Duff Said: Unwise investments

04 April, 2019

Philip Duff considers the difficulties of funding a new business in the world of hospitality

BARS AND RESTAURANTS GO BANKRUPT AT a rate that would raise eyebrows even in Trump Towers, and that’s saying something. Why is that? One reason is too little money – and the other is too much.

To generalise wildly, almost every hospitality business is undercapitalised, because no one will loan hospitality businesses money to open as they are very risky to invest in. This, of course, means hospitality businesses open without enough capital, thus can’t weather even minor setbacks, and promptly go bankrupt, contributing to that statistic of hospitality businesses being risky. The common advice is to open your doors with enough cash to pay all your bills for at least six months, so you have time to grow your business in an organic way instead of having to desperately do promotions and discounts almost every day just to get some cash in the till.

I don’t think I know any operator that actually had half a year’s expenses on hand when they opened their first place. Usually they have to open by borrowing from friends and family, and that tends to make operators want to borrow the bare minimum in case the bar doesn’t work out. It makes sense to borrow as much as you need, instead of as little as you think you can get away with.

Another reason is that if no one has opened a business in the location you have chosen, you’re either a pioneer or a settler, and the only way to find out which is to open. Pioneers, as industry sage Dave Wondrich is wont to observe, get the arrows, while settlers get the land. That’s why property developers keep a keen eye on the health of new bar and restaurant openings. It’s a bellwether that indicates if an area is on the up and up or in a death spiral. Expertise and experience ameliorate that investment risk – if you’ve lived in an area for a while and seen it go from knife crimes to delivery vans, you have inside knowledge, and if you helped open bars in areas such as that before, you have even more.

Can there be too much money in a bar? Sadly, yes. One reason some bars and restaurants which should have closed ages ago are still open, is because they have too much money. It’s very common at the higher end, in fact.

Some groups of financiers and other wealthy folk compete to invest in ‘hot’ restaurants and bars so as to have a social life and some bragging rights.

Very often the businesses don’t do well – because, even separate from cashflow, hospitality is a competitive, low-margin industry – and only continue to stay open due to fresh capital injections from their patron. It would be better for such places to close when their business could no longer sustain itself. Then, Darwin-like, another, perhaps more sustainable business, could take their place.

Some bars now crowdfund, a la Brewdog. One recent high-profile crowdfunding saw a bar group rake in a seven-figure-sum, for which investors got… well, not much.

Anyone who invested couldn’t sell or otherwise trade their shares, received no voting rights and the only possible exit was if the group itself was, one day, bought by a larger entity.

Oh, and there was no protection against your shareholding being diluted by further rounds of crowdfunding.

Becoming an owner in that case might be a bad investment, but maybe it’s a nice way to ensure extra attention when you drop by for a cocktail on a Friday?

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