You Are What They Eat

This story appears in the February 2003 issue of Entrepreneur. Subscribe »

The numbers add up to a tremendous opportunity: Every week, Americans consume an average of 4.2 meals that are prepared away from home--that's 218 meals per year and increasing. By 2010, the restaurant industry will operate more than 1 million units, with sales of $577 billion capturing 53 percent of the consumer food dollar. Will one or more of those units be yours? It can happen--if you have the right recipe for restaurant success.

Most baby boomers can easily remember when "going out to eat" was a special event; today, restaurant meals are an integral part of our everyday lives. Whether we're grabbing a sandwich on the run, sitting down to a leisurely gourmet dinner at a five-star establishment or enjoying one of the many choices in between, we're eating out more than ever--and the trend is expected to continue. There's never been a better time to open a restaurant.

Experienced restaurateurs say that this is definitely a business where you can make a lot of money quickly--but you can lose it even faster if you don't have three key ingredients: industry experience, adequate capital and a thorough knowledge of the market you're serving.

Start With a Job
Successful restaurateurs agree that the best preparation for owning a restaurant is to work in someone else's first. Think of it as getting paid to be educated. "You'll learn a lot about things you never thought about," says industry expert Rich Melman, chair of Lettuce Entertain You Enterprises Inc., a Chicago-based company that owns, manages and consults with restaurants throughout the country. "There are hundreds of little things, each not being of great consequence as a single issue, but of big consequence when you put them together."

Certainly you should read books and take courses, but plan to work in a restaurant for at least a couple of years doing as many different jobs as possible. And if you're not actually doing the job, pay attention to the person who is--you may find yourself doing it when your own restaurant is unexpectedly shorthanded. "I've had to cook when I've had chef problems," says LaVerna Gilbert, 42, co-owner and general manager of Shelly's Courthouse Bistro in Santa Ana, California.

"With experience will come the knowledge that you know what you want to do," says Melman. "Are you certain you're going to love it, or is it going to wear off? It's your love for what you're doing that pulls you through difficult times." Ideally, work in a restaurant similar to the type you want to open. You may find you don't like the business. Or you may find you're more suited to a different type of operation than you originally thought. You might even discover you're in exactly the right place.

"As I started working in restaurants, I realized this was my passion," says Scott Redler, co-owner and founder of Timberline Steakhouse & Grill in Wichita, Kansas. Redler, 42, got his first restaurant job at 15, opened a Chinese fast food restaurant at 26 that failed in eight months, and now has five successful steakhouses. He also opened two Freddy's Frozen Custard restaurants. "When you have a busy restaurant and you're watching everything happen as it should," he says, "it's a wonderful feeling of satisfaction."

"Everyone likes the idea of owning a restaurant, but it's easier to invest money than it is to work it," says Gilbert. Her advice: If you don't like the work but you still want to own a restaurant, find a good operator to partner with.

Decision Time & Putting the Plan Into Action

Armed with practical experience, you're ready to decide what you want to do and put together your business plan--the most critical element of your restaurant. Map everything out on paper before you buy the first spoon or crack the first egg. Melman says 80 percent of what makes your restaurant a success will take place before you ever open the doors.

Your business plan should include: a clear definition of your concept; a description of your market; menu and pricing; detailed financial information, including start-up capital (amount and sources) and long-term income and expense forecasts; a marketing plan; employee hiring, training and retention programs; and plans to deal with challenges restaurateurs face every day. Bill Ellison, 30, and Frank Perez, 31, co-own and operate Frasier's, a sports bar in Apopka, Florida. Ellison recommends including an exit strategy. "Know how you'll get out if things go bad, as well as how you'll get out if things are going good," he says.

Be thorough, but don't write your plan in concrete. "You have to go into it being flexible," Ellison says. "Don't say 'This is what I have to offer; take it or leave it.' Open with an idea, then evolve to what the customers want."

Putting the Plan Into Action
Once you've decided on the concept and market, begin scouting for a location. Issues to consider when choosing where to put your restaurant:

• Area demographics: Do the people who live and work in the vicinity fit the profile of your target market?
• Traffic: Consider foot and vehicle traffic. How many pedestrians and cars go by daily? How accessible is the location to passers-by?
• Parking: Is the parking adequate, convenient and safe?
• Nearby businesses and other elements: What's around the location, and how might it affect your operation?
• Future development: Check with the local planning board to see if anything, such as additional buildings or road construction, is in the works.

If you're considering a location that has been the site of another restaurant, study its history so you know why the previous operation failed--and be sure it's something you can overcome.

It's the Food, Got Money? & Follow the Rules

Service, ambience, management--it's all important, but most restaurants are known by their menus. Create a menu that is memorable and appropriate to your concept and to your market. Frasier's menu includes items from similar establishments as well as unique dishes. "Every restaurant should have signature items," Ellison says.

Setting prices can be a mathematical challenge. To calculate prices, consider your food costs, labor (for preparation and serving), overhead and profit. Survey other restaurants to get a sense of what price levels the market will support. If a dish isn't both delicious and profitable, take it off the menu.

