Planning for a Restaurant
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
If you're planning on starting a restaurant, you've got a lot of company. In my experience, more people seek advice on launching a restaurant business than any other type of business. While that doesn't make your task easier, it does mean I can help with some tips.
To start, you need to plan your strategy very well. Your restaurant has to focus on some key elements that'll set it apart from the thousands of other eateries out there. These could be location, cuisine, decoration or even--good luck with this one--price. Maybe it's located where there's a lot of traffic, or across the hall from a gym, or near a bookstore, or outside a theater. Maybe there are no fish tacos in your town, or no good Italian restaurants. Maybe there are no cafes near the river with outside seating. You have to know why you're different. In short, don't try to please everybody generally; find your niche market, and please those people very well.
By differentiating your restaurant, you make marketing it much easier. Marketing is critical to restaurant success, but marketing can be expensive. And in most cases, the most effective restaurant marketing depends on repeat business and word-of-mouth. Think about how you choose a restaurant yourself--do you look through your Entertainment book or other coupon source? Do you research with a Zagat guide or online reviews? Or do you ask for recommendations from friends? Ask yourself how people will describe your restaurant and why they'll recommend it. If you can't put that short conversation into easy words, you're in trouble.
Also, if you have a choice, don't start a low-priced restaurant. Low-priced restaurants are much harder to market than mid- to high-priced restaurants. Fast-food franchises are everywhere, and they have a huge corner on that market. People believe in cheap food when they see strong branding and lots of customers. You don't want to be the dive on the corner that can't attract business.
Unless you're already partnered with an investor, you should assume you won't be. In general, restaurants aren't targets for professional investors because they're so risky. The few exceptions include celebrities who back restaurants that capitalize on their names, and well-known chefs and successful restaurant owners opening new venues.
Not having access to startup financing doesn't mean you shouldn't start the business. It means you should carefully decide whether you're going to start slowly, minding expenses, or borrow enough money to start big. Your borrowing options include commercial bank loans, which require assets you can stake as collateral, and SBA loans, which require less collateral than bank loans but still require you to put up 30 percent of the starting costs to qualify for the guaranteed loan. When in doubt about loans, go straight to your favorite bank and ask for advice.
Be sure to count your startup costs well. You don't want to get into a bind where you've spent half of what you thought you needed and you've run out of money. You'll probably have to rent a location and spend a few months fixing it up, and you may need employees some employees to help out during the fix-up period, too. Unless you're moving into an existing restaurant, you'll need to buy kitchen equipment, tables and chairs, cash registers, phone systems and décor to establish ambience. And then you need to budget for what's called "working capital" for the startup period when your spending exceeds your sales. Some say you need at least six months of expenses ready to go; others recommend having 12 months covered.
Your sales forecast is also important. I like to build a sales forecast based on unit sales, meaning meals and drinks, not just gross sales amounts. That helps me break the sales forecast into components I can count. How many tables do you have? How many meals will you serve on Friday night when the place is almost full? What does an average meal cost? How many drinks come with the meals? Then calculate unit sales, average revenue per unit and average cost per unit.
Then comes your expense forecast. With meals and drinks already priced out, your remaining operating expenses are mainly people, rent and other fixed costs. Estimate those per month, and match them to your sales forecast.
When all the costs are tallied, you'll get a good picture of the cash flow and how much money you'll need to keep the restaurant operational. During the early months of startup, your cash flow probably won't cover all your expenses, so you'll want your plan to include how you'll cover the difference.
Finally, as you get started, remember that business plans continually go out of date, and good business plans are never done. You should take an hour or so every month to review the difference between what you planned and what actually happened, and update your plan accordingly.
For more information on starting a restaurant, visit our Restaurant Startup Center .
For reprints and licensing questions, click here.