Having too little money is the problem for most businesses, for a few though the opposite is the case. Overcapitalisation can be as fatal to a venture as being starved of funds.
In the dot com boom of the late 1990s we saw young companies being swamped with too much money which was squandered on flashy offices, comfortable chairs and expensive executive diversions.
Most of the businesses failed as staff didn’t have to worry about gaining and retaining customers while investors didn’t put pressure on managers or owners to perform.
The hospitality industry is particularly prone to this, with cafe and restaurant owners plunging hundred of thousands – sometimes millions – into expensive fit outs and ridiculously expensive kitchen equipment.
Most of these overcapitalised outlets fail because the owners have spent too much on setting up the business and not enough on staffing or providing for ongoing costs.
We’ve seen in the past few years many celebrity chefs teaming up with flush investors to build expensive restaurants with these ventures rarely ending well.
The story of Justin North’s chain of restaurants going into administration is a classic case of this, as the Australian Financial Review describes it;
The Norths, both in their mid-30s, don’t have a wealthy financial backer. They poured in all the cash they had and sold kitchen equipment and other assets to finance the venture.
Westfield kicked in an undisclosed amount.
Ostrich-skin leather tabletops, hand-printed wallpaper, and a huge custom-designed Fagor induction stove imported from Spain (the first of its kind in Australia) contributed to the huge fit-out cost.
In a statement to employees, the North Group said its “businesses are currently in financial difficulty”.
“The administrators are now in control of the group’s assets and affairs and intend to trade the business in the ordinary course whilst undertaking an urgent review of the financial position and explore various restructuring options,” the statement said.
For much of the Australian hospitality industry, the Norths’ problems are a glimpse of the future – the success of the Australian and Chinese stimulus packages in keeping their respective nations out of the mire the US and Europe indirectly led to a boom in restaurant spending and investment.
We saw that boom manifest itself in the opening of pretentious restaurants and the explosion of food blogs as desperate PRs flogged their clients’ venues to the media.
There’s a lot of journalists and food bloggers who are going to find a welcome improvement in their eating habits as the fine dining market now sorts itself out.
It’s going to be tough for those who’ve invested too much or the smaller suppliers to those restaurants.
An area we should be critical of journalists is with headlines like “Restaurant Group Collapses“. A business going into administration is not “a collapse”, it’s in fact the opposite where the shareholders, directors or creditors seek to find an orderly way out of trading difficulties.
Putting out the word that a business has “collapsed” makes the task of salvaging the enterprise much harder for those working to fix the problems.
The Norths have taken the honourable and sensible option. While putting a business into administration can be a brutal process – particularly for the shareholders, investors and smaller creditors – it at least shows the group’s founders have acknowledged the problems in their businesses and are looking to fix them.
All too often, we ignore the fact our businesses are going broke and don’t take the action needed to save them. Doing it early means less pain for everyone.
Having too much money is often worse than having too little money, although most of us would love to be in the position of having big money backing our ventures.
We often talk about learning from failure and not stigmatising entrepreneurs who’ve given it a go and failed, how we treat Justin and Georgia North will be a good measure of whether we are really an entrepreneurial culture.
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