There’ and old saying in the restaurant business: If you want to make a lot of money, start off with a lot of money! This is true for some hopeful restauranteurs. For others, it’s luck. For a very select few, it’s an individual talent of an exceptionally skilled chef. For most it happen via the old fashioned school of hard knocks and working their way up from an entry level position.
There are almost 1,000,000 food service establishments employing nearly 13,000,000 people making it one of the largest private-sector employers in the United States. The same trend is true here in New Hampshire with nearly 3,000 establishments employing 60,000 employees. Restaurants have become a way of life whether you enjoy dining out or are simply employed at some time in your career in the food service industry. Did you know that according to the National Restaurant Association, nearly half of all adults have worked in the restaurant industry at some point in their lives, and more than one in four adults got their first job experience in a restaurant. I like to say, “the restaurant industry teaches America how to work”.
When people say they want to open a restaurant, most are visualizing a casual dining or fine dining full service restaurant. based on the statistics I just shared, it’s no surprise that independently owned full service restaurants outnumber the chains 4 to 1. That may surprise you, but it shouldn’t because most of these are owned by people who have started out at an entry level position, ( a food server, cook, dishwasher etc…) and learned the business from the ground up. Like many industries, this is the way to climb the ladder to ownership.
Let’s take a closer look at what it takes to open a restaurant and the two main keys it takes to be successful from day one.
1. Location – You’ve heard this word a thousand time in many industries. It’s old, it’s trite, it’s true and it’s absolutely the number one factor to consider for opening a successful restaurant. the food, the service, the atmosphere, the value mean absolutely nothing if you are in a ‘C’ location. My simple formula is:
a. High traffic Count, Traffic Light or Prominent Street Visibility.
b. Demographic Study and Feel for the immediate one mile radius.
c. Number of dining seats within a five mile radius.
2. Cash – You need to have an understanding on how to manage cash flow. You cannot underfund or over leverage your business. Not investing enough into your build out and start up leaves you behind the eight ball to continue to reinvest back into the restaurant. Over-leveraging will leave you working hard for the lender!
Let’s say for example your business plan projects that your ABC restaurant is going to have annual revenue of $1,000,000. You might be thinking, WOW, that’s a busy restaurant! I’m going to make a lot of money! The truth is most restaurants make around 5% on sales. So this ABC restaurant would see EBITDA (earnings before interest, taxes, depreciation and amortization – operating cash flow) of around $50,000. (Don’t forget you would then pay taxes to the State of NH and the IRS!). As a general rule, you wouldn’t want to spend more than 1/3 of your annual revenue to build out your restaurant. In this case build out would be around $300,000. Build out costs include construction, legal & professional fees, hiring and training, food, liquor, cleaning, linen inventory, marketing, insurance, utilities, rent, bank fees, and other misc. fees.
If your fortunate, a bank will loan you 50% of start up costs so in this case, you would need 150,000 in cash up plus a borrowed amount of $150,000 paid over 5 to 7 years. The bank would also require hard asset collateral to back the borrowed amount and a personal guarantee. The annual loan payment would be about $35,000 which is paid for the $50,000 EBITDA leaving $15,000 for taxes and maybe a small piece of new equipment. Anything other than foreseen expense that year and you’re out of business. Yikes!
That’s it! You now have the formula for opening a successful restaurant. But what about the food, the service, the atmosphere and the whole dining experience? In today’s full service restaurant world, those attributes are the price of entry. They are not on the list because it’s assumed by your customers, lender and investors that these qualities are superior or you don’t stand a chance. If you have the passion, the energy, the knowledge of creating a great product, atmosphere and dining experience, you’re only part of the way toward being a successful restaurateur.
If you execute steps 1 & 2 successfully, you’ll be in one of the most enjoyable, rewarding, and engaging industries I know.