Look Before You Leap

I get a lot of inquiries from people kicking the tires so to speak, interested in opening their own restaurant. For a lot of restaurant owners, owning a restaurant is a lifelong dream. They can imagine every detail, and it’s filled with happy customers who return again and again. A lot of these independent restaurant owners, they had a certain idea of what it was going to be like to own their own restaurant. But oftentimes, when the preparation isn’t there, the reality is nothing like the dream.

Running a restaurant is one of the hardest businesses to operate successfully. According to an Ohio State University study, 61 percent of all restaurants fail within their first three years and in some restaurant segments, the failure rate is as high as 87 percent. And the average restaurant only makes about a nickel on every dollar it brings in, making restaurants unattractive business ventures for lenders.

To convince the banks and yourself that you can make it in the restaurant business, first do your homework.

Start with a business plan, including in-depth research on the market. The statistics prove it, but you still might be shocked at the number of restaurant owners who never created a business plan.

To ensure your success, a business plan is essential. Include details such as what makes your concept unique, your planned menu and type of service, your price points, a detailed evaluation of the market and your target demographics, your marketing plan, your financial plan, your operational plan, including your key players from industry experts and management to key suppliers and your CPA and attorney.

The financial plan, the most important part, must show on paper that you can make the concept work. Lenders of all types look for these key financial indicators to predict your success: 1) for every dollar you borrow, you plan on bringing in $1.25 in first-year revenue; 2) your overall debt service and total occupancy costs stay between 8–12 percent; 3) you show at least $150–$250 in sales per square foot for a full service restaurant or $200– $300 in sales per square foot for a quick service restaurant; and finally 4) your biggest expense, prime cost (total labor cost plus total cost of goods sold), stays under 65 percent of sales for full service and 60 percent for quick service. And these days, I’m recommending everyone aim for 55 percent to be safe.

You’ve got a real shot of not only getting the funds to open, but a real shot at success if you do your research and create a strong business plan with smart financials.

If you’re reading this and you’re a restaurant owner without a business plan, remember that it’s never too late to plan. You can still develop a business plan that will guide your business into the future. You might be surprised by what you find and what your restaurant’s potential is.

David Scott Peters is a restaurant expert, coach, trainer and speaker, specializing in systems for independent restaurant owners. He is the nationally acclaimed restaurant coach whose unique “SMART Systems” approach to boosting profits has earned him the title of, “The man who can walk into any restaurant in America and find $10,000 in undiscovered cash before he hits the back door – Guaranteed!”  Learn more tips, tricks and secrets in David’s free five-part e-course, “How to Explode Your Restaurant Profits NOW!” Simply sign up to receive the e-course at TheRestaurantExpert.com.