A New Restaurant

Todays post is from Greg McGuire at The Back Burner blog.  I hope you find it as interesting as I did.

Small independent restaurants have been dropping like flies over the past year.  Chances are, if you’ve made it this far through the recession, the worst is behind you.  That doesn’t mean tough days aren’t ahead, but hopefully you’ve at least stopped just trying to stay above water and have started swimming a little.  The waters out there are still dangerous, but if you’re not thinking about growth, you’re setting yourself up for decline.

Restaurants are a business like any other, and as an entrepreneur, you’ve already taken the plunge into the risky but potentially rewarding world of business ownership.  Growing a business is never easy, and trying to grow that business in the current economic climate is even harder, which is why a few key principles for small business ring more true today than ever: (more…)

Asking “How much does it cost to open a restaurant?” is like asking how much to buy a house, or to buy a car. While there are some guidelines to consider, the actual answer is determined by so many different factors, there is no way to set an accurate price that covers all different situations. Each restaurant is unique, and the price tag for each restaurant will be unique.

When you begin to examine how much it costs to open a restaurant you first need to have a very clear idea of (more…)

As we head into the new year, you should think about what your brand is, or what you would like your brand to be.  If you want to be a successful restaurant in this volatile economy, you better know who you are, and be ready to let your customers know who you are.

If you think that building a brand isn’t important to building a successful restaurant business, you haven’t been paying attention to what has been going on on the restaurant world.  (more…)

I went to a local restaurant this past Saturday that I had low expectations of, and it met my expectations.  I had been here before, and I’ve never been impressed with the menu offering or the quality of the food.  I went this past Saturday because I believe in second chances, but mainly because I had a gift certificate and I really believe in free dinners.

I’m not the only one who shares the opinion that this restaurant is, at best, average.   In fact, I have not talked to a single person who thought the food was great, or that it was a great bargain.  The BBQ sauce tasted like it came from a bottle, and the pasta sauce was rather flavorless.  The portion sizes were adequate, but it was a bit pricey for what you got.
The food wasn’t bad, and the menu selection was OK,  but there wasn’t anything that made me want to come back anytime soon.  There was really only one thing that differentiated this restaurant from any of it’s competition: Location.

After the demise of the local Italian eatery, there are very few selections for residents who want to stay local when they go out to eat.  The result of this is, the restaurant can get away with being average, but the place was still full on Saturday evening.

The point being, a great location can make up for a lot of shortcomings.  This restaurants location in an area with little competition has allowed it to be successful despite the fact that it does not excel at providing great food or value.

This isn’t to say you should shoot for average.  If the management and owners would step up their offereings a little bit, the place would probably have lines out the door.  What it does show is the importance of doing your homework when choosing a restaurant location.

I’m sad to report that the restaurant that I have written about in the past has closed it’s doors.  Just when success seemed to be within his grasp, the owner decided to call it quits.  After losing another round in an ongoing battle with the city over a noise ordinance, he decided that it wasn’t worth the trouble, and that the city would never allow him to run his business the way he wanted to run it.

I understand both sides of the issue: The owner wanted the noise ordinances applied  equally to all of the restaurants in the city (it’s not), The city wants to be able to apply more restrictions on businesses taht are located closer to residential districts.

Bottom line is, the failure was the owners fault.

I wrote in my post Top 5 Reasons Most Restaurants Fail, you gotta know the territory.  The owner of his restaurant knew that there were special variances put in place to allow him to open up his restaurant where he did.   He knew the rules, but thought once he got his doors opened he would be able to convince the city to change the rules.  That wasn’t the case.  He had the option to turn down the music, and focus on the restaurant, which was beginning to build a good reputation.  Instead, he decided to focus attention more on the bar side, and allowed his frustrations to get in the way of running a successful business.

I’ve said it before, you have to do your homework.  When starting a restaurant it is absolutely critical that you understand fully what you’re getting into.  You have to do your research into the market, the location, any rules or regulations that could affect your business.  Knowing that up front will allow you to either make adjustments to your business plan, or find a new location.

He chose to ignore the realities of the situation, and it cost him his business.

I liked the owner, and I really wish he could’ve succeed this, but he chose to take on a battle he could not win.

There’s a lesson to be learned here; do your homework, and know what you are getting into.  Starting a restaurant is risky enough without taking unnecessary chances.  You can succeed in his business if you know what your getting into and make smart choices.

