Starting a Restaurant in NYC

[jackal10]

Its a standard sucker ratchet.

The bet is that you will lose money and need to go back to them for more, which you will inevitably. That's OK. You gave away say 30% for the first round. Generously they will let you have the second round on the same terms, and they now own 60%, and they have control. Three rounds and its 90% and all your work is for nothing, just as it begins to turn the corner.

A nastier variant in these times is the death spiral. Here the proposition is that the investors value is maintained even if the value of the asset declines. Thus you start with 30% for which you buy nice new shiny equipment. You need more (or want to cash out), or its review time. The equipment is worth less, having been used, or the economy and the restaurant trade has delcined, or you haven't made the projected numbers. The value of the business is say half what it was. The financiers therfore own 60%, even without putting in new money. Down rounds are really tough.

Actually (at least here) it is really tough to find an investor who would put in the majority of the money without owning the majority of the stock, or without an asset backing or other guarantee. If the investor owns only 30% you will need personally put in the other 70%, which under the schemes above you lose rapidly. The sort of person that would put in money without stock or guarantees, you probably don't want as an investor, and may be even more expensive or difficult to service.

[Bond Girl]

Jackal, this is very helpful perspective. thanks! II haven't fully thought out the downside and you just did it for me.

[herbacidal]

Jackal, I agree with your reasoning on the downside. It is very helpful.

I'd like to think I'd be aware enough to throw in the towel rather than going back for the second round, but I can't say that until the time comes.

For most entrepreneurs, I can definitely see that happening, because many people do fall in love with their idea.

Now that I've re-read your post, I have heard that scenario before, but had forgotten about it. Very informative regardless, and a good cautionary possibility.

As far as the investor who would put in $$ without stock or guarantees,

I also entirely agree.

That said, I think it is always unwise for the operator to not be putting in money of his own in this day and age, precisely for the scenarios described.

Given the current overall business and finance environment, my own ideal financing scenario for a business's startup capital would be:

The business should be projected to make a profit in the second year.

Total startup costs (and therefore total amount of financing targeted)

would include operating costs for year one.

Total startup costs should be no more than 40% debt. Ideally, it would be 30%, half a line of credit and half via a vehicle similar to a bond.

At least half of the equity would be provided by the operator. Ideally, there would be 2 equally talented individuals as partners+operators overseeing different parts of the business, each with influence but not control over the other part.

A variant of this would be 1 partner acting as operator, and 1 as nothing more than partner.

In this situation a sweat equity to dollar equity ratio would have to be negotiated, such that the non-operator did not gain an outsized degree of control over the business. The opposite situation is not nearly as likely, although possible.

This sweat equity to dollar equity ratio would also be necessary if the partners are providing different amounts of startup capital.

Obviously, the situation increases in complexity with the addition of other partners.

Off-topic Lament: Remember the days when Warren Buffet started his first limited partnership on his own?

Seven limited partners contributed a total of $105,000.

General partner Buffet contributed $100.

Limited partners receive 6% annually on invested capital and 75% of profits above this point.

Buffet receives other 25% above that point.

I suppose some VC/hedge funds have similar operating structures, but I can't imagine a first-time operator getting such great terms nowadays.

Apologies, I used me and I a little too much. This is meant to be from either

Ya Roo's viewpoint or a generalized point of view.

Edited January 29, 2004 by herbacidal (log)

[clifford]

This post is fascinating, and I might say, a bit daunting.

It seems to me that starting a restaurant is the modern day version of alchemy. No matter how much you think you have the proper mix of overhead, labor, and F&B costs, a substantial portion of the success is predicated on..........luck?

Even talent AND sound business plan AND a passion for the business AND the willingness to work 80+ hour weeks more likely than not are going to amount to heartache.

As Mr. T so eloquently stated..."I pity the fool"

[herbacidal]

This post is fascinating, and I might say, a bit daunting.

It seems to me that starting a restaurant is the modern day version of alchemy. No matter how much you think you have the proper mix of overhead, labor, and F&B costs, a substantial portion of the success is predicated on..........luck?