Got Money?
A thorough plan should show how much money you'll need to open your restaurant--building, furniture, fixtures, equipment, inventory, liquor license and working capital. With that figure in mind, look at your financial resources. If you don't have or can't raise enough, scale the number back.

Redler says raising the money wasn't as difficult as he thought it would be. The key is to demonstrate to investors that you have a solid plan and the experience to implement it. Also, you must be willing to significantly risk your own funds. When Redler opened his first Timberline, he contributed $24,000 of his own money and walked away from a high-paying corporate position. Because he was willing to risk so much, his backers felt confident taking a chance with him.

Follow the Rules
Though we don't think of food service as a heavily regulated industry as we do medical services or public utilities, the reality is that many aspects of your operation are strictly regulated and subject to inspection. Fail to meet regulations, and you could be subject to fines or get shut down by authorities. And if violations involve tainted food, you could be responsible for illness and even death. Issues such as sanitation and fire safety are critical. You must provide a safe environment in which your employees can work and your guests can dine, follow the laws of your state on sales of alcohol and tobacco products, and handle tax issues, including sales, beverage, payroll and more.

Most regulatory agencies will work with new operators to let them know what they must do to meet the necessary legal requirements. Your state's general information office can direct you to all the agencies you'll need to be concerned with.

Get the Word Out & More Than a Good Meal

Once people try your restaurant, you know they'll come back. But how do you get them in the door?

Most small, independent operations can't afford a splashy media campaign. "You'd have to sell a lot of burgers and wings to make up for the cost of radio and TV ads," says Ellison. "We did a grand opening with free beer and wings just to get people in here. We went door-to-door, passing out fliers. The rest of it has been word-of-mouth." Ellison's experience as a manager has also helped; customers of the place where he worked have followed him to his own restaurant.

Ellison stays away from coupons. "The people you get with coupons are people who only come in when they have a coupon," he says. "If people are taking dollars off your meals, you're charging too much to begin with. Instead, give people good food at a good price and good service, and word-of-mouth will travel."

"The best marketing you can do is have an owner-operator on the floor of a restaurant," says Redler. Display your business card at the host stand or near the register. When you personally greet guests, let them know you're the owner and that you want to be sure their experience is positive because you want them to come back.

When planning your marketing, consider what's going on in the community. "Look beyond your front door," advises Larry Schuler, 42, who owns Schuler's Restaurant, a fine-dining establishment in Stevensville, and Schu's Grill & Bar in St. Joseph, Michigan. Evaluate the things that can affect your business both short- and long-term, he says. If there's a convention in town, will your volume increase? How will local or televised sporting events affect your operation? Pay attention, and you'll manage more efficiently and profitably.

More Than a Good Meal
Even in its simplest form, Melman says, the restaurant business is sophisticated. It takes knowledge, experience and hard work. "Sometimes, you have to be a little lucky," he adds.

"Don't try to do everything yourself," Gilbert advises. "Surround yourself with good people." In particular, she adds, make sure you have someone to stay on top of the paperwork.

Schuler advises joining your state restaurant association and the National Restaurant Association, along with local business networking groups. Take advantage of the information resources you have. For example, most credit card companies will provide you with detailed demographic reports on your customers who use those cards.

Once you're up and running, listen to your customers. They'll not only tell you what they want to see on your menu, but will also give you clues about the business climate of your community and how restaurants need to change to meet evolving lifestyles. After all, says Schuler, "Successful restaurateurs listen to the customer, evaluate their needs and figure out where that will take them in the next eight to 10 years."

The Human Factor
People are a critical component of the restaurant business. Not only is the operation itself labor-intensive but guests will remember--and talk about--poor service long after they've forgotten how good the food was. Managing your human resources must be a top priority. "I tell employees we work for them--they don't work for us," says Bill Ellison of Frasier's. "It's our responsibility to make sure they have the training, the equipment, the food and beverage to get their job done."

Here are some tips to help you find and keep great people:

• Hire right. Take the time to thoroughly screen applicants. Be sure they understand what you expect of them. Do background checks. If you can't do this yourself, contract with a human resources consultant to do it for you on an as-needed basis.
• Create detailed job descriptions. Don't make your employees guess about their responsibilities.
• Understand wage-and-hour and child labor laws. Check with your own state's Department of Labor to be sure you comply with regulations on issues such as minimum wage (which can vary depending on the age of the workers and whether they are eligible for tips), when teenagers can work and what tasks they are allowed to do.
• Report tips properly. The IRS is very specific about how tips are to be reported; for details, check with your accountant or contact the IRS (or see your local telephone directory for the number).
• Provide initial and ongoing training. Even experienced workers need to know how things are done in your restaurant. Well-trained employees are happier, more confident and more effective. Plus, ongoing training builds loyalty and reduces turnover. The National Restaurant Association (202-331-5900) can help you develop appropriate employee training programs.

Want more tips? Read Entrepreneur's business start-up guide How to Start a Restaurant and Five Other Food Businesses, available at www.smallbizbooks.com.