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Are you willing to pay 2-3x for your drinks at the local bar? If not, there's your reason why they don't have 2-3 months’s cash stockpiled. I own minority shar

Are you willing to pay 2-3x for your drinks at the local bar? If not, there's your reason why they don't have 2-3 months’s cash stockpiled. I own minority shares of several restaurants. I have zero management control, roughly 1% equity in each restaurant. But I get full insight into their books, revenues, costs. All three are profitable, each returned my capital investment in under two years, each pays me roughly 20% return every year on my investment. Each has (well, had) about 6 weeks' cash on hand at the start of the shutdown here in mid–March. Each had a line of credit good for roughly another month (in theory). But in practice the LOC is used to balance out month–to–month expenses and revenues. Some months the liquor has increased 5% over last month for no apparent reason and no, you don't have much leeway to renegotiate as there's only two distributors in the area. So the LOC has already been tapped, not necessarily maxed out. Oh, and funny thing, banks have been trimming LOC limits to whatever you've drawn already. If you had a $15000 LOC limit in February which you'd drawn $5000 on for expenses, your bank trimmed the limit to $5000 in March. Each restaurant in a typical month breaks even the third week of the month and is profitable the last week of the month. In reality they lose money for a couple of months of the year but that's balanced by higher profits other months of the year. In normal business times it all balances out. Right now isn't normal. Employees are demanding to continue getting paid, vendors demand to get paid, the landlord wants his damn rent, and all of the cities which are demanding that you pay your employees and not lay anyone off? Yeah, they're demanding that you pay your various taxes. And there's no revenue. None. You try take out and lose money every night because not enough people are buying alcohol (which is where you get your profit on an average night). You don't want to go down the Grubhub/Seamless route because of the vig they demand. So you close your doors "temporarily". There's no "unemployment insurance" for businesses. There's business interruption insurance, but, surprise, insurance companies are slow walking responding to and validating claims (and AFAICT they've rejected all claims for these restaurants and anecdotally none of the other small businesses I know have been able to get any insurance payments). So…everyone's demanding money, no one's paying. You can either try these gofundmes, or close. In my case all of the restaurants are planning to fire employees, sell off inventory, and close. They ran numbers about recapitalizing but since there's no clarity on when restaurants can return to normal (and I mean truly normal, not 50% seating reduction, because that doesn't work unless you can increase prices by 50% or more) — without clarity on how long this continues, it's more pragmatic to conserve cash, close the business, and reopen if/when normalcy returns.

dangus 6y ago
Like I said, it’s all been exposed as the house of cards that it is. Your enlightening information on the way the restaurant industry works doesn’t really make that mode of operation sound very good. And like you said, your investment as an owner has returned 20% every year. Where does that go? Those kinds of returns are unheard of if I were to stick that money in an index fund. So, business owners want to have their cake and eat it too - they want the reward (20% return on investment yearly) without the risk. The business closing is the risk. Which goes back to my original point, which you didn’t address: why does any of this situation make it in the customer’s interest to spend their own cash on protecting someone else’s for-profit business? Will the customer get a slice of that 20% yearly return on investment? Literally donating to your boss is now being seen as a noble pursuit. As a household it’d be completely insane to operate on a six week runway - though I realize that potentially most Americans do. Still, those Americans have unemployment insurance and they have the ability to take up other jobs. Maybe some more restaurant owners will figure out that basing profit solely on alcohol and running on lines of credit was a bad idea in the first place. Maybe restaurant prices will go up. Maybe restaurant prices are set too low in the first place - because more restaurants exist than need to. Most people are better off cooking food and making their own drinks - to answer your question on whether I’d pay two or theee times more for my drinks at the bar: I was pretty sure that’s what I was already doing when I went to the bar.
- ykdxq2ke47ebuqi 6y ago
  It's all economics. Restaurants only exist because there's a market for them. The customer gets the product they pay for. If the market goes away (as it has), the businesses will go away. If people are willing to pay more, then some sort of business will return to fulfill that market. And…this is capitalism. You seem to think capitalism should be something different. At its base, capitalism is I provide a product or service that you want, and it's cheaper (from your perspective) to buy it from me than build it / raise it/ create it / whatever yourself. We've been conned into believing capitalism is entirely something else, it's stocks and bonds, and going public and creating third order derivatives to shift risk onto some unsuspecting entity seeking higher returns. 20% return sounds awesome, right? It's about $1000 a year. The entire capitalization of a given restaurant (of the size/style I invest in) is about US$350,000. That's enough to rent, build out, and equip the space, pay for all the various fees, hire the initial crew and initial marketing. If they're successful they start paying back the investment in about a year. IF they're not successful 1) I lose the money (that's the risk) and 2) they typically fail fast, within 60-90 days of opening. I had one restaurant that opened to great fanfare mid–2012. In October it was flooded due to hurricane Sandy. It never reopened. Another six months it would have been on better footing, but that first year you're upside down in debt and the insurance companies know that if they drag their feet long enough the business will be forced into bankruptcy by creditors who will settle for a meager distribution from insurance. I mostly know about restaurants and software companies and…while software companies have more flexibility right now, I don't know of any small company that just hoards a ton of cash as a routine business practice. Your investors will demand that it get distributed as part of regular dividends or a special dividend. If you're public a “shareholder activist" will buy the minimum amount of shares necessary to make a shareholder action to divest the cash or replace management. The entirety of small business in the US is you raise some money some how, you open the business, you pay off your debts and investors, and enjoy the profits (if any) or you close. If you (again, as a small business, and not someone with access to capital markets) were to bank 60-90-120 days of operating cash and your creditors or investors learned that, you'll be turfed out of your company, or lose access to credit and investment, or a combination of both. And to your point: you're right, the customers could (and likely will) let the businesses fail. And then they'll blog and whine about how "My City has Changed!" and why are all restaurants now variations on Taco Bell. Honestly, I don't see any of the restaurants I'm invested in reopening. I'll be out roughly US$50k. About 180 employees will be out of jobs. And it's not because no one donated to their gofundmes, I just don't think it's a viable business in a Covid-19 world. I think there will be some sort of restaurant experience post Covid, but it'll be split between low end fast food take out/delivery and high end ($100/pp or more plus drinks). Barring widespread testing and/or a vaccine, the local diner, restaurant, hipster mayonnaise fetish joint, is dead.

