Herman: John L. Herman Jr., Author

A Public Negotiation

In the last posting I spoke about the restaurant opportunity within a few miles of my home. I walked into the place and gave a worker an envelope and asked him to give it to the owner. Inside was a short letter saying I wanted to buy the place and a copy of HERMANISMS to give myself some credibility. He called and we met. He wants out and we discussed a price, far less than the money he has invested in the place.

When my wife and I met with him we said we would change the concept and he spoke about the lease with four years remaining and three five year options after that. We walked through the kitchens to check out the equipment, and it is ready to take over, with nothing to buy to run the place with the menu we envision. His ordering system for servers is in place, the Italian Brick Pizza Oven is large and visible to the diners, and other than a new look out front that might take two weeks, the place is ready for customers.

I also told you I scoped out the coffee bar/café in the same strip center, which did 54 guests in an hour and a half, but most spent less than four dollars grabbing something to go. It was pouring down rain, and that could have hurt business. Now, I will share with you how my mind works when I look at a new opportunity.

Of paramount importance for most people is the money issue, so let’s start there. Banks don’t like restaurants and would probably not be interested if you were buying this place. They would; however, give you a home equity line of credit, or a second mortgage on your house if you needed to borrow the money. Keep in mind, if you are getting a loan for this and you will need over one hundred thousand dollars, then you will already be paying about one thousand dollars a month, just to buy the place. We would be paying cash, so right away we have a greater chance for success, as that thousand dollars a month doesn’t have to burden the business. And of course regardless of the price you pay, no business cash flows from day one, so figure in another six months of losing a few thousand dollars a month, let’s call it three to five per month, and that means an extra eighteen to thirty grand you musr have at the ready, because you will need it.

Your advertising budget is critical at the opening because you would be taking over a restaurant with the “smell of death” all over it. Picture a beautiful small strip center with the most expensive boutique grocer/butcher shop, a high-end wine merchant, and upscale stores for the kind of people that live in the area, and then picture this wonderful 110 seat restaurant, which has turned off customers over the last few years with lousy service and a menu no one wants to eat. And understand that because of the area, and the upscale homes, this location affords you a monopoly on food. You are “IT.” There is literally no competition within your immediate area. You can look out around this complex and count thousands of homes, condos and apartments within one mile and there is no other restaurant at all. No fast food joints, no chain restaurants, and no one who delivers to your customer base, but when you take over, the customers won’t know that unless you tell them. We would spend several thousand dollars and make a splash! Perhaps, a “DOLLAR BREAKFAST DAY” or “FIVE DOLLAR PIZZA WEEK.”

Getting help is an issue we are considering. That isolated island location gives you a distinct advantage for customers, but no one living near there would work there. And there is no public transportation to this place. Workers would have to own cars and therefore expect to be paid more than at “downtown restaurants” where people who walk, ride a bus or subway would line up for a job. So, labor will be higher paid, but that also means they may be more responsible types, needing stability and therefore you would have less turnover.

Offering the final price is now the consideration. Sure, he spoke to me about a number he would take, but that was before my “due diligence” was done on his equipment list and the lease we would be assuming. This guy is losing thousands of dollars every month at this place. Checking him out on Friday and Saturday he clearly is drowning in a pool of water with almost no customers to save him. The rent scares the pants off of other prospective buyers, I see it as a location that calls for this much rent, as you would have all of the customers to yourself if you gave them what they want. But now that he has displayed his cards, it doesn’t mean I have to pay the first price discussed.

Now, some of you are thinking that when we met and said a price and he said he would take it that we had a deal. This is where you could learn something from me. Every dollar I give him lower than what we have discussed that I keep is a dollar more of profit and not loss. And that makes it easier for me to recoup my investment. He won’t sell for less than he could get if he sold his equipment and quit. But if I offer him more than a small premium over liquidation value, then I am the sucker…because he is headed for the auction door soon. My plan would be to offer him one third less than we discussed, and that is still considerably higher than what he will get if he closes the doors and stops his financial bleeding. He must stop shelling out money every week, and I am at least ending his losses by taking him over. His pain threshold for losses will either make him take it, or make him counter offer and right away I am still saving over what was first discussed. I will then decide if I want it at that price.

For those readers feeling sorry for the owner, and those who think I am now taking advantage of him, forget it…I am doing this guy a favor by buying it at my price, because no one else out there has offered or will offer more before he slides into the abyss.

Time. That is the last consideration. You see, even though I believe this deal is a winner and could make significant money, I still have to consider if I want my wife and I to be tied to the endeavor for the next three years. I always look at a company with a three year timeline. Get it, make it profitable and then sell it. I will probably make as much money selling it in three years on the sale price as I make in the three years we own it. So I am getting six years of income in just three. And then I can go start or buy something else, because there is always more profit when you sell as your business peaks. Remember, I am buying this at rock bottom price due to losses in the business…when we hit profits and it looks great we would sell it before a down cycle comes.

• Posted: 4 February 2008
• Comments: 3
• Category: Starting a business

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