There are new businesses that do everything correctly, pivot well
as the environment changes, have great customer value, and yet still fail to achieve breakeven. Jeff Barry had been serving friends and family his grandmother's ravioli recipes for 20 years. During all that time, he worked in specialized parts of banking, including asset-based financing and equipment leasing. Jeff was essentially a numbers guy who had a passion to start an entrepreneurial venture centered around his specialty approach to ravioli.
Jeff finally decided to get serious about the effort during the recession of 2009. Noticing that the fast casual dining market seemed immune to the recession and was growing like no other part of the market, he felt the time was right for him to start a restaurant based on that ravioli concept. RavioliOli was to be a fast-casual dining restaurant where fresh handmade specialty ravioli were delivered to your table within five minutes of ordering. The location was going to be slightly upscale and the decor was going to be warm, comforting, and comfortable.
Jeff did a complete competitive analysis using himself and his family to learn all they could about competing restaurants. The family would go to various fast-casual concept restaurants and record how many people dined there during lunch and dinner. He tracked average meal ticket prices and looked for locations that had great road access and parking. Building on his understanding of the competition, Jeff then took six months to develop a full business plan that was ready to pitch to investors.
Jeff started his search for investors with a friend who had money to invest. After securing that investment, he was referred to one investor after another and he was able to quickly raise the capital that he believed he needed to start the company. This included $175,000 of his own money. Securing the location took far longer. He looked at close to a hundred sites with various realtors. Finally, in early 2011, Jeff found the perfect location in Oak Brook, Illinois, just west of Chicago. Jeff really loved the location because of its access to major roads, great parking, visibility, and access to the corporate lunch crowd. Although the real estate market was still reeling, the cost of the lease was substantial (although well within Jeff's business plan projections). After extensive negotiation, Jeff signed a lease for 2,200 square feet and began to generate specific plans for the space. Working with designers and architects, they developed a great space. There is an old adage that says a new business will cost twice as much as you expect and take twice as long. Jeff had heard this and felt like he was prepared when it did happen. However, in the approval process with the landlord and building inspectors, Jeff was surprised to find out that his kitchen was going to require special ductwork that had not been accounted for in the plans. Several other smaller items were also required for unexpected changes, all of which ended up costing an additional $110,000.
As a part of his original business plan Jeff had set aside $220,000 in working capital to take care of contingencies and provide the business with a cash buffer. He decided to have all the small items and the new ductwork installed. RavioliOli opened for business in late February 2012.
Everything was going well at first. There were opening parties, Groupon offers, and lots of press about the new business. However, the working capital fund was rapidly depleting as revenue did not cover expenses. It is not unusual for a new restaurant to take 18 to 24 months to achieve monthly breakeven. In the case of RavioliOli, however, the reserves had been spent early on the ductwork and other items, so Jeff took out an equity line loan on his house for $75,000 and met with the investors who pitched in an additional $110,000. Neither Jeff nor the investors took any additional equity with this infusion. As Jeff ran the numbers with the new capital he realized the business needed to have sales of $2,000 every day of the week to achieve breakeven. When you have a Sunday that brings in only $700, you have to make that up on other days. Jeff thought he could do it, but realized it would be hard.
In the meantime, other negative things were happening in the business. Personnel turnover became a critical issue. A key success factor for a restaurant are its cooks. Jeff needed people who could efficiently make the ravioli the desired way. Unfortunately, two cooks left in March and the head chef and store manager left within the first three months. Jeff ended up working at the store 18 plus hours a day trying to ensure it succeeded. As the pressure on the business grew, it increasingly became a family affair as everyone pitched in to serve customers. Sales continued to grow but were not close to breakeven. At the big July 4th festival in Oak Brook, RavioliOli sold 4,000 plus toasted raviolis and then ran out (much to the dismay of the dozens still standing in line). There seemed to be great demand for the company offering.
After nearly driving himself into the ground, Jeff hired an experienced restaurant manager who quickly put procedures in place and relieved Jeff of having to do everything himself at the restaurant. Jeff and the new manager were able to drive costs down some, but the issue remained that they were not hitting $2,000 day ($60,000 month) in revenue. Jeff spent countless hours trying to renegotiate the lease to no avail. He cut back staff as far as he could and still reasonably serve customers.
Jeff met with everyone who would meet with him about the business to get advice on how to turn things around. He learned from experienced restaurateurs that he was right in line with his costs, procedures, and approaches. He was also told it would just take time to develop.
In December 2012, Jeff met with his investors again to secure more funds. The business was out of money and was still losing money each month. The investors had put in all the money they wanted to invest and recommended that Jeff close down the business. Unwilling to take this step just yet, Jeff dipped into his 401 (k) retirement fund for $100,000 while not getting any additional share of the business for his new investment. With the ability to keep going with his own investment, Jeff obtained the blessing of his current investors to obtain a new major investor in the business even if their equity was diluted. He was meeting with several potential investors every month seeking fresh capital.
While sales continued at a very slow and yet steady rise, the business was out of money again by February 2013. Jeff met again with his investors. He shared with them that he had an investor who was ready to put in $150,000 and Jeff needed everyone to pitch in another $7,000 to $8,000 ($40,000 total), so the business could stay afloat until April when the new money would come in. All of the investors and Jeff pitched in the money. Unfortunately, however, by April the new investor's circumstances had changed and he decided not to invest in the business.
RavioliOli was simply out of money. The business was now approaching $50,000 in revenue a month. Jeff made the decision to pull the plug on his beloved restaurant 14 months after it had opened.
What Advice Does Jeff Have for New Entrepreneurs?
1. Go with your gut. If it feels right, do the homework and go for it. There are no guarantees in any venture, or even more so, in any job. To the extent that you can, pinch pennies and keep fixed cost as low as possible.
2. Anticipate, Anticipate, Anticipate! Whatever the venture, do things right; you'll know when you break that rule. Start early in your life ... part of my issue was that I was approaching 50 years old, and had three kids in college, one in high school, and tuition became a huge overhead in the grand scheme of things. I loved running the business, but I hated losing money. Having said that, a very good friend of mine who knows me quite well and saw me sweating out the losses reminded me that money is indeed a renewable commodity and somehow, someway, we always figure out a way to get it back.
3. Although I made many mistakes, I don't regret a single minute. We created memories of a lifetime through our ravioli-making parties, birthday events, family gatherings, catering jobs, special events, and captivating our younger patrons' bright-eyed amazement as we rolled out the Ravs. We built something very cool, very different, very original, and something for which I am very proud.
1. Can your business survive a long lead time to breakeven? How long do you project?
2. Other than have more money, what could Jeff have done to save the business?
244,337 students got unstuck by Course
Hero in the last week
Our Expert Tutors provide step by step solutions to help you excel in your courses