Deals Gone Bad
Stories of successful chefs turned business mavens litter the headlines, but for every Jean-Georges and José Andrés, there are a dozen would-be star operators with bankruptcy notes, litigation fees, and soured partnerships. Before you get too far down the road, heed some cautionary advice from chefs who’ve lived through the speed bumps of bad business and hairpin turns of clashing personalities. And, most importantly, listen to your lawyer (or ours if you don’t have one yet)!
A Public Affair
While P&L issues are often the root of the problem, several recent, well-publicized cases have involved less tangible assets. This month Laurent Tourondel gained a small victory after nine months in a legal tussle with former BLT partner Jimmy Haber over Tourondel’s right to his own name (the LT in BLT) outside the BLT brand. As Tourondel told Crain’s New York Business, “It was very important to me to get the trademark. It's my name.” Tourondel has already opened LT Burger in Long Island, and LT Signature in Panama City, and he will unveil a new BLT American Brasserie in Times Square in the fall. As Haber tries to defend the identity of his remaining BLT businesses, Tourondel faces future struggles over intellectual property ranging from the color scheme and font of his new restaurant to proprietary recipes and menu items like the Twinkie milkshake. Proprietary recipe rights are notoriously hard to prove. Even though the LT Burger milkshake is a near twin of the BLT offering, the judge proclaimed, “Your guy didn't make up Twinkies. A Twinkie is a Twinkie.” It doesn’t look good for Haber.
For the anticipated New York outpost of Las Vegas’ Lotus of Siam, a diverging vision caused the partnership schism. The Chutima family’s humble, original Lotus of Siam lives in a Las Vegas strip mall and sells most of its wines for less than $10 dollars a glass. When the family chose to expand, their partner in New York, former Cru owner Roy Welland, took a different direction. Welland wanted to create an upscale restaurant, offering a tasting menu and an extensive (and expensive) wine list. As Pennapa Chutima, Bill and Saipin Chutima’s daughter, explained to Florence Fabricant in the New York Times Diner’s Journal, “Our reputation is at stake; as a result, we are terminating this relationship in order to protect our morals and values; also, to protect the image of my parents, who have worked their hardest for the past 25 years.” Knowing and protecting the family’s and business’ identity has paid off. Besides maintaining a loyal customer base, Saipin Chutima won the 2011 James Beard Award for Best Chef, Southwest.
Matching Salt and Pepper (Movers and) Shakers
More than a common vision, knowing your business partner—and their finances—intimately is paramount to a successful restaurant. When Joe Isidori spoke at our StarChefs.com International Chefs Congress When to Walk Away From a Deal panel in 2009, he had recently left Harbour in New York and ended his partnership with the restaurant’s financier, Richard Schaeffer. Admittedly, Isidori did not know Schaeffer well when he negotiated a managing partner deal with a profit share in the company (a standard profit share for a chef-partner is 10 percent). The restaurant’s funding was in trouble from the get-go, and the lack of common ground between the partners contributed to the instability. “It’s not that we didn’t like each other, but we had different business principles,” says Isidori. “Once I realized that [the restaurant] didn’t have enough working capital to keep it alive, I got out. Otherwise I would have ended up sinking with the ship.” He came away from the deal a little soggy, but with important lessons: “You have to know your partner, who he or she is. [And] you have to understand the budget,” he says.
With new perspective and priorities, Isidori started searching, cautiously, for his next step. Thankfully, the positive reviews Isidori garnered at Harbour gave him an edge in the competitive New York market and caught the attention of his future partner, Bruce Bushel.
Bushel had been documenting the opening of his first restaurant in a fiercely honest, educational New York Times blog, You’re the Boss: The Art of Running a Small Business. His early posts give insight into the process of establishing a trusting business relationship. As Isidori describes it, “I wanted to make sure that the business model was sound, that I would get along with my new partner, and that the project would meet certain standards. I had to find someone who understood my mantra of sustainable resourcing. For three months I sat down with Bruce, had dinner with him, bullshitted with him, talked about art, talked about movies. What I didn’t know, he knew, what he didn’t know, I knew. We turned out to be a good salt and pepper team.”
