Need advice, would you take this risk?

[nkdude]

Hello all, been lurking for a while. First post.

A little about myself. Age 43 and wife is 38. Married with no kids. Monthly joint take home income is 7k (5k job, 1k side business and 1k wife part time work). I neither hate nor love my job. Total net worth without home equity is around 300k (50/50 allocation-I know this is not aggressive but it lets me sleep well). Home equity is around 150-200k.

So the risk? The risk is whether to buy a business or not. Wife wants to buy a small restaurant for 55k. This place is currently inactive, we will be basically paying only for the equipment. Lease will be for 5 years depending on landlord. Wife is very optimistic that she can be breakeven in 1 year time. Without going into the details, lets just say that we will have to put in 2-4k per mth during this 1 yr period. After this, we may make any where from 2k mth (bad business) to 8k mth (great business). However all of this is just guessing, for all I know it could never make any profit at all. I know what expenses will be but not what sales will be.

Now my question is would you guys take the risk of doing this? Would you take the risk of signing a 5 year lease, investing 55k and more, for the chance, not guaranteed, to go from taking home 7k a month to 14k?.

Right now our life is great and we have time to enjoy it. We live below our means but still enjoy life. With the business, we will be working 7 days a week until we can afford to hire help. We have no debts other than our mortgage, which has low monthly payment and only 60k balance. Of our 7k monthly income, we probably only spend 2.5k and bank the rest. I don’t really have any FIRE plan other than to save as much as I can; that is I don’t have a date, but will retire when I feel that I have enough. Of course the sooner the better!

So, do we disrupt all this for the chance to FIRE earlier? What say ye?

(I hope I posted this in right section)

 

[bbbamI]

I've never owned a business, but here are my thoughts:

Wife is very optimistic that she can be breakeven in 1 year time.

Is this based on facts or hope? You say she works part time. Has she ever worked a 5 or 7 day week?

Right now our life is great and we have time to enjoy it. We live below our means but still enjoy life. With the business, we will be working 7 days a week until we can afford to hire help.

That will be a major change, how do feel about owning a business?

So, do we disrupt all this for the chance to FIRE earlier? What say ye?

Life is all about choices and taking chances. However, I think you need to take your time. Learn everything you can about running a business. If you're convinced this is worth a shot..go for it.

 

[barbarus]

Do either of you have any experience in running a restaurant?
At best, 4 out of five small businesses fail in five years statistically. The restaurant business is much less successful. Established restaurants are having major problems now and things are getting worse.

Pragmatically, it would be cheaper to get a new wife

, but if that's not an option be REALLY careful.

You are playing Russian roulette with five of the six chambers loaded.

 

[CuppaJoe]

My instinct is to discourage you two but I happened to read this article today. This business thrives on great, cheerful, friendly customer service. They got the restaurant bug in 1998, I ate there occasionally and got to-go soup often.

S.F. Soup Co. has strategy for expansion

Of course, I would listen to BbbamI and Barbarus. The people in the above article had great backgrounds; he went through a post-MBA training program at a megacorp I know well.

I'm not clear if you plan to keep your job, or if both of you would put in 7 day weeks. Reminds me of a former co-worker, a lawyer, who married a chef, they soon divorced and he opened a restaurant with a co-worker, mega mega business success.

BTW, welcome. Let us know what you decide.

 

[Caroline]

From everything I've seen it's a very tough business.

If you're wife is working part-time now, why doesn't she take another part-time job in a restaurant? She can see what it's like to work full time and find out what the issues are before biting off more than either of you want to chew.

Good luck, regardless.

 

[haha]

Are you Chinese or Korean or Indian or Ethiopian or Mexican? If not, say no. I see 2 classes of restaurants that sometimes are successful enough to stay open. One is low food cost, low capital committment and ethnic.

The other is started by people with $1mm+ to invest, and if it is very good and can attract a buzz seems to do OK.

No consumer retail business yields to the type of analysis that we on this board indulge in.

Ha

 

[dex]

However all of this is just guessing, for all I know it could never make any profit at all. I know what expenses will be but not what sales will be.

Has your wife worked in a restaurant?

If you don't know the sales you don't know all the expenses - variable costs associated with the sale. You should be able compute various sales scenarios to determine if the business is viable.

Do you have a detailed business plan?

Basically, I thing the cost structure doesn't feel right for a restaurant that could generate a net profit up to 96K/yr.

Also, I don't know how you could compute a profit of 2 - 8 K/mo without knowing the sales.

55K purchase price
3K opportunity cost on 55
48K "put into it"
12K loss of wife's income
118K first year cost
1.2 to 4.9yr pay back time

 

[CuppaJoe]

HaHa has an interesting point. There is an ethnic restaurant near me that was highly capitalized, was successful in one location, closed and re-opened in a high-traffic area. They were booked up months before they opened. I never ate there, don't like their high-tech decor, but got food to go a couple of times. The food is identical to an ethnic place in my neighborhood; I like the decor there, never have to make reservations and the employees are like old friends.

