5 lessons learned from a business closing (and how to avoid similar mistakes)
Les Sablons opened a year ago in a renovated bus station in Harvard Square. Despite the hype of a trendy new restaurant with a rising star chef, the restaurant closed for business last month. Shock-waves were felt through the city and it wasn’t because “just another restaurant” closed. After all, restaurants come and go with almost as much frequency as the tides. But this restaurant was opened by the wunderkind Garret Harker. The Garret Harker behind Eastern Standard, Island Creek Oyster Bar and Row 34. He helped launch Barbara Lynch’s restaurant empire. If anyone can run a successful restaurant, it is him. And, if he can’t make the restaurant succeed, then who can?
Garrett declined to comment for the article that ran in the Boston Globe, so the exact reasons are unknown. No doubt it was a combination of many factors: sky-high rents in Boston/Cambridge + a saturated restaurant scene + and a labor shortage = a difficult environment to succeed. One could argue that plenty of other restaurants succeed in the same market conditions (exhibit A: Oleana Restaurant), so maybe this closing is just a fluke. But, there are always key lessons here of basic business principles that sometimes even the most seasoned entrepreneurs lose sight of.
Lesson #1 – Make sure the numbers add up
Rent, and occupancy in general, is one of the biggest expenses of a restaurant, and also the one that business owners can least control. Once you sign a lease, you’re stuck. Before you sign a lease, especially in high-rent districts, make sure you know what it will take to cover your nut each month. This means, understanding:
- food and labor costs,
- overhead,
- debt service.
You can then calculate a sales target based on those numbers.
Click on the links for video tutorials on breakeven and cash flow budgeting
Once you have a sales target, you can then break it down to see if your target is realistic. For example, if your sales target is $1,400,000 per year, then you need to generate, on average, $28,000 per week, or $4,000 per day. If customers spend an average of $50 each, that’s 80 customers a day, every day. A 30 – seat restaurant will have a tough time. A 90 – seat restaurant has a better chance.
You want to ask yourself: Does this seem feasible? Do the numbers add up and make sense?
Lesson #2 – Know your costs
The economics of running a restaurant (and a farm) are changing.As an example, the cost of labor has increased markedly for several reasons:
- There are more restaurants than ever, and programs that have allowed for immigrants to enter the US to work in hospitality and agriculture have been cut back. This create a tight labor market, and workers can command higher salaries.
- Minimum wages have increased; in Massachusetts, it’s $11 per hour with a goal of $15/hour over the next 5 years.
- The cost of living in the city is so high, that the available workforce is finding jobs outside the city.
It’s important to recognize that the old benchmarks just don’t work anymore. Targeting a 25% labor cost is no longer feasible. It’s now inching up to 35% – 40%. You need to understand your costs and make adjustment so that the numbers add up.
Lesson #3 – Know your Market
In the restaurant business, as in farming, you are competing for “share of stomach.” There’s only so much we can cook and eat, so there’s a confined demand. Some theorized that Les Sablons closed because they just tried to replicate the same formula as their other restaurants; it worked there, so why not here? Yet, there was nothing distinct about Les Sablon over any other high-end restaurant in Harvard Square (Parsnip, Harvest, Benedetto fill a similar niche).
While it’s tempting to copy what has already proved successful, it makes it that much harder to stand out in a crowded market place. Certainly, I felt that when I ate there – it could have been any other fine dining restaurant in Boston. The setting was lovely – but so were the others and often with better price points.
It’s important to understand your market – who you compete against for share of stomach, and how you will differentiate yourself from the others. If your customer can only eat 1 meal a week in an expensive restaurant, why should they choose yours over the others? Know what makes your business different (and better!) and learn how to communicate it to your potential customers.
Lesson #4 – Keep Track of Your Business
If you followed lesson #1, you know what it takes to make your restaurant (or any business) work. You know what you need in sales, so that you have enough cash to cover your bills and pay your debt.
Great. Now you need to make sure you stay on track. Have a system in place, such as QuickBooks, to track all your costs. And here’s the important thing: you need to look at the numbers regularly. That means you need to regularly look at your profit and loss statement, as well as your balance sheet.
Want to learn more about reading financial statements, attend our webinar… learn more about QuickBooks here.
Lesson #5 – Stay Nimble
Things rarely go as planned. If you pay attention (by looking at your financials regularly) you’ll notice when things start going awry. You will see when sales targets fall short, or expenses run high.
Don’t hide your head in the sand and hope things improve: stay nimble to adjust in a rapidly changing market place.
If sales are falling short, what do you need to do?
- Is your product as good as you want it to be?
- Is your service as good as you want to be?
- Do your customers appreciate your value-proposition?
- What do your customers value, and do you offer that?
When Restaurant Clio first opened 20+ years ago, people complained that the portions were too small. The customers didn’t appreciate the value of the food. So they adjusted: they increased the portions sizes. With that small maneuver, they increased their chances of viability. Twenty years later they made another adjustment. They noticed that their little sashimi bar in a dark corner of the restaurant (named Uni) was increasing in popularity, while the main dining room was waning. So, they shifted the focus of the restaurant: they phased out Clio and expanded Uni. The owners reinvented themselves and created longer-term sustainability.
If expenses run high, what do you need to do?
- Which expenses are out of control?
- What can you do to rein in costs?
- What systems do you need in place to better manage costs?
Summary
Running a successful business is never easy: sometimes you do everything right, and you still fail. And others succeed despite lack of planning and expertise; they get lucky. But if you understand the economics of your business, pay attention and adjust quickly; you’ll increase your chances of success.