Even talent AND sound business plan AND a passion for the business AND the willingness to work 80+ hour weeks more likely than not are going to amount to heartache.

I would say that a substantial portion of any business' success is predicated on luck.

The best that can be done is to work hard and work smart and put the business in position to be able to take advantage of luck when it comes.

I would say that in many situations, something that would be called luck if a business is able to capitalize is just passed by if a business is not in such a position.

No different for a restaurant than any other business or even a sports team.

Or a person and his/her career and life, for that matter.

Put another way, you do the best you can with what you can control.

On top of that, you maneuver as best you can to adapt to whatever outside your control affects you.

Edited January 30, 2004 by herbacidal (log)

[LJC]

Hi Bond Girl:

I am coming into this thread pretty late but I have reviewed many of the posts and I hope my input can help.

I have worked in the hospitality industry for over 12 years and I have worked on (in mgt capacity) 7 new openings ranging in quality and style from a casual cafe in brooklyn to on of Manhattan’s 4 stars. All of these projects were privately funded (as most restaurant projects are) and owned by reputable and successful NYC operators. I now work in commercial real estate doing site selections for mostly F&B related companies.

You seem to be getting some good advice and support for the wonderful egulletiers; so here is my two cents:

First, LOCATION, LOCATION, LOCATION. It is very difficult to work proformas and accurate budgets without knowing the location costs and space confines. The location will dictate the potential # of covers you can do each day, possibly the menu you choose to offer, the number of seats, the kitchen lay out and subsequent equipment you will need to purchase. You can ballpark rent budgets by area but every location is different and there is no rule for space cost. Each location is unique and no two are the same in price, size, term etc. (PM me and I can give you some good ballparks for diff. neighborhoods).

Don't plan or design or spec kitchen equipment before you chose a chef and a location. A combination of the chefs style, menu and space will dictate the equipment you need and can fit. A good example is a deal I worked on where a prestigious building built a rest. (back of house) based on some a--hole consultants advice before they found an operator. When they found a worthy operator he was unable to use the kitchen as it was built and it wound up costing the building owner $160k to re-tool the kitchen to the chefs style of cooking.

PR is 50% of the equation. Some celebrity chefs and restaurateurs do their own PR. But if you don't have a reputation the writers will follow nor do you have close personal relationships with the editors of the top publications you need to hire a competent company.

Real estate is the name of the game for a beginner; you want to control a location. If you can own it great but if you lease it you want options to extend and the right to assign. What is Mc Donalds Bussiness? Well, it's not hamburgers, they control and own some of the most desirable real estate in the country.

One poster wrote something about locations being available in bankruptcy. I can tell you that a lease on a good location is incredibly valuable. An example would be the lease of a failed Union Square location was just sold to a new operator for $400k. I guess that the operator who could not keep his restaurant afloat was able to breakeven by selling his lease.

As far as the returns on some of the larger investments mentioned in the thread (i.e. $12M) we are talking about proven operators with solid concepts that are projected to gross around $20M per year. There is an operator in NYC currently looking at a deal for 30,000 square feet at a cost of over $4.75M/yr. It is simply a matter of scale. These numbers seem huge but make sense in their business models.

Good luck and I too am cheering for you!

[Bond Girl]

Location is the key from what I heard, unless your name iis Mario Batali, then iit's a whole different story. I think i know the Union Square property that LJC is talking about. The whole business is starting to look like alchemy to me as well. As a restaurant operator recently told me, you don't go into this business to make a lot of money, unless you are doing fast food. You go into it because you like it and hopefully you can make some money.

[beans]

As a restaurant operator recently told me, you don't go into this business to make a lot of money, unless you are doing fast food.

Oh, that too is filled with the same woes as I'm into the two week mark (since opening the doors) with my family's lunch/takeout "fast food" palace.

We'll see with time. Perhaps they meant a commercial, franchised chain ?