I wish the owner the best in whatever is next for him, and hope that whoever moves into this location has better luck succeeding.

I have been asked if using business plan software is a good idea when writing a business plan for your restaurant.  My answer would be, “Yes and no.”

Business plan software is a great way to automate the process of writing a business plan, and there are some very good ones out there.  BPlans from Palo Alto Software is an excellent program.  Once Once you fill in the information the program formats it, and puts it all into a presentable form.  It definetly saves you a lot of time there.

Where you have to be careful with business plan software is that it allows you to get lazy.  BPlans comes with hundreds of templates and examples that make it possible to “borrow” from the template for your own projections.  Bad idea!

Think back to what the purpose of your business plan is.  While most people focus on it as a tool to get financing, the bigger job is to make you focus on your business, and make a plan about your restaurants future.  That can only happen if you do your homework, and focus on all of the nitty-gritty details.  It means doing your market and competitive research.  It means looking at the economics of your location, and making realistic projections based on what is going on in your area.  No software or template will be able to do that as accurately as you can.  It takes hard work, but if you want your restaurant to succeed it is a necessary process.

If you are doing your homework to collect and analyze the information all along the way, then by all means use a good business plan software program.  The key to success is doing your due diligence, and knowing your business inside and out.

Starting a restaurant is only the tip of the iceberg. There are tons of details to keep track of, and issues to deal with. If you want to own a successful restaurant, you must keep your eye on your finances.

I’ve written in the past that if you don’t know what you are doing with the accounting part of the business, you should hir it out to a professional. That doesn’t mean you are off the hook with all things financial. Quite the contrary. If someone else is doing your books for you, it is all the more important that you spend the time to thoroughly understand your restaurants financial position. One way to do that is to make sure you know how to read your restaurants financial statements, and understand what they are telling you.

There is a lot of information that will be available to you. Over time you should learns as much as you can, but for starters there are three basic reports that you should be able to understand:

Income Statement – Tells you good your restaurant is at making money.
Cash Flow Statement – Tells how your restaurant is paying for it’s operations, and shows you future growth potential.
Balance Sheet – This shows you what your restaurant owes, and what it owns.

Income Statement

When people talk about the “bottom line,” they are talking about a businesses net profit. The income statement is where you find the bottom line.

In it’s simplest form, Profit = Income – Expenses. The income statement is a detailed list of that formula. It starts by listing all of the restaurants income. Every way your restaurant has to make money is listed, along with how much was made. This is totaled on the line called Total Income or Total Revenue.

The next section is the Cost of Goods Sold (COGS) or Cost of Sales. This is the direct cost of the things that you sold. If you sell a steak dinner for $15, and the food cost $5 and the labor cost $5, then the cost of selling that steak dinner was $10. Subtracting the cost from the income will give you Gross Profit.

The next section in the income statement is Operating Expenses. This is the cost of running your business. This section is where you account for building lease, maintainence and repairs, insurance, marketing, etc. This is totaled to give you Total Operating Expenses.

When you subtract Total Operating Expenses form Gross Margin you are left with Earnings Before Interest and Taxes (EBIT). When you subtract out interest and taxes you are left with Net Income, which is located on teh bottom line of the income statement.

Again, this is a very quick overview of the Income Statement. Look for future posts that will go over the Cash Flow Statements and the Balance Sheet. After that I will try to get back to looking at each of these areas in a little more detail. There is a lot that you can learn from these if you take the time to figure it out.

You can take a lot of the risk out of starting a restaurant if you do your homework and really understand what you are getting yourself into.

The other day I wrote about not being able to please every one with your food.  Going along with that is that you can not be all things to all people.  You need to narrow your focus down.  Define who you are, then be the best you can be at that.

I need to talk about the restaurant that recently opened in my neighborhood.  I keep going back to this example for a couple of reasons.  First, I had the opportunity to work there during the opening, so I got an inside look at what took place.  I got to see what went right, what went wrong, and how many of the mistakes could have been avoided.  Second, there was a lot that went wrong during this opening, and there are a lot of lessons that can be taken away from this experience.

When the owner decided on his concept, he chose what he referred to as a Southern California restaurant concept.  The restaurant was constructed with a dividing wall down the middle, creating two separate rooms.  One side was a dining room, with white linens, mood lighting, and on Friday and Saturday evenings, a strolling musician.  On the other side of the wall was the lounge.  It had a juke box, TV’s tuned to whatever sporting event was taking place, and on the weekends, live bands performing.

