March 09, 2016 Starting and Managing a Small Business

Whether you’re a foodie, a chef, or simply someone who wants to dive into the entrepreneurial pool with a new venture, the rules are the same. The food-service industry is hard and many restaurants fail during their first year, often due to lack of funding and proper planning.

Here’s what you need to know about starting your own restaurant, so you get off on the right (lucrative!) foot.

1.  Nail Down That Target Market

Before you commit to opening a restaurant, you want to make sure that your restaurant is offering something new. Restaurants are a dime-a-dozen so you’ll need a way to differentiate yourself from the competition.

Assess your local restaurant market. What type of restaurants are currently out there? What’s the common thread of the local restaurants that are successful in your area? Is there a type of restaurant that the market is saturated with — such as pizza joints? Is there an opening for a new type of restaurant, such as an authentic ethnic restaurant with fresh new flavors?

Your goal is to fill a market niche. If you can provide something new to the restaurant scene and local food culture, you might intrigue new patrons and find a booming customer base.

2. Decide Whether To Franchise Or Start Fresh

Opening a franchise has the benefits of name recognition and assistance with sales, business plans, marketing, but the downside of a large financial output and limited autonomy in running the business “your way.” When you purchase a franchise, you own the rights to open a new chain restaurant and you pay royalties to the head office — McDonalds and Panera are two well-known franchises.

Part of the purchase cost of the franchise gives you access to their menus, marketing, and their corporate vision. In return, franchisees are required to adhere to the vision and mission of the franchise umbrella, which may be off-putting if you have your own vision for what you’d like to see in your restaurant.

Bottom line: Franchises can be an easier way to jump into the restaurant business for those without experience, but they require a lot of upfront capital and require you to follow franchise rules.

3. Be Prepared To Work Hard!

The restaurant business is not a get-rich-quick scheme. You’ll need to maximize your sweat equity for a successful business. Typical business hours don’t apply to the food service industry. Starting a restaurant (and keeping it open) require you to work mornings, evenings, late nights, weekends, and holidays.

It’s hard enough to cook dinner for a crowd at home, but the demands of a commercial kitchen are on a whole new level. If you don’t have experience in a commercial setting, consider either taking some classes to get up to speed or hiring an experienced kitchen crew to make sure you can keep up with demand during the dinner rush.

In addition to mental endurance, you’ll need physical endurance because the nature of working in a restaurant can require long hours standing, lifting, moving, and walking. The plus side is that the constant motion and activity means that your days fly by!

Bottom Line: Go in with your eyes open, roll up your sleeves, and be prepared to put some sweat equity into your new venture.

4. Planning Is Key

Just as with any other business, you’ll need a business plan to get your restaurant off the ground. You need to set your immediate goals as well your long term plans.  Your business plan will also be crucial to securing financing, as well as wooing potential investors.

It’s not just about selling your grandmother’s famous red sauce – you’ll need to create a coherent menu plan and get your suppliers lined up to make sure you can consistently provide quality food to your customers. Starting a restaurant takes financial planning, too. You’ll have to rent or purchase a space, rent or buy the equipment you need for the kitchen, bar, and dining room, and make sure you can afford to purchase the ingredients you need. You’ll also need to meet your state’s licensing requirements for food safety and, if applicable, alcohol sales.

Bottom Line: A restaurant is, first and foremost, a business. Make sure you have a solid business plan so you’re ready for anything.

5. Know The Costs Of Doing Business

Starting a restaurant isn’t cheap. The most expensive approach will be building a new restaurant from the ground-up, since you’ll need to set up the restaurant with all the commercial kitchen cooking equipment and everything you need in the dining room- from plates and napkins to chairs and tables to the decorations on the walls.

If you’re renovating an existing restaurant, the start-up costs will be less than the blank slate approach. However, the rent for an existing restaurant may be more than for a space that you’re building from the  ground up.  

Experts caution that a restaurant can fail if they’re underfunded because some new  restauranteurs don’t estimate how much capital it will take to keep the business running. One question to ask yourself when you’re starting out is whether each purchase is crucial to opening the venue, or whether that particular purchase can wait until you’ve earned some money to put back into the business.

A general rule of thumb:

  • Cost of goods = 25% to 40% of revenues
  • Payroll = 20 to 25% of revenues
  • Rent = 8 to 10% of revenues
  • Marketing, Payroll, Taxes = Fluctuates

Those numbers add up quickly! At the end of the day, if you have 5% profit, that’s a positive return. When you’re just getting off the ground, cash flow will be tight. You may want to open a line of credit so that you have access to capital if you hit a cash crunch.

Bottom Line: You’ll need capital and a line of credit to get your restaurant business off the ground.

