How Not to Start a Business in Mexico
Editor's Note: The following post is by TDV contributor, Ben Lagow
Recently, during one of my frequent visits to LewRockwell.com, an article caught my attention. It was titled, "So, How Can I Make a Living in Mexico?" written by Jim Karger of The Dollar Vigilante. It piqued my interest because I had actually attempted to make it in business in Mexico.
For about a year during 2006-2007 my wife (fiancé at the time) and I made our foray into the wild world of small business. We moved to the beautiful town of San Miguel de Allende, Mexico, loved the place, and decided to strike out on our own and support ourselves with a local business. Our dream and vision was to create a bohemian-chic art-café near the Art Institute and attract a wide range of artists, locals, and tourists. The Gypsy Café opened and over a few months expanded into a restaurant, and then a bar, and finally closed its doors in the spring of 2007.
After much introspection and reflection I can summarize our missteps into 7 categories. I hope these lessons will be helpful to other aspiring entrepreneurs.
1. Lack of Capital
Though a cliché, it is true and cannot be stressed enough. We had what I thought was a decent amount of startup capital. We planned, prepared spreadsheets, created budgets. But once the "go" decision is made, it's a race against the clock to open the doors and start bringing in cash. In the meantime money burns fast. There is always something unexpected.
We were all in. We had no additional savings or backup. When the doors opened for business, we had only enough to cover a few months of rent. Through tenacity and hard work, we actually began breaking even after only a couple of months. But, this was not an optimal situation. Restaurants notoriously lose money for months before turning a profit.
So, always budget extra for the unexpected and leave a cushion of savings to live on in case you need to bail. If the initial investment is a high hurdle, consider a business with minimal start-up costs.
2. Insufficient Market Intelligence
It is good advice to talk to the locals anywhere, but especially true in a small town in Mexico. We had only lived in San Miguel de Allende for a short time and thought we had it figured out. We had a great idea to do something no one else was doing. We planned things on paper. I even went to a barista course in Guadalajara. I knew I could make some of the best coffee in town. But it takes more than that. It takes a certain amount of street smarts. We were really quite naïve about many of the softer skills of business operations that can be difficult to foresee such as locating the best suppliers, creating effective advertising, and reacting to changes in customer preferences.
Just one example is that we opened without a liquor license and thought we didn't need one until we hired an Italian chef and started making pasta. Our customers asked: "Where's the wine?" The Italian then took us to the local cerveceria (beer distributor). What we didn't know is that the cerveceria can get you a liquor license for free as long as you agree to buy from them. They don't teach that in business school.
3. Work the System
This lesson is similar to the previous. When operating a business in Mexico, or any foreign country, it is a tremendous help to have a partner from that country. In my case my wife is a Mexican citizen, which eased much of our paperwork troubles. Even so, neither of us had operated a business before, so we had a lot to learn when it came to the authorities. One aspect of Mexican local governments (which I was very frustrated with at the time, but later came to appreciate) is that while they can be very inefficient and slow, they can be flexible in some cases. The trick is to know which rules can be bent and when you can bend them.
One great example of this is when we were just ready to open and acquiring various permits, the "Uso de Suelo" permit was taking particularly long to get approved. We were worried we couldn't open, so we asked our local accountant what we should do. His response: "Open!" In other words: "don't wait on them, open your doors and start making money!" We did, and sure enough, the inspector showed up a week or so later, and our permit was approved. It's not that easy in every case, so ask around to find out how to get things done efficiently.
4. La Migra
This topic is worthy of a whole book. If you're going to do business abroad, you're going to have to deal with immigration. And similar to other government entities, it is slow, confusing, and frustrating. But, having dealt with the US immigration system as well (worthy of another book), I would take the Mexican system any day. Here is a great example. I was previously teaching English in Mexico, so I had a work visa. But I needed a visa for the Gypsy Café. So, my wife and I went to the local immigration office. There we were able to sit down and talk to an official regarding our situation and get some minimal advice. We filled out the paperwork as they asked, and a month later got our response: Denied. It was like a kick to the gut. The official was empathetic but could not give us an explanation other than "it was decided by the director." That's when we got smart and hired a lawyer. The lawyer filed my papers and a couple months later I had my official work visa.