dangus 6y ago

Like I said, it’s all been exposed as the house of cards that it is. Your enlightening information on the way the restaurant industry works doesn’t really make that mode of operation sound very good. And like you said, your investment as an owner has returned 20% every year. Where does that go? Those kinds of returns are unheard of if I were to stick that money in an index fund. So, business owners want to have their cake and eat it too - they want the reward (20% return on investment yearly) without the risk. The business closing is the risk. Which goes back to my original point, which you didn’t address: why does any of this situation make it in the customer’s interest to spend their own cash on protecting someone else’s for-profit business? Will the customer get a slice of that 20% yearly return on investment? Literally donating to your boss is now being seen as a noble pursuit. As a household it’d be completely insane to operate on a six week runway - though I realize that potentially most Americans do. Still, those Americans have unemployment insurance and they have the ability to take up other jobs. Maybe some more restaurant owners will figure out that basing profit solely on alcohol and running on lines of credit was a bad idea in the first place. Maybe restaurant prices will go up. Maybe restaurant prices are set too low in the first place - because more restaurants exist than need to. Most people are better off cooking food and making their own drinks - to answer your question on whether I’d pay two or theee times more for my drinks at the bar: I was pretty sure that’s what I was already doing when I went to the bar.

ykdxq2ke47ebuqi 6y ago
It's all economics. Restaurants only exist because there's a market for them. The customer gets the product they pay for. If the market goes away (as it has), the businesses will go away. If people are willing to pay more, then some sort of business will return to fulfill that market. And…this is capitalism. You seem to think capitalism should be something different. At its base, capitalism is I provide a product or service that you want, and it's cheaper (from your perspective) to buy it from me than build it / raise it/ create it / whatever yourself. We've been conned into believing capitalism is entirely something else, it's stocks and bonds, and going public and creating third order derivatives to shift risk onto some unsuspecting entity seeking higher returns. 20% return sounds awesome, right? It's about $1000 a year. The entire capitalization of a given restaurant (of the size/style I invest in) is about US$350,000. That's enough to rent, build out, and equip the space, pay for all the various fees, hire the initial crew and initial marketing. If they're successful they start paying back the investment in about a year. IF they're not successful 1) I lose the money (that's the risk) and 2) they typically fail fast, within 60-90 days of opening. I had one restaurant that opened to great fanfare mid–2012. In October it was flooded due to hurricane Sandy. It never reopened. Another six months it would have been on better footing, but that first year you're upside down in debt and the insurance companies know that if they drag their feet long enough the business will be forced into bankruptcy by creditors who will settle for a meager distribution from insurance. I mostly know about restaurants and software companies and…while software companies have more flexibility right now, I don't know of any small company that just hoards a ton of cash as a routine business practice. Your investors will demand that it get distributed as part of regular dividends or a special dividend. If you're public a “shareholder activist" will buy the minimum amount of shares necessary to make a shareholder action to divest the cash or replace management. The entirety of small business in the US is you raise some money some how, you open the business, you pay off your debts and investors, and enjoy the profits (if any) or you close. If you (again, as a small business, and not someone with access to capital markets) were to bank 60-90-120 days of operating cash and your creditors or investors learned that, you'll be turfed out of your company, or lose access to credit and investment, or a combination of both. And to your point: you're right, the customers could (and likely will) let the businesses fail. And then they'll blog and whine about how "My City has Changed!" and why are all restaurants now variations on Taco Bell. Honestly, I don't see any of the restaurants I'm invested in reopening. I'll be out roughly US$50k. About 180 employees will be out of jobs. And it's not because no one donated to their gofundmes, I just don't think it's a viable business in a Covid-19 world. I think there will be some sort of restaurant experience post Covid, but it'll be split between low end fast food take out/delivery and high end ($100/pp or more plus drinks). Barring widespread testing and/or a vaccine, the local diner, restaurant, hipster mayonnaise fetish joint, is dead.