 

[FIREd]

The restaurant business is notoriously risky with a high failure rate. It is also a very demanding business (long hours, short or no vacations, etc...). And, let's not forget, it is a very challenging time to be opening and building a business which depends so much on people's discretionary spending given the current economic crisis which by many accounts could be severe and prolonged. Unless you really understand what you are getting into, I would forget about it.

 

[stoopwallace]

NKDude:

I have never run a restaurant, so please take following as semi-informed advice (I've built and run a $5m company & started 6 businesses -- 4 successful, 2 crash and burns).

Quickees:
- one or both of you simply must have experience in the restaurant business. It's a surprisingly complex business (really) that takes a wide-range of talents. Marketing, product development, product delivery, inventory, inventory spoilage, finance, HR, etc... way more complex than the bizzes I've built.

- From startup experience, three columns are necessary. Col1: Your current projections. Col2: triple your expenses & time-to-breakeven, half your return Col3: Quintuple your expenses, and reduce your expected by 80%. Can your personal finances/plans weather a crater? I know from experience. Biz failures blow & have a wide-ranging impact (health, finances, relationships).

- as an investment, businesses that create a product once and sell-many times are mucho more fun and profitable. Unless systemized, a restaurant is a daily hamster wheel (the wheel stops and needs a kickstart-a-new, each and *every* day).

- If you must buy a business, risk your capital on one that is operating and profitable. There are many about: see bizbuysell.com

- $55k for equipment alone seems high.

- 5 year lease on a basically vacant space seems (to say the least) risky.

Best of luck,

- Stoop

 

[freebird5825]

is there any chance of her signing on as a manager trainee with an existing restaurant business? she could get the experience and it would be a lot less risk for you both.
or is there a catering and/or small business owners course of study available at a local community college or nearby culinary institute ?
FWIW, my mom worked in the restaurant business all her life. her advice to me was "go to college".

 

[OAG]

I know nothing about the restaurant business so feel free to ignore me. However, over the past 10 years or so we have lived in Florida and Ohio, travel a bit, and like to watch "for lease" signs. In Florida I watched restaurant businesses start up and go away at very rapid rate. The same has been true in Central Ohio (for example the Home of Wendy's) over the past 3 years or so. You have gotten some good advice in the past responses. DW should go work as an assistant manager in some restaurant, preferably a Mom and Pop operation as this looks like what she wants to start up. I suspect she would have to hire on for "free" the way some of these shops are on the ropes. To do that she will get a lot of insight into what they go through, where the pitfalls are, and then she would be able to go into this endeavor with "eyes wide open". Frankly, I sure would not do this myself especially a start-up without any current customers.

BTW your and DW seem to be doing very well financially and may have hit the mythical "mid-life crisis". Sometimes "steady as she goes" is the best plan. IAE good luck on whatever you and her decide to do and welcome to the board.

 

[Martha]

Too fickle a business. Think about your willingness to lose whatever you put into the business.

I suggest seeing if your local university or other organization gives assistance drawing up business plans.

 

[rkser]

FIRST THINGS FIRST, go (Atleast your wife) work in a restaurant for 3 yrs, then start thinking about opening one.

Do not risk your happiness or your networth for a dream which may not work out.

Good Luck

 

[Moemg]

Well I did own a restaurant with my ex husband . It saps the life out of you and it is a fickle business . We had years we were so busy the money just rolled in and then we had the slow years . My ex worked seven days a week and never took vacations this all contributed to our divorce so I'd say think long and hard about this . On the other side there is a very sucessful restaurant near where I live that is only open for breakfast and lunch so they still have a life . If I ever got in the business again ( No way ) that is what I would do .

Why doesn't your wife just start a catering business ? You can basically call the shots and do it out of your house .

 

[cute fuzzy bunny]

Wife wants to buy a small restaurant

Thats as far as I had to read. No.

Opening a restaurant is one of the worst ideas anyone can have. Under the very best circumstances where you've got a niche, great food, great employees and you both personally work your butts off for 12-16 hours a day, 7 days a week...you might turn a profit.

Another thing is the economy right now. I've been around and about the last few weeks and restaurant parking lots are empty. They're all running 2:1 specials. On the occasions I've eaten out lately it seems all the waitresses are new, 16 years old, and have no idea what they're doing. The food quality and quantity has dropped. Prices are up 15-20%.

In short, we're not going to be eating out anywhere for a while...

My brother in law bought a restaurant for his wife about 3.5-4 years ago. Well established operating business with lots of customers, was around for about 30 years and very popular. His wife had significant experience with front and back end restaurant operations as an employee and had worked at that restaurant. They had a top notch cook willing to stay on, and three low wage hard working waitresses that the customers loved.

They didnt make it.

 

[CuppaJoe]

What I'm seeing is: location location location. We still have to wait to get into our favorite place, it takes no reservations but they greet everyone like old friends; OTOH, the wait isn't as long now so, ironically, we are going there more often, it has medium high prices for great food and ambiance. A nearby place off the crossroads has always struggled but gets by with the overflow business.

What day is this? Must be Sunday or Monday because favorite restaurant is not open until Tuesday 5:30 p.m. Gotta be successful to take two days off. Closed on Sundays because of Spanish heritage. Ah, tapas, small plates, sangria.

