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Investing in the Bar and Restaurant Business

September 27, 2019 No Comments


Today’s episode is
all about investing in restaurants and bars. At some point, we’ve all thought
about owning a restaurant and bar. We don’t watch Bar Rescue
and said to ourselves, “I can do that. I can do that way better.” We’re no different. I don’t really know too much
about the restaurant and bar business, so it’s a little bit
out of my area of expertise. If you’ve ever had
a burning desire to work twice as hard as
you ever worked in your life for a near certain chance
of losing all of your money, today’s episode is for you. Today we explore why
owning a restaurant-bar can be the worst investment
ever, and a few examples where it worked out. I’m in one of those now. Welcome to my bar. This is the Inwood Tavern. We at Dumb Money own
and actively operate two of the most successful
bars and restaurants in Dallas, and we know how difficult
this industry can be. So Chris and Lin bought
Chelsea Corner together, and Lin and I bought
Inwood Tavern together. So some quick stats according
to the National Restaurant Association a few years ago. About 60,000 restaurants open
every year, and 50,000 of them close. So what makes the places we
bought different and complete anomalies? We’ll tell you. Chris, Lynn, and Dave are
going to take me to school, so I can learn about
restaurants and bars. We’ll share with you what we’ve
learned through our experience, and how we’re thinking about
assessing this new restaurant investment opportunity. We don’t often talk
about actual numbers, because we’re usually investing
in other people’s businesses. But in this case,
we own the business. So we’re going to share
with you the real numbers, so stick around for that. And if that weren’t
enough, we’re also going to tell you
about a new restaurant-bar that we’re considering
investing in. [? We’ll also ?] [? be ?]
making a passive investment in a corporate-owned
restaurant-bar concept that was started right here in
Dallas, called The Rustic. Now would be a perfect time to
hit that Like button, subscribe if you haven’t already. We’re Dumb Money. We’re all about sharing our
real lives and real investments with you here on YouTube. So we bought Inwood
Tavern in 2014. It’s been open since 1964. It’s the oldest
continuously-operating bar in all of Dallas,
and we bought it just in time for the 50th
anniversary party. It’s a neighborhood bar,
it’s been a favorite of ours since college. When we were running
a software company, this was the place that we would
go for happy hours after work, or when we went to lunch
and never came back, this is where we
usually ended up. One of the first improvements
we made to this place was fixing the bathrooms. It was literally
probably the main reason that people didn’t like
coming to Inwood Tavern. It’s been five
years, but I think they still look pretty nice. Trust me, there are
not many dive bars that have commissioned art
from well-known local artists. In fact, this artist designed
the whole bathroom for us. Across the hall, the world’s
smallest men’s restroom. But again, well-designed,
always clean, and got my name and this one. Wouldn’t be a dive bar
without a pool table, and while we don’t serve food
we do have chips and beef jerky, and free popcorn
anytime you want it. This whole side of Inwood Tavern
didn’t exist when the bar first opened. The walls on both sides were
originally painted sheet rock. The previous owner put up fake
brick, it was like a linoleum. We liked the idea, so we
recreated it with real brick. We have DJs on the weekend,
we have karaoke on Tuesdays. We had to rebuild the
stage, and it’s great having a general
manager who also knows how to do
construction, because he rebuilt the stage for us. So yes, originally this was a
parking lot with a chain link fence around it. Added plants, added nice lights. After the bathrooms, the
second big project we did was replacing every
single television. We now have four TVs on the
patio, four in the main bar, four in the back bar. Want to be famous? Come to Inwood Tavern,
take a picture, #inwoodtavern, and
you’ll get on screens. Heated in the winter,
cooled in the summer, because Texas weather is
completely unpredictable. It’s literally my second
favorite patio to hang out on. I do have to give it
to Chelsea Corner, their new patio is amazing. This is my restaurant,
Chelsea Corner. I own it with my buddy, Lin. We both worked here 25
years ago, me as a bar-back, him as a waiter. It’s a great example. Special events is like– it’s a lifesaver for us. Without special events,
we’re underwater. It’s a huge part of what we do. We run special events,
probably 10 or 12 a week. And our kitchen, I think
Chef Dario is here. Is Chef still here? Oh, sorry. Come on in and say hi. Without him, we literally
don’t have a restaurant. It took us two
years to find him, and he is literally the savior
of the entire operation. And that little delicate balance
of having a good kitchen team led by a great head chef is– without him, I would probably
sell the entire operation tomorrow. He’s that important. So thank you, Chef Dario. You’re welcome. I appreciate it. The reason why so many
restaurants and bars go out of business is high fixed costs. We have 65 employees
here, and these napkins, along with our bar towels
and our kitchen uniforms, cost us $3,000 a month to get
cleaned, delivered, and folded. Less than two months
ago, we paid $4,000 to have eight vinyl booths
completely recovered, and one of them is
already ripping again. We pay $2,000 a month to have
an auditor come in weekly, and weigh every
bottle of alcohol and count every can of beer
to help us monitor theft. And like every other
bar in the world, we still have
rampant theft issues. It never ends. These guard rails, our insurance
company made us install them. They charge us $80,000 a
year for liability insurance. $80,000 a year. Meet our $10,000 ice machine. We have two of them. They cost us about $5,000 a year
to maintain and get repaired. I love our real wood floors. What I don’t like
is the $5,000 a year we spend having them refinished. Golden [? Tee, ?]
