Pizza Place Beer Garden
Think about all of the things you might do if you were sure you could just break even.
Me? I run a lot and am fortunate to live alongside the Katy Trail, a 240 mile long gravel path that happens to be both a state park in Missouri and the longest running trail in the country. Along that trail, in Rocheport, Missouri, there happens to be a small piece of land for sale with a pizza oven on it. You can’t imagine how often I’ve run by that and thought to myself, “I should buy that and start a pizza place-cum-beer garden.”
I would do it, too, if I knew that all I had to lose was my initial investment. But of course running a business is hard and a restaurant particularly so, and I could lose a lot more if I didn’t operate it well.
Somewhat related there was an interesting article in The Wall Street Journal over the summer about how the people who want to build things in rural America (i.e., doers) can’t agree about the value of those things with the people who have the means to finance them (i.e., bankers). Here’s the link. We’ve experienced this phenomenon both with the piece of real estate our picture frame business operates out of in the middle of Michigan as well as with the piles of airplane parts we have out in southern California. Both are worth way more in our eyes than in the eyes of lenders and that probably also makes sense because, more so than the lenders, we know what to do with them (I hope).
So I was glad to read that we are not alone:
Lambke wants to construct a new building on the empty lot next door but has run into a problem impeding economic development in rural communities across the U.S.: The new building would cost $7.4 million to erect. When completed, it would be worth $2.4 million, according to an appraiser brought in from Boston by a local bank.
First of all, that’s an impressive feat to devise a plan that would result in an immediate 70% loss. Second, how can something be worth less than its cost anyway?
The answer is that things trade at a discount to their book value all of the time. The reason is that anything, absent momentum, is worth less than its cost because unwinding stuff is expensive. Take my pizza place-cum-beer garden. Even after I bought the property I’d probably have to pay to upgrade the oven, buy furniture and fixtures, hire staff, acquire inventory, do marketing, and so on and so forth. Then if it failed, I’d still be on the hook for taxes, have to severance the staff, pay the local hauling company (shoutout D.J.) to dispose of all the stuff, and so on and so forth.
At the end of the day there wouldn’t be much left against my initial investment, and this is why banks will never lend 1:1 against any asset and usually will only do so at really steep discounts. It turns out creating value is hard!
So hats off to the people who start things. And even more so those who do so and create value. Most small businesses are stupid risk/reward profiles, but America wouldn’t be the country it is without them. So sometimes I’m glad more people don’t think like me.
That said, does anyone want to invest in a pizza place-cum-beer garden in Rocheport, Missouri?
– By Tim Hanson
