A restaurateur can give an existing establishment a new lease on life, turning a struggling restaurant into a successful one. But is it worth the risk? Andrew McKenzie talks to those who have been brave enough to test the waters.
For many people, buying an established restaurant can be a tempting alternative to the risk and effort of a new one, especially when a bargain buy might deliver the same success. However, it still pays to remember that a restaurant has failed or is for sale for a reason, and bargains are few and far between.
Tim Connell, proprietor of Coast at Cockle Bay Wharf and Manta at Woolloomooloo Bay in Sydney and one of Australia’s most prominent restaurateurs since the 80s, believes that although it can be commercially tempting, turning a failed or failing restaurant around is one of the most difficult tasks any restaurateur can undertake.
“Taking over an existing site can be fantastic commercially because all of the infrastructure investment made by the previous owner is substantially discounted when a business fails,” he says. “Just don’t underestimate what you’re getting into. It can be extremely difficult.”
Connell says that despite decades of experience, numerous successes and a smaller number of failures, he’s never found a single formula that works. There are so many variables in the type of restaurant, its location, even the personality of the owner.
Even so, Connell’s first foray into restaurant ownership with The Last Aussie Fish Caf—the success of which helped establish his reputation—came about when a high profile, “hatted” Melbourne restaurant went into receivership.
He had been working in and around the industry for some time, most recently as a seafood providore. He had already approached one of Melbourne’s best-known chefs of the day, Ian Hewitson, about the concept of “an up-market fish and chip” establishment.
Connell says he had been watching this particular site for some time, observing a recent expensive refurbishment, but he could see that it was clearly still struggling. As soon as it came onto the market he pounced.
“We took out the shell of the refurb but it was largely cosmetic, quite substantially reducing the investment costs so we could focus on the menu and other aspects of the business,” he says. “It was packed from day one, and we went on to open a Last Aussie Fish Caf in Sydney and the Gold Coast over the next couple of years.”
Connell attributes the success to a combination of timing—Australia was ready for up-market fish and chips, the right high-profile people associated with the restaurant, quality menu, top produce and luck.
However, restaurant management consultant and principle of Eldred Hospitality, Tony Eldred says that if you are overly reliant on luck you are being very foolish.
“There are two types of business you can buy into—successful businesses and dogs,” he says. “Both types will require a very high degree of skill and experience to make work, but if you’re buying a dog, it is essentially worth the value of the fixtures.”
Eldred says that going into any hospitality business—whether you are a new owner or established—will take careful preparation and research.
“You need to have a good idea about the business or site you are going into,” he says. “If you are buying a successful business you need to know how reliant the success of that business is on the name of the owner. If it is run by a name or a known person, I simply wouldn’t recommend buying it because you lose too much as soon as that person walks out the door. On the other end of the spectrum we have a category of “super dogs” or “Chernobyl sites,” which are so bad that they have polluted the reputation of the restaurant to a 5km radius. These sites will require double or triple the marketing investment, and it will also take longer to get established.”
Eldred says if you are planning to buy a “dog”—and the potential upside that entails—you should look for an expensive fit-out, which you might be able to convert, and a good location, although you can expect better positioning will cost more in rent.
“I had a clever client who took over the run-down tearooms on the Port Phillip Bay foreshore and negotiated a flat 21-year lease on the historic figures of this less-than-inspired predecessor. My client then proceeded to build the business to a turnover about 10 times the previous level. To cut a long story short, the rent ended up amounting to less than one per cent of their turnover. That’s the way to do it, but believe me it’s rare. It’s usually the landlord who has the upper hand.”
Melbourne-based chef and restaurateur Michael Lambie says that location is far and away the most important element of success for any restaurant, but it is also essential to understand the tried-and-true formulas for making a restaurant work.
Lambie is the executive chef with last year’s The Age Restaurant of the Year, Taxi, in Melbourne’s Federation Square, and the half owner of the tri-hatted Circa, also in Melbourne.
Lambie says there is a lot of commonsense in making a restaurant work, but it’s easy to become overconfident and judge someone else’s failure in a simplistic way.
“Some sites simply don’t work, and it doesn’t matter what you do,” he says. “A backstreet location without access, parking and visibility is going to be very difficult. From the commercial perspective, buying into an established business is much easier than setting everything up yourself, but if a business doesn’t work quickly you can still lose a lot of money.”
Tim Connell believes he can tell if he has a hit on his hands within three weeks of opening, and if the establishment is in trouble within three months. This doesn’t mean he hasn’t made mistakes.
For example, after setting up Coast, Connell took over another high-profile Cockle Bay restaurant, Ampersand, which had been owned by Tony Bilson. His error was to change its name to Liberte.
“In retrospect I think it was a mistake to change the name of a well-known business like that, we lost a lot of goodwill,” he says. “It’s important not to let your ego get in the way of recognizing what works and what doesn’t.”
However, Ken Burgin of restaurant consultancy Profitable Hospitality says that more often than not, a name change is a good idea when taking over an existing business or restaurant site.
“Nobody puts ‘under new management’ signs up any more,” he says. “A new name and a new attitude says we are new and fresh, come and try us.”
Burgin says this new broom should also be applied to existing staff because it is very difficult to confidently assess whether they are an asset or liability for your new venture.
“Even if you have been into the business and seen them working, you just can’t tell what they are like day-in-day-out, and especially for a failed business it’s safer to start again.”
When it comes to buying into an apparently successful restaurant, Burgin says you need to have a long look at the numbers and processes of the restaurant on paper, because bargains are few and far between.
“Occasionally people pick up a complete casualty which they can turn around, but more often than not a great business doesn’t even make it onto the market, because it’s sold in a very closed network.”
Burgin says there are many factors to look at when assessing the potential purchase of an existing business, but he likes to see a business in which the whole is worth more than the sum of its parts. He says that when you find it, you have to be prepared to move quickly.
Not surprisingly, both Burgin and Eldred emphasise the importance of appropriate advice in assessing any potential purchase, but Connell and Lambie also recommend a thorough understanding of the numbers—often this requires the use of expert consultants.
“At the end of the day the restaurant game is about dollars,” Lambie explains. “Pretensions fall away very quickly without them.”
One of the most important figures to consider in a new venture is the rent and lease conditions. Burgin and Eldred agree that many landlords have an unrealistic view of the rent they can charge, and high rents are one of the major reasons that well-run restaurants fail.
Eldred says a fair proportion of the industry seems to be working hard for their landlords and not for themselves, and a good lease from the restrauteurs’ perspective should ideally have rent at about five to six per cent of turnover.
However, even when all your homework is done, there is no substitute for the skill and experience that can only be gained by long involvement in the industry. Eldred says he spends a lot of his time trying to discourage the many “naïve, undercapitalised” hopefuls wanting to buy a hospitality business for whom the venture leads to inevitable failure.
“A failed venture is worth very little more than the value of the kitchen equipment,” he says. “So often you see inexperienced operators who have invested hundreds of thousands on a fit-out just before their money runs out. This might be an opportunity for someone else, but it’s sad to see and unfortunately it’s all too common to see.”