ATM fees, and pool. An outside vendor
maintains this for us, but also keeps most of
the money we make from it. That empty spot on the wall? That used to be a really
cool fish sculpture that a customer broke. We spend about $14,000
a year fixing things that customers break. 2.5 million dollars. That’s how much money we
have to make every year just to break even. This is why most
restaurant and bars go out of business, and why
you should think twice before investing in one. This is the back office
at Inwood Tavern. I promised you we’d show
you some real numbers. I’m going to show you exactly
how much money we make here, and why a bar may not
be the best investment. Everyone wants to be
in the bar business, and it makes sense, because
it’s a high margin business. You sell a product that– let’s say a beer costs $1. You sell it for five,
there’s lots of money to go around, right? Let’s dive in, look
at the actual numbers. I looked at the last
six months and came up with a monthly average for
both our sales and expenses. So if we start with
sales, about $156,000. Cost of goods, $34,000. And our gross profit, about
$122,000 on an average month. And if you’re thinking
about opening a bar, obviously, you know
you have expenses. There are some obvious ones
like rent, utilities, licenses. About $1,600 of legal
expenses every month. Another $1,600 of cleaning,
3,000 of insurance. Can’t forget the tax man. Almost $20,000 in taxes. All of that adds up to about
$37,000 a month in expenses. 36,620, to be exact. And if that was it, we’d
have a net profit of $85,000, but that’s never it. There’s always more expenses. Payroll, equipment rental,
repair, security, pest control, DJs, bands, karaoke every
Tuesday, bar supplies, marketing and other expenses. Oh, and let’s not forget, $4,000
of credit card processing fees. That’s almost $42,000
of additional expenses you may not have
thought about when you were budgeting how much it
would cost to open your bar. All of these add up to 41,715. So we’re able to do
$156,000 in sales, we have our cost of goods,
expenses, and more expenses. Instead of $122,000
in gross profit, or even $85,000 in
net profit, we’re now looking at just over $43,000. At an anomaly bar that
has no cost of food, we don’t have a
kitchen, small staff. It’s a fairly simple operation. But what happens if we have
a slower than normal month? Last month, for example, April. April showers cost a lot of
people not to go to bars. Instead of our typical
$156,000 in sales, rain caused us to
be about 20% lower, which takes this healthy
net profit way down. And that’s a lot of work
for $14,000 of profit. Imagine a bar that didn’t have
this level of consistent sales. The scary truth about investing
in restaurant and bars is you do start over
at zero every month. You have to find
a loyal following. It’s kind of like YouTube. You have to find
a loyal following, you have to have them
coming back every month. A slight drop in sales
could be a disaster for any bar and restaurant. Which is why we say the bar
business could be the worst investment ever. I’ve got to clean all this up. This took way longer
than expected. We have money to make. Well, we said we would
never ever, ever do this, but here we are,
contemplating investing– not even in our
own restaurant-bar, but in someone else’s
restaurant-bar. Why are we doing this again? I think it’s a
typical story, right? Everybody you know– I don’t say everybody, but a
good chunk of people you know, all say they’d
love to own a bar. Everyone who’s sitting
around in college is like, yeah, I’m going
to own this place someday. There’s this idyllic view– and I’ve always tried to figure
out what that is in people. But for some reason
it’s, if you own a bar, you’re the most
popular guy, you’re throwing a party every day. Who doesn’t want to be
the center of all that? And deeper than that,
when you’re in a bar you spend so much money
that you think they’re making all this money off you. You just you just assume
that bars and restaurants are super profitable. OK, well, you’re that
guy that’s always coming from a making money
perspective, which is true. But I think a lot of people
idealize owning a bar, and they look at it as
something that it’s really not, which it’s a business. Worst investment ever. Well, I disagree. It’s been proven. Most of the time, owning
a bar restaurant– Can we go ahead
say most startups– No, no. Way worse than restaurants. That’s not true. There’s more startups out
there than bars being opened. Even successful
restaurant-bars in general make virtually no money. Barely enough money
