Don’t Go Too Big During Startup

PROBLEM

I helped a client open a restaurant franchise. It was a partnership between a long-time established foreign corporate investor and a US entrepreneur. After the business plan was done, and the site was chosen, the foreign investor wanted to double the size of the store and lease 2 bays, rather than the original 1 because it would be their flagship store in the USA.

I advised the US entrepreneur against this, as it would only double their fixed costs, without adding much foot traffic or sales volume, and could put the entire plan in jeopardy. Under pressure from the corporate partner, he agreed to the larger sq ft store, and assured me he would make it up by offering higher priced entrees, have events to generate buzz, media & press, etc. Unfortunately, no matter what they tried, it did not make up for the increased rent in an upscale area, and the restaurant folded after only 1 year.

The 2nd issue was the lease- since the entrepreneur didn’t want to put up the needed 4 months of security deposit, he had signed a personal guarantee, showing his overconfidence of the restaurant’s success. The lease did not allow for him to terminate early, but did allow subletting. Even after he sold his restaurant furniture & fixtures to the new sub-tenant, his name remained on the lease for the rest of the 5 years, and he could be called upon to pay rent if the new tenant defaulted on their rent.

LESSON

These were very painful and costly lessons.

1st Lesson – Start Small. If your business does well and warrants expansion, you can grow it at a later time.

2nd Lesson – Execute the Business Plan. You paid for a professional to analyze the market and potential of your business, and although small tweaks may be necessitated for some contingent items – making any substantial changes, especially to fixed costs, will sabotage the plan and eventually your success. Do not be swayed by well-meaning investors who offer hope but not backed up by numbers.

3rd Lesson – When signing a lease, always look at termination clauses and penalties. Choose the option to minimize risk and avoid personal guarantees if at all possible. Trust your instincts – if you don’t feel right signing a personal guarantee, you probably shouldn’t.

Thanks to:

Mercedes R. Infante
Orlando, FL
Mercedes@InfanteCPA.com