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The Importance of Keeping Up Appearances for Small Business Owners

In 1995, Nick Sarillo opened up his first restaurant, Nick’s Pizza & Pub, in Crystal Lake, IL. 10 years later he opened up his second restaurant in Elgin, a Chicago suburb. By 2007, Mr. Sarillo was seeing revenues in the area of $7 million. Even with the beginning of the recession, Nick’s Pizza & Pub still seemed to be holding up where many small businesses were failing.

In actuality, Mr. Sarillo was in just as much trouble as many small business owners. He had large debts that he had incurred to build his second restaurant, leading to a bad debt-to-equity ratio, and decreased revenue as a result of fewer people having money to go out to dinner because of the economy. However, Nick’s Pizza & Pub, with the help of a few innovations, was able to maintain a healthy enough appearance that the banks didn’t look as closely as they might have and the business managed to remain afloat.

Although the individual innovations that Mr. Sarillo came up with are interesting and can be found in the article, the really interesting part is the bank’s behavior. Mr. Sarillo owed and still owes several million dollars in debt. Although the Nick’s Pizza & Pub is no longer teetering on the edge of bankruptcy, it was at one point and the bank failed to notice. The sales records and property values were high when the bank approved loans, and because there were no obvious signs of instability, the bank trusted the business. In other words, because the bank received several signals indicating a positive state, they decided to follow the information cascade and disregard any small signs of instability they might have received, leading them to approve Mr. Sarillo’s business for a loan which, in retrospect, was far higher risk than they realized.

The article can be viewed here:

http://www.nytimes.com/2012/10/25/business/smallbusiness/at-pizzerias-an-owner-learned-the-importance-of-accounting.html?ref=smallbusiness

-tsm78

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