A second-generation pizza entrepreneur — his father owned a pizzeria in Carpentersville, Ill. — Mr. Sarillo, 50, opened his first Nick’s Pizza Pub in Crystal Lake, Ill., in 1995 and his second in 2005 in Elgin, a nearby suburb of Chicago. Annual revenues rose to $7 million in 2007.

But while he was sharp on culture, Mr. Sarillo acknowledges he was naïve about numbers. He overborrowed and overbuilt when times were good, then almost lost his business when the economy turned. Only an impassioned online plea to his customers saved Nick’s.

“Barring some sort of miracle, we are going to run out of cash to pay our vendors and team members over the next couple of weeks and will have to close,” he wrote in a September 2011 e-mail sent to customers and later posted on the company Web site. The following conversation has been edited and condensed.

Q. What was your father’s pizza joint like?

A. It was good when my dad was there to tell people what to do. He was a good guy, but he didn’t coach much. He just said, “Get this done now.” When he wasn’t around, it was slack. He always taught me you can never have more than one restaurant because no one cares. Other entrepreneurs were telling me the same thing. But I realized that was because of the culture they created in their businesses. That’s where I said I’ll do something different.

Q. You describe your management style as trust and track. What does that mean?

A. Especially with a younger generation like we have at this restaurant, they’re going to be more motivated and more productive if the managers are more like coaches. Instead of being told what to do, they want to be supported and coached. This trust-and-track model is about giving the team the tools they need, telling them the result we need and trusting them to get there in their own way. At the same time, you have to track the results.

Q. Tell me about your community involvement.

A. As in many companies, I used to write checks and donate — because I’m a good guy and I care. But there wasn’t much awareness in the employees or community about why I was doing that. Then we came up with our fund-raising system. Instead of an advertising budget like most companies — say 3 percent of sales — we have zero dollars in our advertising budget and give back 5 percent of our net sales to our community through fund-raising. We do that by allowing organizations, the ones I used to write checks to, to come in and use our building to raise money.

Q. And then you started having problems in the Elgin restaurant? A. When I built my first restaurant in Crystal Lake, it was only 150 seats and about 3,500 square feet. I could have done the same thing in Elgin. But like many entrepreneurs, I have that eternal optimism. The Elgin restaurant is just over 9,000 square feet, with 350 seats. It was a $5 million project with property and building. I overbuilt the restaurant based on the projections that there would be 80,000 people moving into housing development projects there. None of the developments got built.

Q. What happened?

A. Unemployment got really high in our areas, over 10 percent. So the families didn’t have money to go out. Sales dropped a little in 2009 and 2010. We did some great promotions where we were giving back, a couple days a week with half-price pizzas for people out of work. Those kinds of things helped us maintain a healthy level of sales to get by. We weren’t building any cash, but we were making it.

Q. When did you realize that you weren’t making it?

A. Sometime in the beginning of 2011 I asked an adviser for some help, and he schooled me on debt-to-asset ratios on my balance sheet and basically gave me what I would call a come-to-Jesus speech.

Q. What exactly had you missed?

A. I wasn’t watching how the liabilities side of my balance sheet was growing. I was incurring more and more debt, and our debt-to-equity ratio was getting way out of whack. A healthy ratio is one to one, but ours was more than three to one. I had millions in debt. I had the $5 million project. And the asset values were decreasing as the property values were going down. That’s the downside of having so much success. I got a little complacent about taking on debt.

Q. Given your balance sheet problems, how were you able to get bank loans?

A. When I first got approved for the bank loans, our sales and everything was climbing and improving, and the values of our properties were real high. The bank probably didn’t look as close as they should have as well. And they gave us a line of credit that they probably shouldn’t have.

Q. By September 2011, things were really bad and you wrote the letter to your customers saying you were about to go broke. How much did it help?

A. I still have that sales report on my wall because it was so amazing. The Elgin restaurant in the first week had an increase of 105 percent and Crystal Lake had an increase of 110 percent. The second week and third week were close to that. They were like 90 percent. And then maybe 85 percent the third week. It was five weeks before sales settled back down again, but not all the way down.

Q. This must have taken a toll on you personally.

A. I’ve never been in this kind of situation. I’ve always made my payments, ever since I was 16 years old. So the responsibility at a personal level weighed heavily on me. So much so that — while I’m very athletic, I work out, I swim a lot — at the end of this, right around Labor Day, my back tightened up. I’d blown two discs in my back. I totally believe that had something to do with the stress I was holding.

Q. Did the letter get you out of the hole?

A. We got current with all our vendors. We made payroll. We paid our mortgage for that month. But also the bank worked with us on our loan. They deferred our principal for one year.

Q. Are you paying the principal now?

A. Yes. We just started.

Q. Can you keep both restaurants open?

A. Yes, we can, as things are now. It’s still not easy.

Q. What does your father say?

A. He’s a proponent of selling the restaurant company and starting over. He thinks I work too hard for not much pay, just to get things turned around. A lot of business owners would claim bankruptcy and get out of this and start over again. He’s concerned about the stress.

Q. Do you still plan to open more Nick’s Pizza Pub stores?

A. Yeah, I would for sure. What we do in our communities and how we run our business is really amazing, and I would love to bring this to other communities. But it’s not going to happen anytime soon.

This article has been revised to reflect the following correction:

Correction: October 25, 2012

An earlier version of this article contained an inaccurate phrase in a quotation from Mr. Sarillo. In answering the question “What exactly had you missed?”, Mr. Sarillo meant to say “our debt-to-equity ratio was getting way out of whack” rather than “debt-to-asset ratio.”

Article source: http://www.nytimes.com/2012/10/25/business/smallbusiness/at-pizzerias-an-owner-learned-the-importance-of-accounting.html?partner=rss&emc=rss