For novice restaurateurs, risk of failure is high
Ari Taymor’s 3-year-old restaurant Alma basks in the kind of acclaim most young chefs can barely begin to fathom.
Within a year of opening, when Taymor and business partner Ashleigh Parsons were just 26 years old, the downtown Los Angeles eatery was crowned the best in the country by Bon Appetit magazine. Each of the eight tables was booked for three months solid.
Even now, the elegantly plated California cuisine continues to scoop up awards and remains popular with guests.
But Alma, Taymor said, is in constant danger of going out of business.
It’s a common state of existence for many hot young restaurants. Their wunderkind chef-owners are often culinary artists but financial novices, honing their skills through hours of grunt work, learning their way around a kitchen but not a business plan.
“They’re younger and generally don’t have the life experience — they know what they know, and they don’t know what they don’t know,” said John A. Gordon, principal of Pacific Management Consulting Group, which specializes in restaurants.
Despite entering an industry notorious for its slim profit margins and volatility, many new restaurateurs launch businesses without making allowances for sudden surges in ingredient costs, changing worker compensation rules, broken dishware and kitchen upgrade expenses. Their eateries get sucked into a cycle of hype perpetuated by foodie blogs and culinary cognoscenti, who laud innovation but also bore quickly.
Alma’s current cash-strapped status is partly due to a lawsuit that Taymor and Parsons have battled for much of the last year.
Michael Price, a business manager for entertainers and writers, filed a complaint last summer with the Los Angeles County Superior Court alleging that Taymor and Parsons reneged on a handshake agreement to give him 20% ownership of Alma after he “spent substantial money and time reorganizing the way Alma did business as well as resolving Alma’s numerous financial and legal issues.”
Price declined a request to comment but said in his complaint that “the most primitive understanding of business did not exist” at Alma — a situation “complicated by lack of available capital.” He alleges that he proposed “sweeping initiatives” after Taymor and Parsons asked him to bring the restaurant back from the “brink of ruin.”
Although Los Angeles is increasingly a magnet for ambitious culinary stars such as Taymor, new restaurants tend to make investment experts wary. More than half of restaurants fail within their first five years, they said.
To develop a 60- to 80-seat restaurant at a new site, owners need at least $1 million in capital or loans, according to Jeffrey E. Sultan, a Los Angeles attorney who specializes in restaurant start-ups. The money goes toward such expenses as lease negotiation, construction costs, kitchen appliances and fixtures, liquor licenses, inventory, furniture, rent and initial operating capital, he said.
“A lot of inexperienced restaurateurs go into a project under-budgeting,” he said. “Invariably snafus happen — the construction budget can go haywire, there are regulatory constraints depending on what city you’re in, there are delays during which you have interest costs and mortgage payments.”
But getting funding can be difficult.
“When it’s a first-time chef, they just don’t have a track record,” Sultan said. “It’s generally not the kind of economic investment for a sophisticated investor just because there is such a high failure rate for these kinds of ventures.”
Nguyen Tran endured the pressures after launching Starry Kitchen with his wife, Thi, out of their North Hollywood apartment.
In 2010, the underground phenomenon evolved into a formal business with a restaurant downtown. Fans swarmed the new outlet, eager for a taste of the Trans’ popular meatballs and Singaporean chili crab.
The recipes were a hit. But the Trans made mistakes, assuming that sales tax was automatically deducted from transactions, causing penalties to eat into already small profit margins. Less than three years after opening, their business partners sold the lease.
The Trans revived Starry Kitchen as a roving pop-up restaurant and launched a crowdfunding campaign this year to raise $500,000 for a permanent place. The effort failed, and the business closed in February.
“I was really young and naive when it came to running a business,” Nguyen Tran said. “Foodies want to say it’s all about the food, but that’s not true.”
In June, rising rents in the trendy Silver Lake neighborhood killed Heywood Grilled Cheese Shop four years after it opened, according to co-owner Michael Kaminsky.
“Every person I spoke with gave me the advice that it was going to take three times as long and twice as much money as we had planned,” he said. “They are right on the money.”
Casual burger bar Short Order opened in the Fairfax district in 2011 to intense press interest. On the restaurant’s second day, it welcomed 900 customers.
The huge volume exposed problems that the restaurant’s team hadn’t yet worked out, said Bill Chait, a veteran restaurateur who backed the operation. The eatery, hampered by its complicated two-story setup and high ingredient expenses, closed in April.
“There was a huge build-up and expectation for that restaurant before it opened,” Chait said. “It was pent up and consequently puts you under a lot of pressure.”
Restaurateurs have some options. Local chapters of various restaurant associations sometimes offer mentorship programs and business tutorials.
A year ago, a website called EquityEats launched in Washington, D.C., to help restaurateurs raise money from local investors, who invest at least $100 and receive an equity stake and returns on profits.
But without the help, many restaurants struggle.
“The industry has a tendency to spit people out,” said Alma’s Taymor. “People are chasing goals that don’t return an investment — Michelin stars don’t lead to financial stability.”
Alma was never intended as a cash cow, but rather, as an experiment in sustainable business, Taymor said. The business was regularly denied loans by banks and was initially funded by friends, family and Kickstarter donors.
“Traditional investors would laugh us out of the room,” he said. “We were week-to-week from Day One.”
Price’s lawsuit, set for trial in January, details the sorts of things that can go wrong in an untested business.
Price alleges that the eatery’s problems were “numerous and far-reaching”: blank checks left on an open table to be stolen by an employee, expensive wines stored next to dumpsters during hot days because the restaurant interior was too small.
In the complaint, Price alleges that he went from being a regular at Alma and a “sympathetic ear” to offering to help renegotiate the lease and shaping up shoddy bookkeeping.
Last year, the trio agreed over drinks that Price would become an equity partner, according to the complaint. But when Price pressed for documentation of the deal, Taymor and Parsons backed out with “buyers’ remorse,” Price alleges.
Taymor said Price offered his services as a friend and mentor with no strings attached.
He remembers the conversation as a potential “starting point to a more formal partnership.” He said that Price was never promised an equity stake and that the lawsuit came in response to a rough proposal Taymor and Parsons sent.
Last month, Taymor and Parsons launched an Indiegogo campaign to raise $40,000 through online crowd funding to finance the legal fight. Donors submitted half the amount within two days. Taymor says the amount may still be insufficient, but “we’re not beggars.”
“We’re not in this for material success,” he said. “We’d start again.”