too great for a ‘personality driven’ business. There must be significant potential.
I can’t stress this enough. Because you are buying a ‘personality driven’ business, potential is the mega purchasing criteria. What the business is currently taking in revenue is merely an indication of potential and unfortunately is directly linked to the current owner. Be careful of goodwill components. There is nothing inherently wrong with goodwill [it’s what we all develop in our respective businesses as a saleable quantity] but it is a pointer to revenue, not a guarantee. As personality is also linked to a physical environment, changing the way a business looks effectively invalidates so called goodwill making potential even more important. Despite the above paragraph, there is nothing wrong with buying a business’s potential! This is the punt we all take whether establishing, buying or selling a business. Just be aware that there are no guarantees and no free lunch [pun intended-sorry].
So, the first few questions you need to ask are:
· Does it feel right?;
· Am I going to enjoy the challenges?;
· Will my personality create success in this business?’;
· Will the projected figures enable my desired lifestyle?;
· What is the potential of the business over its current takings?;
· What are the risks?.
If you are still passionate, then comes the due diligence. Things like the lease with its terms and conditions, normalised books, exact and individually itemised bills of sale, changeover periods, inventory, client lists, etc. This is the boring bit but also critical. [We advise on, buy, work and
sell restaurants for a living and in order to make the ‘boring bit’ more palatable have developed a little spreadsheet which takes into account most of the variables including risk, ROI, COS, EBIT, staff and comes up with a business valuation. In our own business we complete a P&L inclusive of trend analysis every week. Broad brush maybe, but critical.]
If the seller or the agent can not answer all questions, walk AWAY.
I believe the emphasis on buying a business needs to move away from the ‘block people approach’ to ‘the jigsaw people approach’. [Block people build business success by creating solid foundations whereas jigsaw people create business success by bringing together the various elements of success ã] The jigsaw first approach is infinitely more suited to buying a restaurant than the block first approach. Unfortunately it is also harder, more intuitive but very satisfying. It’s a bit like playing golf. The block approach to golf can be likened to honing skills on the driving range – important, intrinsically satisfying and restorative because of
its simple and singular focus. [If life gets a bit much consider the therapeutic value of smacking the crap out of a couple of hundred golf balls at the local driving range] The jigsaw approach to golf focuses on the golf course as the challenge with all the variables such as wind, rain, grass, sun, bunkers, roll, etc all needing to be taken into account to be successful.
We all need both approaches in our lives depending on the situation. Restaurateurs need both in abundance but, when buying a business, need to be jigsaw people ‘first’. The intensity of competition will not allow a block approach.