[Clerkenwellian]

Off-topic Lament: Remember the days when Warren Buffet started his first limited partnership on his own?

Seven limited partners contributed a total of $105,000.

General partner Buffet contributed $100.

Limited partners receive 6% annually on invested capital and 75% of profits above this point.

Buffet receives other 25% above that point.

I suppose some VC/hedge funds have similar operating structures, but I can't imagine a first-time operator getting such great terms nowadays.

Apologies, I used me and I a little too much. This is meant to be from either

Ya Roo's viewpoint or a generalized point of view.

times have indeed changed: managers of hedge funds and venture capital funds now make a significantly higher return than this! It's not uncommon for them to receive a majority of the return once a certain threshold is reached.

[Bond Girl]

It had dawn on me after much ado that the whole issue here really revolves around funding. Before you have the money or commiitment to it, you really can't do shit. So, I went about educatiing myself on what is the norm in restaurant funding. I called a guy I know who's made millions running his own distressed fund private equity company. He told me that no deal is a bad deal, it's how you negotiated. If you are getting at least 30% then it's a good deal, just make sure you negotiate a good compensation package for yourself, he advises.

Another friend told me that what I needed was not proper investors per se but high net worth individuals who can afford to lose the money.

A third one asked why don't just take out a loan? I would have full control of my business then.

It seemed that there are more ways to skin a cat, you just have to decide on the best one for you.

[jackal10]

All the advise comes to much the same.

Funding something as insanely high risk and poor return as a retaurant takes either some non-economic love, or a very high return to compensate for the risk

I doubt if you would get a loan without collateral, usurious interest rates and personal gurantees. The problem with a loan is that you end up with the debt, reagradless of how well or badly the restaurant does. At least with equity you can walk away.

[herbacidal]

Oh, that too is filled with the same woes as I'm into the two week mark (since opening the doors) with my family's lunch/takeout "fast food" palace.

We'll see with time. Perhaps they meant a commercial, franchised chain ?

They probably did. Although Chinese takeouts tend in urban areas tend to do well.

Beans, what kind of takeout place is your family trying?

[JosephB]

For $20 you can apparently operate a virtual restaurant. The March issue of Saveur reviews "Restaurant Empire," which allows users to pretend that they are creating and running a serious restaurant. The reviewer worked for nine years as a video game producer, and thinks "Restaurant Empire" is "realistic enough to make you wonder whether you really want to own a restaurant."

Buy it from Amazon

[Bond Girl]

Or, you can just be good at playing computer games. I'll check it out.

[jackal10]

Read this and weep:

No fat profits at Fat Duck

HE is a celebrated chef who charges upwards of £85 a head for a meal. His restaurant has just been awarded three Michelin stars, making it one of an elite 47 in the world.

The Fat Duck at Bray, Berkshire, chef and owner Heston Blumenthal, 37, has proved how tough it is in the restaurant world. Accounts recently filed at Companies House show he has gone heavily into debt to reach the top.

Blumenthal's company, Fat Duck, showed a profit of less than £19,000 on turnover of £1.2 million in the year to March 2003. Blumenthal also took a pay cut. Directors' salaries were £129,000 compared with £143,000 the year before, when the restaurant made an £18,000 loss.

Jamie Oliver's restaurant Fifteen was the subject of a TV series and is booked months in advance. But it still made a loss of £679,000 in its first year. However, Fifteen is forecast to go into profit next year.

Others have been less lucky. Jean-Christophe Novelli ran into terrible financial trouble when he launched a chain of restaurants in the UK, France and South Africa. Despite rave reviews, he lost money and the bailiffs were called in

And Gordon Ramsay, another holder of three Michelin stars at his

restaurant at Claridge's Hotel, Mayfair, is also feeling the pinch. Due to lease complications, he closed his London restaurant Fleur, which only opened last year. And Ramsay also had to shut his Glasgow restaurant, Amaryllis, after three years.

[alacarte]

No posts on the restaurant start-up in awhile. Either Bond Girl is busy, or we have discouraged her.