6. Location, Location, Location!

One of the most important decisions you can make about your new restaurant is where it will be located. The most amazing food in the world won’t sell if customers can’t find your restaurant.  

Not only will you want to be close to your potential patrons, you’ll also want to be in close proximity to your vendors and suppliers. For example, a seafood restaurant should be close to a fish market, or even better, close to the docks when the boats come in.

There are four essential elements to consider when scouting a restaurant location:

  1. Population - Is your restaurant located in an area where they are enough people to patronize the restaurant? You need to open in a densely populated area, or in an area where there is enough foot traffic to fill your seats.
  2. Parking - Is there onsite available parking for your patrons? If not, is their close local parking, such as a public garage? If not, could you obtain zoning to build a lot for your location?
  3. Accessibility - Is your location easy to find? Can you find it on a map? Using GPS?
  4. Visibility - It’s common sense: If your restaurant is highly visible, you’ll have more patrons. Can you see your restaurant from the street? From prime pedestrian traffic?

Bottom Line: Choose a location that makes it easy for your customers to come to you.  

7. The Fine Art Of The Perfect Menu

You want your dishes to dazzle your patrons and leave them eager to come back from their next meal. Of course, you want to hire an excellent chef. But there’s more that goes into planning a restaurant menu from a business perspective.

Experts say that the ideal restaurant menu offers a balance of traditional dishes and new cuisine. You also need to look at the cost of food to keep your balance in the black. Having more menu items doesn’t necessarily make your restaurant better – it’s all about finding a manageable level of variety.

The ideal menu (again, from a business perspective) has the following:

  1. Low cost options for patrons
  2. Dishes that are easy to prepare so the chef and kitchen don’t get backlogged
  3. Menu items that versatile so waste is minimized and ingredients may subbed into other items

Bottom Line: Plan your menu with an eye toward taste — and profit!

8. Don’t Forget The Proper License And Permits

In order to start a restaurant, you will need to get the necessary licensing to serve food and, if you chose, alcohol.

Licensing can be a long, tedious process and take up to several months. It’s best to apply for the necessary licenses as soon as you find your location, so any bumps in the road don’t push back your opening date.

Your selected restaurant location and structure has to adhere to local zoning laws. If you need to purchase or add equipment, you need to get that approved by the local health department (specifics vary depending on your state). Food safety courses may be also be required of your staff before you can get a license.  

Serving alcohol will require a liquor license, which has variable fees and requirements depending on your location.

Bottom Line: Licensing and permits can be a time-consuming, costly process, but are a necessary for starting a restaurant.

9.  Your Staff Is Crucial

Finding and hiring your restaurant staff can be a challenge. It can be hard to keep good staff on the payroll, but it’s worth it to put time and energy into hiring the best you can.

In the service industry, your staff are some of your best assets. They are the face of your restaurant and who your customers interact with when they visit. They’re the people who can handle your customers when things get busy and make their experience pleasant and smooth.

Don’t rush the hiring process, take time to properly screen applicants, and conduct thorough interviews so you know you’re putting together the best team you can. You’ll also want to check references and verify past employment so you can confirm prior food-industry experience. These steps may seem as if they add extra work to your already busy schedule, but it will save you headaches down the road if you take the time to properly vet potential hires.

When you’re hiring staff for your new restaurant, keep in mind your own experience and abilities. If you haven’t worked in the restaurant industry before, you’re going to be very reliant on your managers, servers, chef, bartenders, and kitchen staff to keep things running smoothly.

Bottom Line: Your staff can make or break your restaurant. Take the time to hire quality staff and treat them well.

10. Word Of Mouth Marketing Is Golden

In the restaurant industry, word of mouth is paramount. If you create a fabulous ambience and serve out-of-this-world food, your happy customers will want to share their positive experience with others. On the flip side, if your customer finds a fly in their water glass and it takes an hour to get their entree, they’re going to spread that news, too.

Word-of-mouth has gone digital with Yelp and other online review sites, so it’s more powerful than ever. In short, you can’t afford to have an angry or unhappy customer. Go above and beyond to provide customer service and your patrons will feel appreciated, and spread the word.

Bottom Line: Word of mouth is the best kind of advertising.

Who’s Hungry?

Starting a restaurant can be exciting, satisfying, and potentially very lucrative. Just be sure to have a solid business plan and be ready to work hard. Bon appetit!

 

Top Related Articles

How to Start a Restaurant

Sales Tips for Small Business Owners

Business Advice from Food and Beverage Entrepreneurs

Let's Get Started

In just 15 minutes, you can be on your way toward applying for a small business loan. Start by telling us a little about yourself.