Sorry for the delay everyone. It's Mardi Gras time down here, so my GOGO & I have been spending quite a bit of time on the streets measuring foot traffic in front of some sites I have been looking at. As a sidenote, you can often request a report from the city engineer on the traffic counts they record for a particular street or intersection. Sometimes your local public transit company will have the same.
(http://www.amazon.com/GOGO-Counter-H.../dp/B001UDW68U)

I hope to find time to load this thread with some extended content on issues that I believe should be considered in greater detail. Let's continue the Q&A, but if you have a subject you want addressed more specifically please post it the thread. Subjects I wont be expanding upon include: comparing one franchise with another, breaking down a P&L (at least not yet) or should I buy a bbq place or a taco stand. I really want to address preconceptions or intuitions you may have that could lead you to making a mistake with your time & money. If there is something about this industry that strikes you as odd or you are unclear on the logic behind it, no matter how silly you might think it is, please feel free to post it in the thread. I'm going to start with failure & failure rates, how I value chefs, pre-planning a concept & some thoughts about lease agreements.

Failure Rates
Any conversation about investing in a food & beverage operation inevitably includes the subject of failure rates & the perception that F&B investments have significantly higher rates of failure than most other business starts. Do they?

I do know that restaurants are very public investments that generally require a permanent physical location, signage, advertising & usually engage the public more personally & more frequently than a business that sells stationary or jewelery or ceramic figures. People generally eat a few times per day & have to make a decision about where & what they will eat much more frequently than they do about other transactions. I could go an entire year or more before having to visit a jeweler or stationary store, but I have to think about eating every day of the week. (This physical human requirement for nourishment is the primary durable advantage this industry has over others.) My point is that we have a more personal & more frequent connection with f&b operations. The jeweler could have closed up one week after my last visit, but I might not know until a full year later. If your regular coffee shop shuts down, you might learn that in <24hrs. It's also very obvious to everyone when a restaurant goes dark perhaps highlighting these failures over others. The sign comes down & the window wrap goes up, the parking lot is vacant --we can see with our own eyes that they have closed. What about the businesses out of our view? Or the businesses that simply don't have your attention?

Anyway, the below captioned links should answer all of your questions on failure rates & the last one is an absolute must read for anyone seriously considering an investment. Confront these issue & then move on to the more important ones.
http://www.restaurantowner.com/public/302.cfm
http://www.businessweek.com/smallbiz...416_296932.htm
http://www.econ.ucsb.edu/~tedb/Cours...ntsfail.pdflop mburger

As you can probably tell, at this point in my career I don't focus too much on failure rates & don 't expend much effort trying to determine what businesses have the highest or lowest rate of failure. I do have some interest in which models are thriving, but I draw those conclusions more by my own observations & operating knowledge then by specific stats on store openings & closings. It's easy to misapply that type of thinking. Chipotle is doing pretty well. Does that mean that the market for burritos is in general a strong one? Maybe, but imo it likely means that a concept with laser like clarity of offer & focus, strong operations that know the value of managing or controlling most of their inputs, some economies of scale & a brand with a high perceived price/value equation can take sales away from lesser operators. That's really all the info I am looking for. It keeps me focused on drilling down through a concept to find it's true value & not just start selling burritos or coffee or yogurt.

The overall market for people spending money on food & beverage is a strong & reliable one & as suggested above, primarily due to the basic human requirement for nourishment. There is of course much more to the business end of it then just supplying that nourishment. Dozens of factors will determine if a particular customer will choose to spend his money with you. However, it's safe to say that there is not some better, faster, cheaper & acceptable substitute for eating in the form of a pill or shake that will make restaurants & quick serve concepts obsolete—but there are certainly better, faster & cheaper concepts in the works that will provide more value to the customer & better serve them.

Last thing. It's easy switch our focus from failure rates to success rates. Don't be fooled. As we will discuss further in this thread, there are many factors at play that will distort these numbers & we will learn quickly that many establishments will continue to operate & change hands despite being “failures” & not appear in the stats as a failure, they will likely appear to be successes—and quite often they are not

What is Failure?
Let's assume for a moment that failure is not some absolute condition & perhaps measure failure on a continuum like so:
100% Success----------------------Break-even--------------------100% Failure
Let's also assume:
100% success=operating results that meet or exceed all of our expectations (illogical or not)
100% failure= total loss of investment that results in a bankruptcy filing.