 

[SecondCor521]

I say no.

In your original post, it's all about money. I think in order to be successful starting a small business you have to include having a passion for the work or industry. I didn't read any of that in your original post.

Also, if I had to pick a business to start that I didn't have passion about, the restaurant business would probably be among the last on my list. High start up costs, inventory, employees, low margins, liability concerns...

Let us know what you decide.

2Cor521

 

[GoodSense]

Sounds like too much risk for not much of a return, plus making the next couple of years of your life miserable. I wouldn't do it if I were you.

 

[nkdude]

Thanks for all the input guys. This is the sort of excellent advice that I have constantly gotten from reading this forum.

Sorry , I forgot to say that DW does have significant experience and she did run her own place before. The previous place was also a small rest/carryout same food. Only difference is that the previous place when she took over had sales which she was able to build on, whereas this one currently has no sales whatsoever and higher fixed expenses.
No business plans drawn up other than the financial projections.
I will not be leaving my job, but will be helping her out evenings and weekends, which I did previously.

Dex: My figures are based on projection of what daily sales will be ie; if daily sales are 200 then our loss will be 3k/mth, if daily sales are 800 then profit will be 6k and so on. I have accounted for both fixed and variable expenses. Yes its that 118k first year cost that scares the heck out of me.

I have ran several projections using different assumptions. But they are only projections.... who knows what will actually happen. The way I am beginning to see it, only 3 things will happen: the place will loose money, break even, or make money. So do I place a bet of 118k for a 33.33% chance of making unknown amount of money? Better odds at Russian Roullette. With one bullet that is ! (go ahead. Slap me for thinking this way !)

We know that the rest business is risky and very stressful, more so when you start with no sales!. Not to mention cooking is tough on the body and DW has already spent many years in the kitchen. Me, I am leaning on the No side. The one important thing I forgot to mention and someone just posted something about having passion. For me it is just about the money, for DW its her passion. DW misses having her own place and being the DH that I am I just want her to have what she wants. The woman loves to cook. And when someone compliments her food….shes over the moon!.

Just cant decide what to do. We do have a few more weeks to decide.

 

[cute fuzzy bunny]

Have her cook you a lot of meals and tell her the food is terrific.

 

[plex]

It sounds very risky even with some previous experience running a similar buisness.

The big problem is you are risking a huge amount of principle, these are the 55k equipment costs, and then I would imagine there would be some other costs, like supplies. There are many investments which do not require putting any work into them at all, have very low probabilities of losing it all, and will easilly return 8-10% on average over the long term. So you essentially are losing 10% of your upfront costs every year the buisness doesn't work out...and if the buisness fails? You lose that 10%/year amount for the rest of your life.

Also, while you are not risking your largest source of primary income, it is still a fairly large chunk of your normally expected primary income, this is not additional secondary income. So you are also taking income risk.

Then you are taking a mortgage risk, how likely would it be that you be able to sublet to someone if the buisness fell through? Does the rental offer even allow for subletting?

Despite all this though, if you feel the location is perfect, there are lots of people with money to spend in the area, you have a firm buisness plan in place (which you have verified by researching other succesful similar buisnesses), know exactly what your potential costs/profits, have a backup plan if things do not work out, and your wife has explored other oppurtunities involving food preperation (like catering), then it sounds like it may be worth a shot.

Just do your research and check all of your options before making such a huge decision, do not rush it.

 

[Urchina]

Are there other ways that your wife can get the "compliment the cook" high? Here's my thought:

1. Cook for an existing outfit.
2. Cater
3. Teach cooking classes at a community college or adult ed class. Not much money here, but LOTS of adoration and acclaim.
4. Work at a B&B. More intimate setting, less stress (since it's just breakfast).
5. Run a food booth at festivals. Intense, but only on weekends, leaving the rest of your time free to live.

I personally wouldn't tackle a restaurant without a well-written business plan and serious fire in the belly.

Also, why is the current place closed? If it's a great location, someone would have snatched it up. We have places in town that are serial failures, and only rarely does someone make a go of it in those places.

Finally, I'd do a check of your local health laws. If the equipment in there doesn't meet code, you're going to have a huge expenditure right up front. Not worth it. See what the latest health inspection says.

Good luck with your decision!

 

[Bryan Barnfellow]

5-Year Lease

I'd think about an alternative business to buy -- the one that sells 5-year leases for new restaurant tenants. Can't lose!

- Bryan B.

 

[cardude]

Even in good times I would advise you not to do it because of the hours you need to put in and the fickleness of the "non-branded" restaurant business, and in the current market I would definitely tell you no.

I own a small business (14 employees, 10-12M in sales historically-- not now), and for the first time in the 14 years I have owned it I am really starting to struggle-- lost 20K last month. People are just frozen and putting off all bigger-ticket buying decisions in my area.

Owning your own business is a great way to build a big nest egg, but I would only buy one that is already up and running. Also, make sure you are very well capitalized. I think my business will make it, but it kills me to have to feed it with my personal funds now.