How to own your own Restaurant
Ok, so you want to own a restaurant? You like to cook and entertain, so you think it’s a good idea. Here’s a few bits of advice from my experience.
Best case scenario: You are instantly successful, people love your food, you make a ton of money, you win Person of the Year award for being awesome.
Worst case scenario: Nobody visits your restaurant, you go personally bankrupt, you have to work everyday at a restaurant that loses money, and you’re trapped because you signed a 5 year lease. Your your friends abandon you, you spend hours toiling away in a money pit, and your dog dies.
Look at the numbers.
Restaurants have a certain number of variable costs and fixed costs. The goal is to make enough margin to cover the fixed costs and give yourself a profit.
Revenue: Some business models are better than others. You need to have appropriate revenue for your cost structure.
Notice that chain restaurants are open long hours and appeal to lots of people. Look at Chipotle; they have relatively small floor space, earn a good margin, and can push people through the line at a breath-taking speed. Same for Starbucks. These models are good because they can generate high revenues with relatively low costs.
Try to estimate potential revenues by talking with other business owners. Even consider counting the sales of a competitor as you sit down to lunch.
Food Costs: 25-30 percent of sale price. Expect the cost of your food to be roughly 25-30% of what you charge on the menu.
Labor: Labor costs are typically 25% of what you charge. Of course this varies if you work at the restaurant.
Lease: You often have to sign a five year lease and personally guarantee it. This is a big risk. Leases are usually measured per square foot per year. Every city is different, but let’s say this restaurant leases a 3000 square foot space for $25/square foot, or $6250/month.
Things Break: Restaurants need equipment and needs to be repaired and replaced. Ice machine, $2000. Margarita machine, $2000. Heating and Cooling repair, $500. Advice: learn how to fix stuff yourself.
Random Maintenance and Expenses: Dishwashing soap, bookkeeping, accounting, lawyers, new mop, dishes etc. This can add up to thousands/year.
Insurance: This definitely varies by business, but let’s say $300/month.
Inspections and Government Fees: There’s a lot of random fees that you have to pay for. Want seats on the sidewalk in good weather? Pay the government $300. Renew a liquor license? $700.
Advertising: Advertising is a necessary expense. Fortunately it leads to higher sales.
Credit Card Fees: These can be 2% of sales.
Taxes: Sales tax, payroll taxes, some leases may even require you to pay the property tax. I recommend getting on the monthly tax plan to stay on a tight schedule.
Other Expenses. It’s surprising the number of unexpected expenses that show up.
Hypothetical Monthly Restaurant Numbers
Let’s say you’re doing ok, below is how your numbers might look. Of course, if you’re just starting a business, this will be tough.
Now, let’s say that sales are lower. Look at how that affects the bottom line, since many of the fixed costs won’t change. Labor will probably be at a high percentage because you still have to have employees, even if you have no business.
Ok, now let’s show a disaster situation, and probably a likely situation for the first few months after you open.
A good way to get an idea of costs for your area is to talk to other business owners. They’ll often be willing to share daily sales numbers or their rent cost. From there, you can extrapolate potential profit.
Big Issues
You’re the boss. People will come in to solicit you to sell advertising or whatever, employees will call you when a waiter freaks out and quits, when the avocados went bad, when a customer has a complaint, when the credit card machine breaks. There’s just a ton of stuff that will need your attention.
High Staff Turnover. Restaurant employees quit all the time. It’s easiest to hire wait staff who have worked at successful restaurant, since they won’t require much training.
Today, most kitchens in big cities are staffed with Spanish speakers. This is both good and bad. First, you must be sure that employees are legal. Second, language barriers exist, so it’s easier if you speak Spanish. Latin immigration has led to lower kitchen wages and longer tenure by employees.
You’re on the hook for the lease. Once you sign the lease, you have to pay every month. It doesn’t matter if you want to quit or if sales are slow. A landlord usually makes an individual owner personally guarantee the lease, so you stand to lose more than just your investment.
More than a 9-5. Restaurants make money by being open long hours. That often means being open 80+ hours/week. If you’re successful, you can hire managers. If not, you might have to work every hour that the restaurant is open.
Liquor License. Getting a liquor license can be a hassle. With me, it took 11 months of government bureaucracy, $10,000 in lawyers fees, a few thousand in other random fees, in addition to the hefty cost of buying the license itself.
Leakage. Things break, things disappear, get wasted or stolen. If you lose $100, that might be your profit for the day.
Tips
Money. Have some money saved, or at least have access to capital for unexpected costs.
There is no boilerplate lease. Negotiate the lease. Get the landlord to cover maintenance, pay property taxes, etc. If possible, avoid personally guaranteeing the lease.
Location is King. It’s better to pay a little more for the best location than to save money by being on a less trafficked street. Notice that Starbucks always has the best location?
Rather than starting your own restaurant, consider a partnership. Looks at businesses for sale and meet with other restaurant owners. Join local business groups.
Good Luck!