The businesses on either end must be the ones you can identify the quickest and easiest. That's the first instinct we want to develop so we can focus on the middle which is where most of our deals will come from.

100% Failure
In the case of a restaurant going dark, we are likely in the area of 100% failure. By dark I mean an unannounced closing that results in locked doors, covered windows, disconnected phone line etc...etc.... If it is a franchise, it will be often be stripped of all signage or otherwise identifiable markings. Franchisors are very particular about this, they do not want their brands associated with failure. A reasonable business person will try to exit a failing concept with a sale before going dark, not finding a buyer while open & operating is an ominous sign as most of the value is due to ongoing operations. Cliffs: going dark is really, really bad news & you should generally stay away from these deals.

If we are looking to acquire this type of business (and you must be very careful doing so) it's generally to re-concept & leverage some the existing equipment & improvements & hopefully the location.
There's a good chance the landlord now controls the contents, so I am looking to do business with him & him only. Many,many questions need to be answered before proceeding, but in general I am looking to take these places over for $0 in upfront investment & taking over a lease. You can be certain I am using my experience, previous tenant failure & my fresh cash to pay the rent as my primary negotiating leverage.

PS: There ares some things that you may want to strip out of these businesses, customer lists or accounts related to catering or bulk orders—items a failed owner is generally happy to get some cash for. Sometimes it will just be a phone number If your in a quick serve concept that relies on delivery, your phone number is one of your most valuable assets. I have offered thousands for phone numbers and have never been sorry in doing so.

100% Success
Not always the case, but these are generally the businesses that are simply not on the market for sale.
Why would they be? When these types of transactions take place they are often very private with no interruption in operations. If they are listed, it's for a premium price. That price might seem unreasonable to you in absolute dollars as compared to the “cheap” listings you see everywhere. However, those cheap listings often end up being much, much more expensive in the long run. Unsophisticated buyers will pursue a listing for 50K because it's “cheap”, but not pursue a 400K listing because it's “expensive”. I think most of you are wise enough to see the faults in that thinking.
So when someone asks how do I buy a profitable business at a good price, I generally say luck & your checkbook.


I will post the second part connecting failure & expectation later tonight.

If you can hold on a bit, I am likely to post the details of a concept I am working on that will be pitched to hands off investors & I will probably elaborate on what my requirements are to close the deal. It's not going to answer your question perfectly as I only pursue concepts that can be expanded into hundreds of units & part of their investment (what they are really investing in) is the franchisor position & not so much the first couple of operating units.

That said, you will likely have to give up more than what you initially have in mind, not necessarily in real equity. A 40% stake in the profits does not require a 40% stake in equity. And ~40% is the number you need to start with, it could be higher.

Good stuff. The link doesn't work tho

Wow, I thought a 51% controlling interest was an absolute minimum.

In my case, I don't think my person is bringing enough to the table and was thinking of not giving her more than a 20-25% interest plus perhaps a small salary or hourly wage

My hope is that this concept could turn into a 100 plus chain but I don't want to do that work, I want to turn it over to an expert like yourself and keep a passive, smaller interest of a much bigger pie and let the experts do what they do to take it nationwide

What would you need to see from my concept for it to attract you to do your thang?

http://www.econ.ucsb.edu/~tedb/Cours...urantsfail.pdf

The truth is I have very little interest in hearing about concepts that are not coming from very experienced operators or are not of my own design.

Good info. The first questions that came to my mind are: A) why are you selling it? B) how would I ever verify financials? and C) do I keep the chef/cooks? Since menu and reputation are the bulk of what I'm really getting since the property being a lease.

This example is more of a thought exercise rather than something I'm actually looking to buy, but that restaurant is extremely well-reviewed (limited sample size) online and in a growing touristy area. The co-owners/chefs have one or two other restaurants in other cities, so it may well be that they are looking to focus on bigger markets somewhere else. I'm not sure if they're local or not.