What's the scoop, Bond Girl?

[Bond Girl]

Busy s the rght word. Do you guys know that a deal broker (is. some one who find you the money) can charge you up to 10% of what you want. So, if you want $1 miillion for your restaurant, you have to pay him/her $100,000. Then there is the potential investor, and they all seemed to want yoour blood for giving you the money, and a few even want more. A lot more. I feel like I've been schmoozng so much that water is starting to roll off me. Having said that I am having the time of my life, I learned how to eat and talk at the same time, and acquired a whole social calendar. Off to the Spice market tomorrow with another potential investor. Wish me luck.

[jackal10]

Good luck

It usually takes btween 100 and 200 full presentations...

Even so you then have to hassle with the lawyers...

Pay the deal broker on on success, when the money is in your account, not before.

[alacarte]

Good luck!

And it's wonderful that you are enjoying the process of building the restaurant too. Puts one in mind of the old saw about enjoying the journey as much as the destination.

[marthapook]

Just one thing to add to the previous postings

when you do get up and running. . . .

pay your purveyors cod or bill to bill

i've seen may a restaurant close because the 30-60-90-day-take-from-peter-to-pay-paul thing just does not work

buy what only what you have the cash flow to pay for

that one simple rule can make or close a restaurant easily within a year

best wishes

[Bond Girl]

The problem with having investors from outside of New York is that quite often their idea of "seasonal food" is not your idea of "seasonal food". This is particularly the case when your investor is used to seeing Greenhouses and import labels on their produce. While presenting my restaurant business plan to an extremely wealthy investor from Texas the other evening, I hit a stone wall on the concept of "Seasonal Menu" (after having explained to her the difference between farm raised salmon and wild salmon). The investor wanted to know what will be the "signature dish" of my restaurant. I patiently explained to her there won't be a specific signature dish per se, as the menu is seasonal, it will probably change from time to time to reflect the season and the ingredients that are available at the time.

"Well, isn't that what all restaurants do anyway?" she replied. "And, they all have a signature dish!" She proceeds to tell me theb signature dish of the restaurant in her town.

I think I am beginning to learn that your investors not only need to have money, they need to be food-smart as well.

[oakapple]

I think I am beginning to learn that your investors not only need to have money, they need to be food-smart as well.

Actually, it strikes me that a little bit of knowledge can be dangerous. Either the investor should help to run the restaurant (and have the background to be helpful), or s/he should entrust that responsibility to those who do. I haven't opened a restaurant, but in most fields, investors who dabble in substantive decision-making can be the kiss of death.

[robert40]

My God.

Even if you had not planned a seasonal menu how could one ever guess which dish will become a signature.

So many time's a chef think's one dish will stand out only to flop while another is a hit that was never expected.

Obvious this lady had no clue and when you first noticed that, it would have likely been a good idea to tell her anything she wanted to hear.

I really wish you all the luck in the world Bond Girl !!

I have faith that you will prevail when all is done.

[Bond Girl]

Obvious this lady had no clue and when you first noticed that, it would have likely been a good idea to tell her anything she wanted to hear. 

Thanks guys. So far, it's been six months into the venture, and I've encountered:

* One highly temperamental chef who changed his mind every other day

* One condescending chef who didn't hesitate to informed me that I don't know shit about food.

* A shark like deal broker who wanted 10% finder's fee and equity in the business.

* A dirty old man who would invest if I make it worth his while.

* Two guys who wanted a chic trendy lounge on the UES, but didn't want to give any one any salary increase in five years.

* A flaky banker who never returns calls, but will call you just to tell you that he's going to be calling you.

* A lot of investors who thought "fresh" meant anything they found in the frozen section of the supermarket. It's "freshly frozen".

* One investor who thought morrells looked like animal organs.

But there are also a lot of people who gave me a lot of help and encouragement. And, even more to give me sanity checks when I needed. Otherwise, I would have given up a long time ago.

[alacarte]

what a cast of characters