So far the partners’ experience opening and running Southfork Kitchen in the Hamptons has been “fantastic,” despite a candidly well-documented setback or two on Bushel’s blog (like the episode which sparked the entry titled After the Fire: Do Not Touch Anything). When we spoke for our interview, Isidori was in the restaurant garden picking produce, but even crouching amid serene greenery, his mind raced with future plans. “This is definitely not a last stop. Long Island is the next culinary and wine destination, the new Napa, and I hope to be a pioneer for it. We could be the seafood version of Blue Hill. I could see a smaller version in Manhattan.” After all he’s been through, Isidori is not ready to settle down, but it’s good to know he’s part of a capable, compatible “we.”
Life Lessons2004 StarChefs.com Rising Star Ralph Perrazzo left Bradley Ogden (where he’d helped earn the 2005 James Beard “Restaurant of the Year” Award) to help the PURE Restaurant Group expand their company. But while he waited for postponed projects to gear up, Perrazzo started talking with longtime friend and front-of-house counterpart, Hugo Moreno. “I was like, this is BS. I’m working my ass off and doing great things. I had no control. We looked at each other and said, ‘let’s do our own thing.’”
So rather than recruit heavy investors or wait to build sweat equity in the company, Perrazzo invested his own money into what would become the Rare Concepts Group. “Hugo and I wanted to own our own place so the partner or investor couldn’t tell us what was on the menu.” The gamble meant Perrazzo had more incentive, more control, and the possibility of higher payoff. It also meant that he carried more risk. “The only reason I invested money is because the concept we had was awesome,” he explains. “Unfortunately, when push came to shove and one of the investors fell out due to an IRS tax evasion audit; we both lost our own money. It was crushing.”
In the end Perrazzo, had to cover the down payment on the building (thankfully he hadn’t signed the lease) and made a decision to pay the designers he had contracted for their initial work. “Those guys get stiffed all the time, but I didn’t want to damage my name in the industry.” Despite walking away from his dream with some bruises, Perrazzo hasn’t given up. “I’m sure eventually I’ll go down the road of doing the concept I want to do and starting the business I want to open. Everyone needs to take the chance, and sometime it works, and sometimes it doesn’t. I always say you have to invest in yourself to get somewhere in this industry.”
After the unforeseeable sideswipe to Rare Concepts Group, Perrazzo regrouped. “A lot of people never take the plunge. I’ve lost a lot of money and a year of my life. A lot of chefs would go hide, but it’s life. It could have been a lot worse.” Last year Perrazzo joined Ken Oringer in Boston as pastry chef of the acclaimed restaurant Clio. He’s already getting attention for his desserts, putting into practice some of the ideas he gathered through travel and research for his own company.
Expert OpinionDebra Guzov, co-founder and head of commercial litigation of Guzov Ofsink, LLC, has a well-seasoned (if not behind-the-burner) viewpoint on the subject of chef business deals. She’s witnessed and helped clean up after nearly every issue that can cause a deal to go bad. A public following is great for the ego, but Guzov sees accolades as leverage for chefs to draw investors and negotiate a good deal. “The optimal time for a chef to start a business is once they have a footprint with the public, meaning once their name has some household recognition. Then there’s some buzz and more likelihood that people will put money on the table and enter into a business with that person,” says Guzov.
Guzov agrees with Isidori and Perrazzo that finding a good partner is also paramount to building a healthy business. “Everyone should have a certain level of expertise in their craft or art. Acquiring the best skill set means making sure you have the right business partners surrounding you,” she says, “people who can help you get to where you need to be and help you realize your vision.”
Guzov says chefs often fail to account for the value of their own creative contribution in negotiations. “Always go into a negotiation ready to protect your intellectual property so the agreement you enter into provides that you are licensing the use of your name and that you have the right to terminate the use of your name. Many chefs don’t feel they have the leverage to protect themselves,” says Guzov. “But you risk losing the right to your own name.” Not only that, but if you don’t assert your value up front, you may feel cheated and resentful of your partners.
Guzov also encourages chefs to review the terms of lease during negotiations. If the business falls apart, you need to be able to reassign a favorable lease. Most commercial leases allow business owners to assign the lease if the landlord approves, and the approval cannot be unreasonably withheld (read the fine print to be sure).
Of course the biggest cause of business failure is money. “Underfunding is really what is problematic,” says Guzov. “Listen to your accountants and business advisors, and make sure you have enough of a cushion if business doesn’t take off with a running start.” Some things, like IRS audits, are hard to prepare for, but Guzov recommends including a clause calling for third party mediation in case of an unexpected impasse between partners. The independent third party advice is nonbinding, but it can help parties resolve disputes without having to go to court, allowing for a more graceful exit.