Edit: Just saw your post about the sports bar with tips on discovering and/or estimating the financials. Great stuff.

Fair enough, can u elaborate more on your thoughts about how much equity you retain and if my thinking is off, etc?

I'm not sure how to structure these deals where my money is at risk and all the other person is risking is their time, time is valuable but if they don't bring a hell of a lot to the deal, then it seems absurd not to retain a controlling interest

Wait, I'm not trying to get into my concept or get you to invest, I'm curious what specifically you would want to see from an experienced operator that would make you want to invest in his business.

I'm asking because if I decide to go forward with something, I'd like to put it together IN a way that is not just profitable but an attractive investment to people that could take it to a multi unit, large scale operation.

For example, I'd love to know what path Chipotle took that made it attractive for mcdonalds to invEst in

Great thread, thanks for doing this.

Can you talk a bit about what questions you ask yourself before you decide to open in a area? How do you figure out those answers without investing a lot of money (is this even possible)?

To get into specifics, I live in Brooklyn and we have a large Jewish community in the area. There are many kosher restaurants as well as fast food joints that cater to the need for kosher food. If I was considering opening something up, what must I know in order to have a shot at succeeding? Is there anyway to know if the area can handle another restaurant/fast food place without actually starting up?

Yes, I understand your not looking for $ investment, I was speaking of my investment of time & effort & in some way $ because their is an opportunity cost involved in pursuing one concept over another.

There is not much chance that you will put together an operation that strong operator would like to franchise without making many, many changes or improvements--in the end, they don't really need your concept. & I think you might not be fully aware of the complexity involved in building a franchise model from the first unit. My advice is to focus on thing, do it really, really well & maybe someone will be interested--but the reality is that's very unlikely. Start with one idea, one store, make it profitable.

The answer to your chipotle question is in my previous post.

In a very general sense the first question I ask is..do I need foot traffic, actual footfalls of people walking around or can it work if you have to get in the car? Some concepts that do the majority of their business at lunch would look pretty good to me if I was in midtown manhattan (the largest concentration of office space in the world.) That same concept would not work very well in a bedroom community where the majority of residents are absent during that service period. It is possible to do quite a bit of DD without making much investment at all. Studying traffic patterns, footfalls, looking at maps, which side of the street I want to be on etc..etc.. It's very tedious though. I spent a couple of days last week standing on street corners counting pedestrians.

I don't open up to dominate a market. I would like to, but my goal is to peel off 5-10% of my sales from my individual competitors, so I don't worry about a high concentration of operators.

What is your background? What kind of experience do you have? Also, what ideas do you have for an operation?

I've opened up two successful businesses in the past 4 years. One wholesale bus which I started with a number of partners and another financial service business that I started on my own. I'm also working on a number of online projects with partners. The past four years I've learned a lot about businesses, working with partners, dedication, and planning to succeed. I however have zero experience with restaurants/retail businesses.

I had two ideas not sure which one to pursue further if at all. There is a space for rent that is near a highschool that has over 2k+ kids in attendance and is in high traffic foot area. Most of these kids order in, or go out for lunch.

There are no shortage of food options, here's what's nearby

2 Pizza joints within 6 blocks (very competitive pricing, 2 slices and a coke for $5)
1 fast food Chinese restaurant (also offers lunch deals)
2 Mid-High end restaurants
2 Bagel stores

My first idea was to open a yogurt type store as there seems to be a clear void for that. However, I'm not sure I can sell enough yogurts to make it profitable with the rent being $7.5k a month.

My other idea was opening up a kosher Subway franchise. We had one open in Brooklyn a couple years ago, the first couple months they were packed but they shut down after 8-10 months. The location was pretty bad though.

I guess my questions to you are should someone like me with no retail/food experience even consider getting into this business? Am I aiming too high by trying to open my first place in this type of area, and which of the ideas if any makes more sense to you.

Thanks

sir.op is tired of you and your concepts. he cant teach us anything from you.

dude............kids dont eat yoghurt! or kosher sanwiches! unless they are weird kidds!