Advantages and Disadvantages Owning a Restaurant

Do you have what it takes of open a restaurant?

ADVANTAGES

People got to eat! For years upon years, people have been hardwired to grab something to eat when they are hungry. This is a major advantage for any startup restaurant. The only thing you need to consider is the future of your product, and will there be a demand for it in your local geographical area. That’s really it in my opinion. People have to eat and here in the U.S. and around the world is something we all enjoy to do. It’s not like opening a haberdashery. Food is universal, and our very basic senses can lead us there. We’re lucky to live in a country where you can try cuisine from all over the world without having to travel to those parts of the world. When people see a restaurant they know there will be food, but now you have to get them into the door and we’ll discuss marketing later on in this guide.

DISADVANTAGES

Labor I’m sure you’ve noticed that most food businesses need a lot of employees to function properly and smoothly with the majority of those workers being low-paid. That leads to a workforce of unreliable employees with a high turnover rate. Finding and keeping qualified employees is a major challenge for the food industry.

Low margins – The food industry is very price sensitive, more so in the world of fast food chains. This leaves you with a very fine line to walk with cost of goods, labor and making a profit. It’s true that food franchises often see high revenues but the net margins are often overlooked. You are also susceptible to food spoilage and theft along with other issues only found in the food industry. I’ve seen anywhere from 4%-11% depending on rent, food and labor cost. We’ll talk more about his later on when negotiating rents and setting up a clear budget. We will also explore my free restaurant software www.recipe-costing.com that can help you get your costs and your daily breakeven number.

Expensive initial investment – A restaurant will require a substantial investment from you in order to get started. You need to pay for many items up front in order to run the business. Not only do you need to pay for the food and labor, also ovens, grease disposal, venting, furniture, point of sale system, and maintenance among many other expenses.

There will always be more disadvantages in the restaurant business then there are advantages. I think more so in the food business with thousands opening up a restaurant in the U.S. not to mention all over the world. There are people out there that are great cooks at home, and that’s where they belong at home unless they’re ready to face some of the challenges that are far from cooking and there are many. Building out a restaurant can be fun or a nightmare. Setting up a POS system can be easy or hard. Dealing with the State and County is never easy. These things have nothing to do with cooking; unfortunately, it has to be done to open the doors.

THE FUTURE…

If I only had a crystal ball, to see what the next trends in the food industry will be? Will the economy be on a rise or are there more financial pitfalls keeping customers away from retail and eating out? We just don’t know and that’s one of many things that make it hard in this business. I remember TCBY and ICBY they came about in the early 90’s the yogurt trends. They were opening all over New York and New Jersey, and people couldn’t get enough frozen yogurt. A couple of years later they closed as quickly as they opened. Here were are in 2014 and now we have new players in the yogurt industry. Regardless of the uncertainty of speculating what the future will bring, trying to predict the next big trend coming down the pike is important for anyone in this business. And nowhere is it more important than in the restaurant industry, where operators strive to fulfill customers’ most basic needs and their most fanciful desires. One thing we can agree on is convenience and quality. Customers want great tasting; healthy quality food and they want it fast. They don’t want to be inconvenienced by long waits, and food that’s been sitting on a shelf begging to be bought. They want to feel they’re eating in a safe, and clean, restaurant. Make your customers feel this way and chances are they’ll come back, and repeat customers will make you successful.

DO YOU HAVE WHAT IT TAKES?

You’ll need to ask yourself if you have what it takes to run your own restaurant business before you decide to open one. Running your own restaurant business is different than running any other type of business. There are many things that you need to be able to manage if your restaurant is going to be successful. Some of the things that are specific to the food industry that you’ll need to be aware of include:

  • Managing your restaurant staff
  • Government regulations
  • Taxes
  • Safety concerns
  • Recipe costing
  • Menu cost and pricing
  • Vendor item pricing
  • Ordering food and other inventory supplies.
  • Franchise Fees and Uniformity (If buying into a franchise)

You’ll need a reserve of funding to keep the machine going when you first open because unless you’re opening a McDonalds or Burger King, people are not going to be lined up to get in.

You have to be ready to do it all. You are the emotional leader and without your direction your team will be lost; more importantly, you’ll have to motivate yourself even when things seem grim. Keep up your spirits, so everyone around you will do the same. Don’t be afraid to make decisions, call people out, and run your business. If you won’t, then who will? Make sure you’re ready to put in long hours, be on your feet most of the time, and every detail requires your attention. Make sure you’re organized and you plan out every day, week, and month. The more organized that you are when it comes to scheduling, buying inventory, and taking care of finances the more success you’ll achieve. It will prepare you to tackle unforeseen circumstances, as opposed to, reacting to them when they happen. Surprises will always arrive, but there may be some you’ll respond to better through proper planning.

AVOID THESE MISTAKES

Here are the top ten restaurant mistakes that are vital to your success:

1. Business Plan

We offer a free business plan at our website www.recipe-costing.com/restaurant-business-plan.doc. It’s a real working business plan specifically built for the operation of a restaurant. Use it as a guide and always work with a professional when your build your business plans. Don’t fall into the trap of not taking the time and effort to write a business plan. At a minimum, it will give you an idea of your concept, financial projections, and start-up cost. After writing your business plan, make sure to review it monthly because things will change and you should update your business plan regularly. If you decide to open a second restaurant, your first business plan is like a journal you can revisit to better prepare yourself for your next build out.

