My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, November 12, 2018

Advice for Entrepreneurs - A Case Study of a Failed Restaurant

Just over a year ago, my wife handed me our monthly copy of Toronto Life Magazine. She suggested I read a story “on a guy who started a restaurant”. The article's headline had the intriguing header of, “A Restaurant Ruined My Life”.

The story is a first-hand account by Robert Maxwell of the trials and tribulations of a would-be restaurateur. The piece goes through how he quit his job, bought a restaurant, struggled, had a little success, had personal issues and eventually lost the restaurant. The quick synopsis above does not do the story justice. The actual details make for a fascinating read on many levels. I suggest you consider reading this article. Here is the link.

What I want to do today is compare Robert’s experience to a blog post I wrote way back in 2011, titled, Advice for Entrepreneurs that had 12 pieces of advice. Not all are applicable, and a restaurant can be a whole other beast, but let’s see how my advice stands up; and consider if Robert had read my blog, would he have been better off? My original comments are in black and my comments related to the article are in red.

Personal Relationships


In the blog, I stated that “the most important issue facing any entrepreneur involved in a relationship or married, is their significant other. Starting a business requires a significant time commitment and comes with a large element of risk. If your significant other is not willing to support you both financially and spiritually, either your business or marriage/relationship is doomed”.

In the article Robert recounts that his wife Nancy eventually embraced his dream of opening his own restaurant. As a neutral observer I would suggest that Robert provided Nancy a romantic notion of what owning a restaurant would be like (they would have breakfast at the competition, work together at lunch and Robert would be home in time to tuck in the kids) and thus she embraced a somewhat fanciful notion.

Be Honest With Yourself


In the original blog post I stated that “you must ask yourself before you commence any business is; are you an entrepreneur by choice or circumstance?”

I would suggest that the restaurant was Robert’s dream and that the circumstance of a buy-out from his employer allowed him to start the restaurant, it was clearly a choice he wanted to make. So, he gets a check-mark here.


"Business Plans and Cash Flow Statements


In the blog I stated “my first suggestion is to walk before you run. Make sure you start slowly and have everything you require in place. To ensure you have everything in place, you need a business plan and cash flow statement”.
In my opinion, this is the genesis of Robert’s failure and largest error in starting his business. He did start walking by first operating a booth at food market that allowed him to test his food and ability. He also knew that 80% of restaurants failed.

However, Robert’s critical first error which he could never really recover from was he did not put together a business plan and most importantly a cash flow statement. For a restaurant, the cash flow statement is almost impossible from a revenue side, as you never know how quickly or if the restaurant will catch on; nevertheless, a cash flow statement allows you to understand what your initial cost will be and how long you can operate under various revenue scenarios.

In the article he states he had $60,000 and had already run out of money before the restaurant opened and needed an additional $20,000, he was lucky to get from a friend. But from that point he was always on a shoestring budget and tight. The lack of planning also contributed to him leasing a location that was in terrible condition and not necessarily the best location.


Partners and Employees – Know Your Abilities


Another point I made in the blog was that “most people are either sales oriented or business oriented. If you are strong in both aspects, you have the best of both worlds. Whether you start with a partner or hire an employee later, know your strength. If you are a sales person hire a good bookkeeper or accountant to help you. If you are the business person, hire a good marketing person or get advice on how to market your product or service”.

In reading this article, I felt Robert was in a sort of no-man’s land regarding to his abilities. He was an excellent chef, but still needed to hire one, was weak in financial planning (even though he had an analyst background) nor was he a marketer. There is nothing wrong with this no-man’s land, but Robert needed to account for his lack of expertise in his budgeting and cash flow.


Financing


In respect of financing, I said the following back in 2011, “where possible, you should try to start your business after you have worked a few years and built some capital. Many young entrepreneurs access family money, either as loans or as equity. However, since many start-up businesses fail, you should ensure that if you borrow or capitalize your business with money from your parents, you do not put their retirement plans in jeopardy. Where possible, have a line of credit or capital cushion arranged in advance”.

As noted in the article, financing is almost non-existent for a new restaurant. Thus, Robert needed to build greater capital before starting the restaurant. His financing was weak.


Marketing


Marketing is vital for many businesses. The marketing for a restaurant is a little different than the average business, thus my comments were not entirely applicable in the November 2011, post.

That being said, the restaurant had a soft launch and was advertised and eventually got a couple reviews from newspapers that spurred business. It is not clear if Robert pursued these restaurant reviews and if he used social media to publicize the restaurant.


Don’t Discount Your Services or Product


In the original blog I stated,“one of the biggest mistakes I have seen entrepreneurs make is discounting their services or products to get business”.

In the article Robert says “What I didn’t realize was that I was charging too little - we were producing exquisite, labour-intensive meals and selling them at Swiss Chalet prices. I clearly didn’t have a head for business.” Not much more to be said.


Keep Your Books Yourself


In the original post I said “This is a bit of an unusual suggestion, but if possible, you should initially keep your own books and learn about accounting. You may require a bookkeeper to assist you, but you will always be a better decision maker if you understand your own books. You do not want to be dependent on your bookkeeper”.

There is not enough information to comment on this. But Robert did not spend enough time to learn about the basics of owning a business such as he would need to incorporate for creditor protection and that he was liable for HST and payroll taxes as the owner.

Give it Time to Grow


In my post I said “Most businesses require three to five years to begin to mature and solidify. Thus, you will need patience and an understanding that you will not be “raking in the cash” for several years.”

For a restaurant this is not relevant, since so many close within a year or two. They are typically hit or miss, most often a miss.


Your Psyche


Finally, my last comment on the blog post in 2011 was “Many entrepreneurs at some point in their business lives have been perilously close to bankruptcy or have actually had a business go bankrupt. While not always the case, entrepreneurs seem to have nerves or steel or at least give that impression. You may be able to be successful without those steely nerves, but they would be an attribute if you start a business, so you can face down the many challenges that will confront your business.”


I don’t know if Robert has nerves of steel or not, he certainly went through a lot. However, as he notes, his nerves were artificially re-enforced with sleeping pills and alcohol, not the ideal way to combat the stress.


Summary


In my post I concluded with the following “It has been my experience that when entrepreneurs reflect upon their businesses, they almost all say that if they knew about the physical toll, long hours and financial stress they would endure, they would not have started their business.”

Robert notes at the end of his article that he is sharing his story as a cautionary tale to other amateurs who have big ideas and dreams and his advice is don’t even think about it. While I am fully in on the caution, especially for the restaurant and bar business, if you are considering starting a business and go through the list of considerations above, I think you may qualify or disqualify yourself if you are honest with yourself.


This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

1 comment:

  1. Well thought out and written. Thanks for continuing to come out with such great stuff.

    ReplyDelete