How to Start a Restaurant: Planning Advice from the Pros
The restaurant business can look so effortless. But that high-performance experience is the result of a huge amount of planning, training and cash flow. We asked three restaurant industry veterans to share their advice on planning a successful restaurant venture.
Before you do any planning, though, do what industry insiders call viability research. “Gauge demand to ensure your cuisine or offering isn't over-saturating your market,” suggests Mike Cordero, chef and owner of A-Town Bar and Grill in Arlington, VA, and three other eateries in the Washington, DC, metro area. “At a minimum, uniqueness breeds interest.” Get help with this research from a restaurant industry consultant or the local or state chapter of the National Restaurant Association; or from your local chamber of commerce, SCORE or Small Business Development Center. You need to know if there's no demand, or too much supply, for the type of eatery you want to open before you invest too much time doing the really hard stuff.
Run the financials. Restaurant pros agree that the biggest business planning mistake people new to the business make is not accurately running the numbers. And there are a lot of them to run.
“Never be under-capitalized,” cautions Keith Simpson, host of the Food Network's Buy This Restaurant (airing Wednesdays at 9 p.m.). It's the fastest path to failure. Here are the key financials to consider in your restaurant business planning.
This is what it costs just to get to opening day. Three key components in a restaurant's pre-opening budget are renovations, staff training and kitchen supplies.
“Start-up costs are almost always under-inflated, and although unintentional, most [renovation] projects end up costing more than initially projected,” says Cordero, who also owns Flat Iron Steak and Saloon in Alexandria, VA. It's not unusual to discover installations (especially electric and plumbing) that are no longer to code, or unforeseen repairs and upgrades that must be addressed. These increase labor and materials costs—sometimes significantly. Sometimes, you may realize a fixture that looked great in the store simply don't fit in or work very well in the restaurant. Carefully estimate start-up costs with the help of financial and restaurant pros in your area, and be sure to fund a contingency account to cover the unexpecteds.
“The average break-even point for a restaurant is three years, so know you may go darker and deeper before you see your light at the end of the tunnel,” explains Mattson Davis, president of Kona Brewing Company, which operates three brewpubs and is headquartered in Kailua-Kona, HI.
Simpson counsels restaurateurs to budget 36 months of projected sales and costs and profits. “If the plan doesn't [yield] sufficient profit within three years to return the original investment, you run a huge risk of eventual failure,” he warns.
Prime costs are the expenses required for production. For a restaurant, that's primarily food, beverage and labor. This figure is used to determine what to charge diners so you make a profit.
“Prime costs must not exceed 54 percent of the gross monthly sales,” notes Simpson, a former chef and restaurant owner. “I would expect prime costs and rent not to exceed 60 percent of gross monthly sales. If this percentage is exceeded—again, with all the other costs factored in—it's likely costs could exceed sales, which will very shortly eat up the working capital and end in short-term failure.”
It's crucial to amass enough working capital: the funds you have left over after you buy the business and make renovations. Working capital covers planned expenses and unexpected ones. “Capital operating dollars cover things like services—the A/C needs to be fixed or plumbing or build-outs,” Davis explains.
“New business working capital must be at least 6 month's payroll,” Simpson advises. “If budgeted payroll is, say, $10,000 per month, there must be at least $60,000 of working capital remaining in the bank account.”
Though none of us likes looking at cold hard numbers when we could be planning tasty dishes, restaurateurs ignore financials at their own peril. If you get a bad case of the shakes just thinking about this stuff, enlist a professional service provider with direct experience in restaurants and your local market.
Accountants help you choose a tax-favorable business type, determine costs and understand ratios, cash requirements and the like. Attorneys draw up formation documents, review leases and purchase agreements, and advise you of legal obligations and long- and short-term commitments.
This may seem like a lot of work before you plan your first menu, but it's worth it, Cordero asserts. “A well-funded, detailed plan-of-action and a strong understanding of the inner mechanics of the restaurant business afford any restaurateur a genuine shot at success.”
Carrboro, N.C.-based Margot Carmichael Lester grew up in a gourmet grocery and parlayed that into a career writing about food, drinks and business for a variety of outlets, including in-flight magazines, consumer titles and websites. She has owned her own small business, The Word Factory, for two decades. A devotee of dining at the bar, she favors sparkling wines and anything with bacon.