Pittsburgh, PA � April 2003 � We don't like to think about it. Or talk about it. It is especially difficult when your own name is on the door. But sometimes closing your restaurant is the most prudent thing to do.

There are many reasons for closing a restaurant and these reasons aren't necessarily anyone's fault. It is most often a combination of factors that all collide at the same time. It is a fact, too, that restaurants, especially independent restaurants, have more difficulty borrowing money than other business entities and, therefore, are often undercapitalized to start with. But at the same time we must not be too quick to blame some rather obvious shortcomings of our own, including substandard accounting practices and/or poor restaurant management, resulting in expenses that swallow-up the hard earned income the second it hits the cash register. And that is exactly where the fault-line exists. The real reasons are often internal, where owners do not take (or have) the necessary time to monitor and deal with important business matters like increased competition, lack of an adequate market for their particular menu and/or the necessary changes to continue to attract new customers. They rely too heavily on existing customers who often don't want them to change anything, which is why they are regulars. They fail to address serious staffing problems, including employee morale issues. They refuse to advertise, assuming they don't have to, and consequently fail to market their restaurant's competitive edge internally and externally. Some owners experience rapid growth with insufficient capital � or worse � decide to open additional units in the hopes of erasing existing debt which is the worst thing an operator can do, even if they do pull it off. And I have seem some that have. At best, it is the most high-risk juggling act that a restaurant owner would ever experience.

Restaurant ownership groups and experienced hospitality consultants have all, at one time or another, had to face this reality. When you do face it, you have to face it head-on. And while your jaws may be gnawing, the best way to do this is with your chin up.

There are several important considerations and steps before you close the restaurant door which include the following:

• Conduct a complete financial audit. A particular restaurant I work with considered selling due to an obvious decline in business activity. The figure the ownership group pulled out of a hat was a one-million dollar asking price including the land, buildings, and F,F&E. It seemed reasonable at first glance. So we conducted the financial audit. The bottom-line revealed that if they did absolutely no a la carte business whatsoever, they would still net $200K a year on banquet business � their strong suit. Since the audit, they have successfully repositioned themselves; redecorated and added more banquet space; reduced an incredible list of perceived, but unnecessary ownership expenses; reduced staff in the short term; and are now booming with financial projections exceeding expectations. This did not involve changing anything on their menu or increasing advertising except to advertise additional redecorated space. Coordinating the sale of the restaurant would have netted my business a percentage, but it was not in the best interests of this operation with the de facto message being: Do not talk to a business real estate broker or anyone else (including suspect hospitality consultants) who may be biased, with their interests in primarily selling the operation, without first conducting a well-researched financial audit.
• Identify cash stores and try to pay down debt. If your financial audit demonstrates that you are nearly wiped out, try to identify new sources of capital. Consider reconstructing your existing credit by consolidating debts and establishing new terms with lenders, purveyors, etc. Do not avoid these important creditors. Instead, carefully explain your situation to these providers who not only have encountered similar circumstances with other restaurant operations, but also may have some suggestions and connections in the industry that may help you. This may include providing them with brief documentation that outlines your recovery plan demonstrating ways in which you have not only reduced your expenses, but also a timetable for your expected turnaround with regular updates. Make sure that if any new agreements are to be signed with these financial partners � especially if it is suggested that you personally guarantee the debt � that these agreements are reviewed by your lawyer, CPA, or both. Other than the more obvious reductions in expenses by the principal/s such as reducing salaries and/or benefits, consider reducing the amount of your leased space or moving to a less expensive location, contact utility companies to investigate less expensive providers, sell seldom used and/or unnecessary equipment, barter for products/services, or take on an equity/working business partner.
• Deciding to close. If all alternatives remain unattainable, decide when the closing will take place and plan for it in advance.
• If you believe that the business is sale-worthy, discreetly contact a business real estate broker and secure an appraisal backed-up with comparable restaurants that have sold, if available, in your marketplace. Make sure the broker signs a binding confidentiality nondisclosure agreement. Be prepared to provide the broker with the necessary items that they may ask for to adequately package and market your restaurant effectively. The items that may be requested include: file photographs; archived positive press reviews; menus � both F&B; deed/s (including surveys) or property lease; insurance policies; all (F,F&E) furniture, fixtures and equipment that will be included as part of sale; [profit and loss statements; income tax statements;] and list/credentials of current employees. I always suggest involving a third party (real estate lawyer, ideally) in this process, only submitting the absolute essentials to the agent and make sure that any prospective buyer/s are pre-qualified at near the asking price before you submit additional [financial] information.Whether the business is salable or not, reduce all expenses and adjust your menu accordingly, purchasing F&B as needed. This may involve closing the restaurant on certain days or reducing your hours of operation to make ends meet. If you decide to sell, it's business as usual, as long as you can hold out.
• If you plan to sell, letting your employees know in advance has pros and cons. They ultimately may find out anyway and leave to work elsewhere it they do. Your goal is to have them stay with you, ideally, until you close, find a buyer, or you find them other opportunities as you reduce your need for staff. One way to handle this is to tell key staff members and personally guarantee (in writing) their salary with incentive bonuses for their final time with you including outplacement assistance. It really depends on who you are and who they are. I have seen an owner give their staff the straight story about closing and, surprisingly, the restaurant ended up doing an about face and they're still open and doing fine. In another case, two restaurant partners I worked with not only told their 30+ employees the date of the closing, but provided outplacement for all employees within a one week's time. This was the result of a forced restaurant closing (investor wanted out). An entire year later, when these same owners opened another restaurant, almost all of their employees came back to work for them. When you do announce your closing, one way or another, outplacement is always a good idea. Contact other restaurants in the area, including your competitors, and try to place your employees in similar (or better) positions in other restaurants so, at the least, you will not have to simultaneously deal with unemployment claims. Provide references for them and initiate interviews in your own restaurant, as convenient, when it does not disrupt operations. Most employees will appreciate and respect you for this. If you are seeking a buyer, hold off on outplacement until you are certain that the buyer won't hire your employees. Good employees are one of your assets, especially if the buyer doesn't plan on completely changing the concept of your restaurant.
• Expect that the real estate broker bring the prospective buyers to your restaurant when you are not operating to conduct a walk through. Provide these potential buyers with an opportunity to dine at your restaurant as a means to view your restaurant in operation, only if it benefits you. Ask them to call in advance for reservations and pick up their check.
• When you finally do sell or close, prepare a press release and be as honest as possible to avoid inaccurate gossip or speculation. If you cannot prepare the press statement yourself � for reasons ranging from being too emotional or too busy, which is expected � hire a professional and have them send or fax your press release to key media people. Remain upbeat, matter-of-fact, and professional throughout this process. If you are contacted by phone, remain consistent in your message and do not say anything more than what is in the release. If phone calls get out of hand, refer calls to your spokesperson.
• Hopefully you will have adequate cash reserves to pay any remaining debt. If bankruptcy is being considered, contact a lawyer who specializes in bankruptcy to aid you in the process and negotiate your existing obligations. Sometimes restaurateurs assume that filing bankruptcy will dismiss all debts when, if fact, it does not. It is important that you have a full understanding of how this type of legal filing will affect you now and in the future, from a credit liability standpoint, before choosing this option as your immediate financial remedy.

Maren L. Hickton is the principal of Maren Incorporated, a hospitality consulting company based in Pittsburgh, PA. Maren can be contacted by e-mail at mareninc@aol.com or by phone at (412) 833-4639.

Maren Incorporated
320 Zara Street
Pittsburgh, PA
Phone: 412-833-4639
Fax: 412-885-8280
www.mareninc.com
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