to pay them out. Fair. Alcohol is relatively–
well, it doesn’t go bad. It doesn’t have a shelf
life, and it generally makes a lot more
percentage in revenue. I can serve you a vodka
soda and charge you $10. How do you get a
complaint on that, right? I serve you a
cheeseburger for $10. 18 Yelp reviews come in. It’s unbelievable. And by the way, it took
five people since 8:00 AM to work in the damn kitchen
just to get the crap prepared to make that $10 burger. But still, constant
expenses, constant– it’s always work, too. When you put a lot of money
in, so like, redoing bathrooms, putting up TVs and
stuff like that, and if you don’t, you’re
going to have to redo that in like, what, five, six years? Oh, it’s a constant. I think one of the biggest
things people don’t understand when they invest
in a is they see that initial investment, right? And then they can barely
live off the profits, and they’re distributing
those profits, and they don’t realize that
they’re not putting anything back into the building. These are emotional
investments for most people. Emotional investments are
always the worst to make. So the biggest
advice that I ever give to anybody
before they think about a restaurant
or a bar is simple. Are you absolutely
doing it to make money and treating it as a business? And unless you can answer
that question honestly, then you have no business. Because there’s way too many
ways to fail in this business by being the popular
guy, and try and open the cool restaurant. Can we agree on something? A restaurant or bar is
only a viable investment if it is meaningfully
differentiated in some way, whether you have the
best chef in the city, or the best location, or
the best history, right? Or what we’re about
to get into now, which is The Rustic, this
investment opportunity, which is the most unique live
music venue [? slash ?] restaurant-bar. And in this case, is replicable. I think that’s the only thing
that’s interesting to me. It’s not just the one location. That has only been achieved
by one other entity, which is House of Blues, that recently
sold for over $300 million. So we’re about to go meet with
them at their Dallas location to talk about opening
two additional locations. Hey guys, we have 15
minutes to get there. So let’s go. How did you come up with
The Rustic as an idea? When we created The
Rustic, the idea was born from my
partner’s bachelor party out in the Texas Hill Country. We were at a ranch,
we were grilling steaks over an
open flame, and we thought, let’s bottle
that up and try and find a location
in an urban center so that we can have
that experience in a densely-populated
urban center. So that’s how the idea was born. If you ask anyone, investing
in a restaurant, bar, terrible idea. Most of them fail
in the first year, and those that don’t
fail in the first year fail in the second year. Point blank, it’s not about
you have a good recipe. That’s not what the
restaurant business is. People romanticize– It’s a business. A restaurant is a
smaller business. Exactly. So tell me about this
investment opportunity. So this deal that we’re
talking about right now, it’s going to take us from
three units to five units. It’s going to build unit
number four and five. This is the tipping
point for us. This is where we go
from a regional brand to a national
brand very quickly. I’m the only one who
was willing to sit down. It looks like everyone’s
got a beer or a sandwich. Should we go get a beer? I think we should go join in. Let’s go do it. I don’t know that I’ve
actually eaten here at The Rustic, which is
probably maybe a bad decision before committing. This sandwich just closed
the whole deal for me. Deal sealed, done. I’m done with just this– the hot chicken and
cheese sandwich. Guys, this sandwich just
sealed the whole deal for me right here. Just sealed the deal. We are going to soon be proud
investors of the next Rustic. The very next two locations. That’s right. And probably the
next 10 after that. Let’s go. Just for starter, it’s a
concert hall, restaurant, bar. That’s the differentiation here. This is exciting. Awesome. Our third restaurant-bar. Our third concept. And just to prove that
the other two places that we have actually
have customers, we’re going to take
you there at night. Because they’re completely
empty during the day, but just wait till you see. If you enjoyed today’s episode,
please throw us a thumbs up, consider subscribing,
and as always, share those comments with us.

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