The building was designed so later in the evening when the dinner crowd had cleared out, the center wall could be opened, creating one large room for the late night lounge customers.  All well and good, except the owner couldn’t seem to decide whether he was a restaurant or a bar when it came to marketing his establishment.  Much of his marketing was focused on increasing the late night business, and the restaurant part didn’t receive as much publicity.

To complicate matters even further, the people that lived near the new restaurant had grudgingly agreed to allowing the city to grant a variance for selling liquor at the restaurant.  They were concerned with potential drunks coming to their neighborhood.  They were appeased by the assurances that nice restaurants do not typically attract that type of person.  As the owner began doing more marketing for the lounge, the neighbors became more concerned.  They had agreed to the restaurant, but they were now feeling like the restaurant was just a cover to allow the owner to run a bar.

The restaurant has survived it’s initial opening trauma, but it continues to struggle.  While it’s opening was greeted with anticipation and excitement, many of the customers feel like the lounge is the main business, and the dining room is an after thought.  What had the potential to be a successful restaurant limps along trying to compete with the business on the other side of the wall.

How will it end?  Only time will tell.

We all know how important it is to have a great location, but have you thought about how the concept you decide on affects your location choice.  It does.  Your concept will, in part, determine how far people will be willing to travel to get to your place.  That little piece of information can be a big determining factor in your restaurants success or failure.

A Tale of Two Restaurants

There are two different restaurants in my area that have different concepts, and very different abilities to draw customers.

Restaurant #1 is one I’ve talked about before.  It is an Italian restaurant that has finally started to see a little bit of success.  The problem is, however, there is no shortage of Italian eateries in our area.  That limits this restaurants ability to draw from surrounding communities.  While the food is good, there isn’t anything that would make potential customers want to drive past one or more of the other Italian restaurants in order to visit this restaurant.  Restaurant #1 has to rely on the people living in the neighborhood for it’s long-term success.

Restaurant #2 is located about 10 miles way.  It’s a restaurant that specializes in sandwiches, burgers, and home style dinners.  It has huge portions, and has positioned itself as a quirky, fun place to go.  It has  a burger topping bar that is in the trunk of a Cadillac that is attached to the wall.  Even though there is a pretty good burger joint not far from my house, I’d rather travel the 10 miles to get to  restaurant #2.

The point is, these two restaurants are in completely different types of location.  Restaurant #1 needs to be located near residential areas.  Because it has to rely on the people living nearby for it’s success or failure, it needs to be in a location that is close and convenient.  Restaurant #2 is located on a busy intersection, but the closest residential area is nearly a half mile away.  There are a lot of restaurants that are closer and more convenient to get to, yet restaurant #2 continues to thrive.

Now I’m not suggesting that you should ignore all of the rules when it comes to finding a great location.  A bad location makes success much more difficult.  While there are a lot of people that are convinced that they are the ones that can overcome the obstacles, the failure rate indicates that most of them are wrong.  Just be aware that there are a lot of factors to consider when you are thinking about your restaurants location.  Don’t be impatient.  Keep working on your business plan and doing your homework.  The right location will come along.

I know I’ve mentioned this before, but it’s worth repeating; restaurants are risky business.  You know it, I know it, and the lenders know it.  That’s why it is critical that you have done your homework before you go to the banker for financing.

Here’s how the conversation goes:

You: I’m looking at opening a business and I need to talk to somebody about lining up my financing.

Banker: We would love to help you.  what kind of business are you thinking about?

You:  I’ve got an idea for a great restaurant concept.

(Silence)

Banker:  Ummm… A restaurant?  Let’s see what we can do?  Do you have any restaurant experience?

Be prepared for the fact that loans for restaurants have a higher bar for qualification.  A credit score that might qualify you for a regular business loan will be a little higher for restaurants.  Depending on which financial institution you go to, the requirements can be very different.  One bank I spoke to offered an SBA backed line of credit with nothing down, no business plan of a line under $100,000, interest rates between 6.5% to 9%, but you needed a credit score of at least 750 to qualify.  The next bank wanted a credit score of 640, but they wanted 20% down, a business plan with 2-years projections, and an interest rate of 9.5%.

In general, the easier it is to get the loan, the more you are going to pay in the long run.