But the numbers looked good…

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But the numbers looked good…

A financial investor had interests in a number of restaurants that did very well. But obviously they weren’t all like that if his story has made it here. This is the story of one of the bad ones.

The building was about a decade old and had been previously occupied by three different food establishments. The prior restaurants had gone out of business, and thus, there were de facto locational risks. But the demographics were great, and the access was great, and the rent was really good, so they took it.

The prior tenant had done minimal work and the interior was dated, but with only some heavy paint and a very few customized fixtures, they re-created the theme of their other restaurants: Kind of a warehouse feel with lots of space. The code and health inspections went well and they opened up 60 days after signing the lease.

On the first health inspection after opening they got several violations because of roach droppings and dead roaches. It was cleaned up and the place sprayed regularly, and the problem seemed to go away. Until the big storm.

A cool wave came through the area with a squall line that dropped the warm balmy summer temperatures of Southern Illinois to the cool of a late summer. The air temperature dropped, and the air pressure dropped, and an over powering stench, along with a fine mist of roach droppings, began to spray from the cracks around the vents and doors. Roaches were dropping from the ceiling onto the staff and guests. People screamed, and ran from the restaurant. The owner / manager was in the parking lot scrambling to give everyone double their money back and a $50 coupon for future use.

Only one person called the health department, and nobody called the local newspaper. Luckily, the health department got the call but didn’t believe it. As soon as the last car pulled out of the lot, the manager closed the restaurant for “remodeling and updating,” and called the other owners.

They ripped into the walls behind the wallboard and found a disgusting sea of roaches (we really hate roaches!) living on a thin film of fat and grease that lined the walls. Prior owners apparently dealt with the problem by sealing the walls as tightly as possible.

While this did confine the roaches, it is what led directly to the dramatic event. The extra effort of sealing accelerated the accumulation of droppings. It also created the condition that would cause the abrupt pressure change to suddenly exhaust the higher-pressure foul air trapped behind the sealed walls– along with the droppings – through weak seams and cracks, and into the lower-pressure interior space.

Finding the source of the grease was not easy. They hunted high and low, and could only guess that it had something to do with the air handling and exhaust system. They were right. The kitchen exhaust-hood ductwork had a joint seam in it halfway between the roof and the wallboard ceiling, where there should be no joints. To add insult to injury, the joint was done incorrectly, causing a fine mist of grease and cooking fumes to be forced into the airspaces within the framing of the building.

The exterminator had no ideas how to handle this, so the owners and their finance team – ignorant as they were –decided to fix the problem themselves.

First they fixed the exhaust-hood ductwork. This took two hours and about $120 of ductwork.

Next they drilled pairs of 6 inch holes in the walls from the outside of the building. One hole was drilled at the top of the building and one at the bottom, in between each set of framing/furring studs. They then vacuumed all of the droppings, along with no small amount of live roaches, out of the walls.

Next, they set off nicotine smoke bombs in the restaurant, and forced additional smoke into the walls though the holes. They repeated this process two times, at which point they saw no roaches, and no more roaches – dead or alive – were being vacuumed out. Then they did it one more time, just for good luck. After a lot of cleaning, and a lot of new paint and patching, the restaurant was re-opened. The entire process took two weeks.

How did this to happen in the first place? The finance guys didn’t demand appropriate due diligence from the restaurant guys: The numbers looked good, after all. The restaurant guys saw a great opportunity, and figured they better get the place quick before someone else leased the prime location. So they didn’t do their homework.

Had they checked the health department records, they would have seen that every month there was a report of a roach problem at this location. All of the locals and the neighbors in the complex knew of the problem, but the new restaurateurs didn’t, and didn’t wonder where the roaches had gone.

When they re-opened, the managers told the locals and neighbors that there was just a problem with how the building was sealed, and that it had taken care of. Now, two roach-free years later, the restaurant is doing well.

The good news is that the finance guys sat down with the restaurant guys, and they jointly devised a checklist for due diligence on each and every site that was to be considered in the future.

In addition, they went after the building owner who had failed to disclose the problem. They settled with the former owner on a reduced purchase price on the building.

The moral is that due diligence, whether on a $100 million project or a $100 thousand project is more hands-on than most people realize.

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