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By the Numbers: What’s Involved in Closing a Restaurant

It’s the end of a terrible winter and we’ve seen a lot of stress and distress in the local restaurant community. Even some well-known restaurateurs are having problems and have had to close restaurants. The decision to close a restaurant, particularly for someone who’s had a certain amount of success in the past, is tough, which means that sometimes it is delayed too long. However, other times the closing is brought about in a hasty manner because of unforeseen circumstances.  

Closing is a multi-faceted decision and must take into account a number of key elements.  To come to the realization that a restaurant isn’t making money and the owners are tired of contributing funds to keep it open is only the starting point.  Here are six different issues involved in closing a restaurant.

Is there a future for this restaurant? You first have to determine the future trajectory, meaning revenue and profitability. Have you seen positive signs that would lead you to believe the restaurant is going to be profitable down the road and it’s just a question of funding? If you look at all the data and the future doesn’t look any more promising than the present—the restaurant has hit the wall, or the concept just doesn’t work in its current location (or at all)—then you need to look at closure. 

Second, and maybe it’s actually No. 1: Are you totally out of available funding for the restaurant and tapped all your sources or has it just become an issue of throwing good money against bad?

How does the restaurant fit in with your other restaurants if you have more? If it’s a single restaurant, it’s a different decision. If it’s part of a multi-concept group, for purposes of expansion and landlords, plus branding, you may want to keep it open and fund the negative cash flow as a cost of doing business so you can get good additional sites. Sometimes you keep a restaurant open even though it’s losing money just because it may still defray some of the overhead from the other restaurant(s).

Another key element, and probably one of the most significant, is what does the lease say? Can you really get out of it? This is particularly important if you have personally guaranteed the lease. If the landlord is not going to let you out of the lease, it may be cheaper to keep the restaurant open and fund the negative cash flow than to have to deal with the landlord. This is one of the toughest decisions of all.  

The next factor is the quality of the site. If it’s an A location, and this concept isn’t working, maybe it should be closed and reconcepted. While it’s difficult to reconcept a restaurant in the same site, it can work if it has a really good site and you’re able to come up with a new concept that fits the space, demographics and offers something unique to draw people in. Of course the problem with reconcepting is the cost, when you’re already having money issues. 

The last consideration is the staff. Are the people in the restaurant top-notch and can you possibly use the restaurant as a training ground for developing staff used in another project? It may be worth a negative cash flow restaurant in order to have really good people for future expansion.

Here are a couple real-life examples of things that have worked and things that haven’t. The first example is a long-established 15- to 20-year-old restaurant that had declining sales and badly needed to be remodeled, but instead of doing the remodel, the owner decided to reconcept it. They changed it to become a more upscale concept than the original, which had been a very approachable concept. The restaurant opened, the food was too expensive and too fancy for the audience that had been coming to that location for years, and consequently it was closed within a year of reconcepting.  

What would have been better, clearly, would have been for the existing restaurant to evolve and close, then remodel and reopen. It would have kept the same customer base and added a new spark of life to the restaurant and hopefully driven sales or at least stabilized the decline. The factors they didn’t consider were: (1) whether there was a future for the restaurant; (2) if it was a quality site; and (3) how to deal with a loyal staff they wanted to keep.

A second example is a restaurant that had a fairly clever and new concept, but it was in the wrong location. A shortage of parking, coupled with other issues like a changing demographic made the restaurant not work. Rather than trying to reconcept it, they just closed the restaurant. A reconcepting would have been problematic and costly because of the identity and the décor. The factors they looked at were: (1) there wasn’t a great future for the restaurant; (2) they didn’t want to continue to fund it; (3) the quality of the site, because of parking and other issues, would always be problematic.

While no one likes to close a restaurant, there are times when it’s the only smart thing to do. And since restaurateurs are optimists at heart: You may be able to open the restaurant in the future with a different concept or sublease it or some other way to mitigate your cost.

Before you close the doors, however, you really need to look at the legal, the financial, the people side and the issue of the social media and the restaurant community in general—your customers. You certainly don’t want to get the reputation that you can’t make a restaurants go, so you have to put a nice, big spin on it. That’s part of the process. 

Dennis L. Monroe is a shareholder and chairman of Monroe Moxness Berg PA, a law firm specializing in multi-unit franchise finance, mergers and acquisitions and taxation in the restaurant industry. You can contact him at (952) 885-5999 or dmonroe@mmblawfirm.com. For more information, please refer to www.MMBLawFirm.com.

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