This is a question that has been asked of me a lot lately. My initial response is I really don’t know. It certainly wasn’t my goal or even my intention; it just happened. That said, you can’t just wander a half million dollars into debt!
When we started planning for The Lazy Susan we had $46,000 cash from a workers compensation settlement, a mortgage for $90,000, student loans of $70,000, and about $10,000 in auto loans for a total debt of about $170,000. We planned on quickly becoming debt free after the restaurant opened. To help you understand our marriage, I have always been the spender and Amy the saver. She was advocating back then that we should cut our lifestyle and take care of this debt. My answer to her was always that we would just make more money and keep our lifestyle where it was.
In the spring of 2005 I finally had an approval on an SBA loan for The Lazy Susan in the amount of $122,700. This loan along with an infill allowance of $88,800 and my $46,000 of cash was going to be all I needed to get everything going. It was just before closing on the loan that all of the problems started to roll in, one at a time.
The first issue that hit us was an impact fee by the City of Nixa. In the planning I had been told that I would be paying an impact fee for retail centers which would have been approximately $1,000. When my architect went and submitted the plans, he was told we would have to pay the restaurant rate impact fee even though we were part of the retail center. We couldn’t get our permits to begin the infill until the fee was paid, so instead of fighting it harder, after some discussion I paid the $6,895 impact fee; $5,895 of it not in my budget anywhere.
The next set back followed quickly, still before closing on the SBA loan. We had a five ton HVAC unit sitting on top of our space. I had never asked and our landlord had never mentioned it, so I had assumed it was included when doing our cost analysis. When we went to do our first draw on the infill allowance, my landlord let me know that they had taken $5,500 out of our account to cover the cost of the HVAC unit, which was a deal on the five ton unit, just not what I had planned for. Upon reviewing our lease, it did clearly state I would start with a grey box and supply my own HVAC and plumbing. I could have fought them on the fact that they purchased the unit without my permission, but it would have resulted in them removing the unit and me paying a couple thousand more to have my own unit put on.
Next came a series of errors, all brought on by the time crunch I forced myself into by not having set aside enough operating capital and starting with too much debt. My budget had accounted for the purchase of used equipment and left about a $6,000 cushion. When I started actually looking at the used equipment, there were many headaches that were developing in reference to wiring and basic compatibility issues. Because the time crunch was hitting me hard in my mind; I negotiated a payment plan with 1/3 down, 1/3 due on delivery and 1/3 due 30 days after delivery and went with almost all new equipment. First two payments got made, but I am currently working on that $18,500 one that I couldn’t make. One of the few used purchases I made was a great walk in cooler/freezer combination which I had budgeted the cost of; what I didn’t budget was the $2,750 it would take to make it operational.
Next was the computer and security system that I really needed. Because I wanted to watch everything while I was away, I also wanted this really awesome camera system. It was great. To get both of these, I negotiated a payment plan of 25% down, followed by three payments of 25% each at 30 days, 60 days and 90 days. I made the down payment, and never made the rest. This left $22,700 that I currently am working on.
The biggest debt other than the SBA loan is with my contractor. This came as a combination of our inexperience together and some ridiculous little known building codes that were not addressed by our architect. A lot of different things happened here, and ultimately much was my fault, some was his, and the time crunch we created contributed heavily in this area as well. Bottom line, we ended up $43,000 over budget and I owed him a little over $57,000.
The rest of the debt was basically a bi-product of our operation. Creating a new system was something that takes time and effort in and of itself. I couldn’t finalize the way everything was going to work until the construction was complete and we could literally experiment with some things. Simultaneously, I was getting so tight on money that I wasn’t going to be able to make my first big payroll unless I hurried and got the doors open and had the cash coming in. Because of this, I made a bad decision to rush our opening day, and we were not ready.
That first weekend, our labor cost was close to 45% and our food costs were over 50%. It doesn’t take a genius to figure out that won’t work. We began developing our system, and started getting these costs under control; but we never came within 10% of our projected labor costs, and never came within 15% of our projected food costs. On top of that, most of our first week customers would not return because of how bad their experience had to be.
Another major issue was that I had too many people on salary too early and for too much. In order to pull everything together as fast as we did, I had to have these salaries. They would really start to hurt once we were open and our sales dropped off from the opening weekend.
In order to pay all of these operating expenses, including rent and advertising, I had every vendor?I possibly could on terms; most on 30 day terms. After about forty days of being open, most of them had put me on COD when I couldn’t possibly pay the approximately $90,000 that was coming due all at once.
In the following months it became more and more difficult to cover operating expenses. I resorted to credit cards to cover the operating expenses that were still not being met by the sales. The end game was becoming inevitable, but I was not ready to give up and started looking for potential partners?or the next loan to finance the now large and still growing debt.
Finally in November I reached the point where I had no more credit available and was still operating at a loss as we couldn’t get our sales to bounce back. November 6th was the last day that I could come up with enough money to pay my employees. Had I not been called to Active Duty with the Army Reserve on October 30th, I probably could have lasted longer. I would have been able to lay off all my managers and run everything myself. That said, it would have only delayed the inevitable.
All told, I was left with 31 vendors that I owed money, seven credit cards that were maxed out, and a strange sense of relief that it was all over. When you add in all the other stuff that I already talked about, you find 53 creditors and $556,848 in debt.