2. The Wrong Location

I don’t want to bore you with the cliché location, location, location, but it’s true. I’ve had some awesome locations and a very poor location. It so happens that the poor location was not my first choice. I wanted to be in this very busy shopping center near COSTCO, but the location was already under contract by Nestle. The east end where COSTCO resided was a very busy section of the mall. I took the west end thinking that the traffic would trickle over to my side of the mall. I couldn’t believe that just being on one side of a shopping center could make that big of an impact and it did. We had to market the heck out that location just so the customers that shopped at COSTCO knew we were there. The right location can either make or break your restaurant. You should never take a secondary location just to save rent. High visibility and accessibility are two key points to having a great location.

3. Startup Costs

Knowing your startup costs are important to the success of your opening. This is where you business plan comes into play. Many times owners are undercapitalized because they believe they’re going to get the best deal on used equipment or they plan to cut certain corners to open their store with minimal investment. Underestimating a restaurant’s startup costs can result in bankruptcy. If you run out of money, you’re GC (General Contractor) will stop working and all sub contractors will be pulled off the site. You’re rent doesn’t stop just because your construction has stopped. One of the best ways to get the right start up costs should be done after you get your architect’s plans. The plans will have all the materials and equipment needed to build out your restaurant. Also have your recipes ready and your inventory cost planned out. I created a software tool to help with knowing your cost. Go to www.recipe-costing.com.

4. Architecture Plans

  • Get three quotes from general contractors that have experience building out restaurants.
  • Take the equipment list from the architect’s final plan and get three quotes on new equipment from equipment vendors.
  • Get three quotes for your external sign.
  • Get three quotes for your décor work.
  • Finally, make sure you keep your funds in escrow with an attorney that’s work in the restaurant business. Let your attorney pay your vendors during the start-up. Your attorney will make sure the work is done and free of any liens before they pay any of your vendors. The attorney is an added cost, however, you will be elated when you run into the first signs of trouble and you have someone representing you at every turn.

Use the highest of these quotes for your business plan startup costs. You will use the lowest one when you’re ready. In the beginning, it will give you a very good idea of what your initial costs may be and it’s an opportunity to see if all your vendors are all on the same page or are the numbers all over the place. Use the sample business plan to review other costs. When you have the total startup costs take about 15%-20% of your startup cost and add it as your working capital fund. When I setup my accounts, I have an operating account, payroll account, merchant account, and working capital account. If you pay royalties and your franchisor requires an ACH, then create a royalty account to drop your royalties into that account. I know it sounds like a lot of accounts. It works well when tracking your funds and reconciling.

5. Profitable Day One

It’s unlikely you’ll be profitable in the first few months. When we opened our Homestead location, we had incredible sales the first 6 weeks. We call it the honeymoon stage, and with all those sales we were still in the red. The reason for not making a profit had to do a lot with training new employees and lots of mistakes on the line. During this time you may have a lot of marketing going on, a soft opening, coupons, and free giveaways will all take away from your profitability. After the world wind, it will take time for you and your manager to get inventory and labor under control and get a real good feeling for your business.

6. Operations

Before opening, make sure you have your procedures in place and your opening checklists. Utilizing these check lists can help increase your success and will insure your employees know what you expect from them. Before I let any of my cooks on the line, I make sure they take a product knowledge exam that they must score a 90% or better. Knowing what goes into the recipe makes the cook much more confident and the learning curve to prepare the meal decreases tremendously. Our point of sale had a training mode and we had an exam for our employees running our point of sale system. Every job in your restaurant should have a knowledge exam.

7. Know your customers

After doing your research, site survey, and developing your business plan you should have the pulse of your customers. Keep in mind that you are providing your customer a food service they are missing. Your concept should be the first one or the best one, and make sure you’re focused on serving your customers.

8. Keep your menu simple

The data you have collected is telling. If you did the research you know what your customer is missing in the local market and what they want. Now keep the menu simple. Don’t try to be every food to everyone or your food cost and success will slip away quickly. Once you have a concept, you need to define your niche and remain focus in filling that niche. Try to use a single food item like chicken breast in many menu items to reduce your food costs.

9. Opening Day and No Plan

The worst thing you can do on opening day is being unprepared. I recommend doing a soft opening for the first week. Don’t advertise you’re opening until you are absolutely sure you’re ready to go. I’ve been to openings where the restaurant owner opened the doors and was missing key items. The employees were frustrated, the owner was putting out fires, and the customers left with a bad taste in their mouth. The customer’s first impression is the most important and you have to impress them as soon as they walk through your doors if you want them to return. The soft opening will allow you to work out kinks or any foreseen problems.

10. Be an Owner

Your employees rely that you know it all and you are their comfort zone. Be patient and develop a nurturing environment to keep your staff at ease. They are going to make mistakes, don’t crucify them since it will only crush the little self-esteem they have left on doing a good job. Explain their mistake, correct it, and tell them to try again. You’re not one of the employees or their assistant. You’re their emotional and spiritual leader. Lead them and when they make a mistake let them fix it with your guidance. Don’t jump on the line and push them aside. There is a difference between working in your business and working on your business. Your job is to work on the business managing cash flow, reviewing reports, analyzing and strategic planning to grow your business.

What’s next?

In any business there are advantages and disadvantages and contrary to popular belief, restaurant failures are more related to unpreparedness of the operator, lack of understanding, and not having enough cash to weather the first 6 months to a year of slow business. Before going out an opening a restaurant it’s important you educate yourself on the actual business of running a restaurant. You may be a brilliant brain surgeon or rocket scientist, but nothing will prepare you for the daily stress of running a restaurant.

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