Cash Flow & Start-Up Cost Matters

Spotting Opportunity, Acting On It, Asking For And Receiving

?Avoiding Deal Breakers

It’s so important to work out the variables and fixed costs to understand how to create positive cash flow right away.?Done right, you avoid borrowing costs and the indeterminable time it takes raising funds.?So start with what cash and credit you have to commit and work on reducing or completely removing 'start up costs’.

Spotting Opportunity

There are so many businesses that didn’t make it through the last two years.?This means there is a dislocation of capital investment, or one can say, landlords are stuck with a lot of ‘white elephants’.?Commercial property owners can only sustain losses for so long before they’re experiencing hardship.?Yet, equipment, tenant improvements added value to what once was an empty shell.?Think of the number of restaurants sitting empty today.?Let’s uncomplicate the potential opportunities taking over dead assets, such as acquiring a restaurant.

Granted, restaurants are one of the toughest businesses to run.?Ask any owner and they’ll tell you it feels like there are a million ways to lose money and three ways to control it.

Acting On It

Once you’ve found a property that has natural appeal going for it, has equipment in place that will be utilized, and looks as turnkey as possible, approach the owner or their agent.?Show interest in entertaining an offer.?Study what their motivations are.

The Offer and the Ask

Here’s a real-life story of a failed restaurant property for sale.?Two years had passed and no one came along who would take a chance of buying the real estate with a non-operating restaurant.?Talking with the owner about the property, the owner realized the real estate would be better positioned if there was a going restaurant operating.?Tom, the owner had tried it and found losing 10K a month was not sustainable.

So, as a young entrepreneur, I offered to give it a new name and concept.?Tom made an offer to lease the restaurant to me for $3000 per month with a $5000 refundable deposit.?Should I want out of the deal within a year, Tom would refund the $5000.?This may sound good, but Tom’s motivating factor was to sell the property, or if I built up the business, he could take over the business.

This is where you must determine the risk factors involved.?With $3800 to work with, there were problems to overcome that would have to be negotiated away.?And the risk of losing control of the property seemed high.

How problems were solved through the ‘ASK’:

The deposit:?Counter offered a $3000 non-refundable deposit with stipulation of a 3-year lease with option to renew- accepted.

The rent:?After many ?math scenarios, I settled on offering ?$1200 monthly rent (5% of est. gross revenue) plus 3% of gross revenue above the first $100,000 in sales.?The stipulation was to include a ramp up period of six weeks- accepted.?

The utilities:?Deposits had to be avoided.?Asked the owner to keep utilities in his name for the six week ramp up period.?The stipulation, I would pay the bills when due.

The inventory:?Before negotiating started, I got 5 vendors to agree to one week credit.?Within three months credit line was extended to 30-day terms.

Alcohol license: One did not exist and the risks and cash needed made the decision simple.?Purchase a Beer and Wine license for $500.

Labor cost:?Set up a 1st and 15th payroll dates so sales would cover payroll and inventory.?Hired 22 people of which 7 were instrumental in the first 3 days of receiving keys and opening for business.?These 7 people got the place cleaned and menu set up right down to the business street sign getting painted with the new name.?Without the 7 who quit their jobs to make the business happen in such a short time-frame, the restaurant might never have found success.?It’s the people who make a business happen; you are only the guy who got the ball rolling.??

Advertising cost: Zero.?Yet, the minute the doors were opened, all seats were taken and a waiting list ensued.?How??The key influencers in town got the word out.?The B&B's, hotels, and merchants.?Word of Mouth is your best friend.?There was $45 left over to make change with on opening day.?Nothing in the bank and no borrowing power.?The experience taught me, it’s about the community, the people who believe in you and willing to stick it out if need be, and control of money making assets.

The Decor: Nothing was on the walls or anything of interest to create ambiance. I had found a local artist who drew the perfect cover for the menu. I decided to put it on a classic tan coffee cup and sold a lot of them. That was a great way to fund replacing the breakage of dishes and lost silverware. The artist refused to charge me, I offered some complimentary meals but she didn't want that either. Guests would ask to take the menu as a memento (location was in a historical gold mining town in California) so there were reprints and updates over the years. This gave me the idea to go ask the local artists in town if they would like to sell their works on consignment and several did, more than enough to decorate the restaurant. The 10% commission went to the servers who assisted the guests in purchasing artworks. It was easy to get new art pieces in to replace what sold.

The first 3 years:?Trials, Tribulations, Lessons, Wisdom Applied.?Stories for another day.

Note- Dreaming about opening a restaurant without deep experience is a bad idea.?A franchise has a much better chance than an independent restaurant.?