Note: Immigration laws got a significant revamp and are going into effect soon, making it possibly easier to obtain a work permit/visa. Still, hiring a competent, local, immigration lawyer is wise. They know the system, the officials, and they will get your papers approved. It's worth the money.
5. Don't Pay Rent
Some may disagree with this, but I absolutely hate paying rent. We did not initially consider buying a place, but a month into the lease I was already regretting it. Finding real estate within walking distance to the town centro in San Miguel de Allende is not easy. So, when we found a place suitable for a café, we jumped on it. My wife and I made several upgrades and renovations to the place that we paid for. The landlord only showed up to collect the rent, which is not an uncommon situation in any country. What is interesting about Mexico is that there are very few zoning laws, making it possible to live and run a business in the same place (it's also why in the US I have to drive a mile from my house to get a candy bar). It is common in Mexico to see storefront shops where the owners live in the back or upstairs.
In addition, we later found out from the cerveceria manager that we were probably paying about double the reasonable rent rate for our space. We got suckered. So, if renting is a necessary evil, shop around and negotiate like crazy. Another trick a landlord can pull is to not renew the lease, effectively terminating the business. Then, they re-open your business and make the money for themselves. That didn't happen to us. We were replaced by a real estate office. Go figure. So, sign a long-term lease (3-5 years) if you plan to stay.
If I had a chance to do it again, I would utilize part of my capital investment on real estate. No landlords to deal with, and it's much more fun to paint walls that you own.
It almost goes without saying, but it's worth saying anyway. Running a business, especially retail, and most especially a restaurant is a ton of work. We opened for breakfast to attract the expats who liked bacon, eggs, and hash browns and even the adventurous that opted for chilaquiles. And once we had a liquor license, we were doing open mics, art openings for students at the institute, and parties in the evenings. We had to let the Italian chef go, but we had my wife's mother and two sisters working there in addition to one part-time waiter. We opened 7 days a week, and closed early on Sundays. There was really no such thing as free time. In the end, the workload did us in more than anything else. We had great food, great coffee, and a vibe unique to the town. We had somewhat of a following after only a few months. But, working crazy hours to break even is not sustainable. We simply burned out.
7. Don't Sell Assets
A classic hurdle in sale of a business negotiation is stock vs. assets. Sellers want to sell stock. Buyers want to buy assets. This is mostly due to liabilities - sellers want to get rid of them and buyers don't want them. The Gypsy Café had no stock, but the principle is similar. It would have been much better to sell the entire business to an investor who wants to continue the operation. Instead we had a big garage sale, which was stupid. Selling the business as a whole, there would be value placed on the brand, operating procedures, menus, suppliers, etc. By selling piecemeal assets, we were lucky to get half of what we paid for our stuff.
That principle is universal. In Mexico it can be difficult to acquire, and therefore, sell certain goods. Case in point, our prize possession was a La Pavoni semi-automatic Italian-made espresso machine - not your standard home-brew piece of equipment. As can be imagined, the market for second-hand espresso machines is fairly nonexistent in a small town in Mexico. After placing the item on mercadolibre.com (Mexico's version of ebay), we finally sold it within a few months. On top of that, we had left town and left the espresso machine in the hands of a friend, who was helpful and honest. He completed the transaction, sent us the money, and we gave him a commission.
And with that sale, the Gypsy Café was no more. They say that what doesn't kill you only makes you stronger. I can testify to that today, although it took quite a while to bounce back. And even though I moved back to the US to get a "real job," the entrepreneurial spirit in me is still trying to break free. The key is to learn from these mistakes for the next time around.
Ben Lagow studied accounting and information systems at Texas A&M University. After a year in the corporate world, he moved to Mexico where he taught English, started a business, and traveled throughout the country. There he met his wife and eventually moved to the Dallas, TX area where he works at a local accounting firm. Ben plans to become a CPA but is always open to new opportunities. His other interests include woodworking, organic gardening, cooking, and living free.