Second in a series.
There is no one right way to go into the restaurant business. This is a story of one critical and financial success.
If its current string of successes continues, the name American Cafe someday may apply to the territory the restaurants cover as well as the style of cuisine. The first cafe opened in Georgetown in 1977; a second opened on Capitol Hill last year. This year, partners Mark Caraluzzi, Robert Giaimo (not the congressman) and James Sullivan opened a third American Cafe at Harbor Place in Baltimore. Now their eyes are on other cities. In just three years, American Cafe has become one of the largest restaurant operations in the metropolitan area.
According to Gourmet magazine, which included American Cafe in a recent feature in dining out in D.C., the young firm is "a youthfully exuberant, incredibly smart venture that grew from a modest start 10 years ago with three students peddling late-night sandwiches down the corridors of one of the local college dormitories."
The partners didn't start out with a huge amount of financial expertise -- Giaimo, who is the financial manager of the group, has a business degree but never had seen a prospectus until they did their own. Nonetheless, the American Cafe has grown in an incredibly orderly progression, with each step in the process built on the one before it.
The three partners started out in 1970, acquiring a Blimpies' franchise on the site of what was to become the first American Cafe.
First they convinced the landlord at the site, who then helped them convince the Blimpies chain, which then helped them convince a restaurant equipment company to finance their entry into the business, said Giaimo. The three started out with $10,000, raised $20,000 more by selling their cars and stereos, and borrowed $50,000.
In 1975, with a solid success of Blimpies behind them, the three decided to do something else. "It was always our intention to create something that would reflect our taste and standards and give us an opportunity for growth," said Giaimo.
Remodeling Blimpies and starting the American Cafe took about $250,000, financed with a loan guaranteed by the Small Business Administration. "There's a lot of paperwork in an SBA loan. That scares a lot of people off," said Giaimo. "But the things they want are things you need to know how to do anyway."
To get an SBA loan guarantee, an enterprise must be turned down by two banks. "That was the easiest part of the whole thing," he said.
After the initial agreement with the SBA, the cost of the project grew by about $50,000, Giaimo said. They went back to the SBA and got an additional guarantee, he said.
The next time the partners went to the SBA, they were looking for funding for both a new restaurant and the centrall kitchen which will allow them to service six to eight Washington area locations. The project was expected to cost $700,000 and the partners had to raise approximately $275,000 of it themselves.
"We didn't have that much in cash," said Giaimo.They raised it by selling about 7 percent of the stock in the corporation, a sale that was accomplished with assistance from Ferris & Co., a brokerage firm that specializes in aiding local businesses.
The partners and their attorney, with help from Ferris investment adviser Milton Lyon, made up a private offering wth a prospectus and sold the stock in units of 10,000 shares for $25,--- each. The offering was for convertible debentures (basically a bond with a fixed rate of interest that can be converted to stock, with no guaranteed return, at the owners' option).
Several individuals and a New York venture capital firm bought stock. Six months later the partners offered to cash in the loans, paying investors a 10 percent penalty if they did. All but one investor chose to convert to stock instead.
"For someone to do that -- holding stock with no interest, no market, no liquid value -- they've got to have a lot of faith," said Giaimo. The partners raised approximately $175,000 from their sale, put in about $100,000 of their own money and borrowed $425,000 from D.C. National Bank with SBA assistance.
Last January, they began putting together a deal for Baltimore. "We were now beyond SBA's limits, and we didn't want to sell additional stock because we don't want to dilute our ownership," Giaimo said. Rouse Co., which built Harbor Place, sought out American Cafe for the development, he said.
The Baltimore venture was built with $525,000 from Rouse Co., which will be repaid in rental payments, $200,000 from an equipment leasing company, and $250,000 from D.C. National and a cooperating Maryland bank. An additional $400,000 came from Monolith Enterpises Inc., the partners corporate name.
In all, they raised $1,375 million to build the Baltimore restaurant and an adjoining market and a market in their Georgetown location. The Harbor Place cafe opened in September.