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.
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.
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.
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.
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.
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.