Starting a Restaurant in NYC

[Bond Girl]

30% is tough but possible with big markups on wine and extras

Rough budget is:

30% food costs

30% Staff costs

30% overheads (heat, light, power, phones, insurance, rates, taxes, card charges, printing, marketing, flowers, laundry, linen, breakages, maintenance etc etc)

That leaves 10% profit. Maybe.

No allowance for contingencies, or bad weather...

That's my assumptions as well. Here is a NY Times article on it. Still can't see it being a good deal for the investors even as a Mezzanine debt.

http://www.nytimes.com/2004/01/21/dining/21TIME.html

[herbacidal]

30% is tough but possible with big markups on wine and extras

Rough budget is:

30% food costs

30% Staff costs

30% overheads (heat, light, power, phones, insurance, rates, taxes, card charges, printing, marketing, flowers, laundry, linen, breakages, maintenance etc etc)

That leaves 10% profit. Maybe.

No allowance for contingencies, or bad weather...

That's only operating costs.

Startup costs is going to be very significant in most cases.

In the rare case you can find an intact acceptable space, you still need to do something to it to distinguish it in the minds of many customers from the previous incarnation.

Repaint walls, change style of chairs, etc.

Regardless, in that situation, it's still a lot cheaper than wholescale renovations, so snatch these places up.

[herbacidal]

BTW,

Yes I would agree 30% is wholly unrealistic.

If you can do 20%, you should be jumping through hoops.

I would set a target of 15% personally. Along the way, you can tweak operating costs and move upwards if you like.

I would doubt many investors would take on debt in a restaurant, for the various reasons discussed that distinguish restaurant investors from most.

There has to be tons of other debt available on the financial markets that has a better risk-return ratio.

The 3Fs might be willing though.

[tomweir]

Don't forget the taxman and the bank charges and any other professional fees that you will be paying off the first year or so...

My first job was with a trucker and he looked at me the first day we worked together and he said, as he prepared the invoice for that day, as he jotted down a list of figures on the back of a envelope.

I need to earn this amount.

I need to pay you that amount.

I spent this amount running the truck today.

I need to save a bit for a new truck.

I need to give the taxman something.

I need to make some profit.

So there's my total.

[JosephB]

OK Yaroo, what is Mezzanine debt?

[JosephB]

In the rare case you can find an intact acceptable space, you still need to do something to it to distinguish it in the minds of many customers from the previous incarnation.

Repaint walls, change style of chairs, etc.

Regardless, in that situation, it's still a lot cheaper than wholescale renovations, so snatch these places up.

What's the best strategy for landing a space formally occupied by a restaurant?

[FistFullaRoux]

As far as creating the business plan, I recommend the Junior Chamber of Commerce (I'm a member) Chairman's Planning Guide. It consists of 10 questions that, if answered properly, can serve as a base for the business plan. It's original intent was to document each public service project that the organization does. Everything from contact information to "What would you do if the location flooded?" or "What would you do if a burglar was found dead in your exhaust system?"

It has been used for everything from planning vacations and weddings to buying a house and creating business plans. I can give you the info, or the best thing (in my personal opinion) is to find a local chapter and join. If you have a local chapter, you have built in business. If you have never built a business or managed one, you can get experience by running community service projects. And you don't have to put up the money for those smaller projects. The chapter can bankroll them, as long as the CPG is filled out properly. Once you've done a few, it's an easier leap into management and ownership.

The CPG is really an amazing tool for things just like this. OK, I'm done shilling for the Jaycees now.

Fascinating thread. This post edited for typos.

Edited January 21, 2004 by FistFullaRoux (log)

[beans]

How realistic is it to achieve a 30% profit margin in this business?

After capital expenditures, 10% is a very accurate estimation of profit.

jackal's rough budget 30/30/30 is a very fair, bare bones breakdown.

Keep in mind in commercial kitchens, equipment is always breaking down/wearing out and replacements need to be purchased.

[Louisa Chu]

Bond Girl, if you have a lot of time and money on your hands then go to culinary school - otherwise don't bother - unless it's just for kicks - or a short program specifically designed for restaurant management.

Stages - have you tried just picking a restaurant - like the one you want - and just calling and asking if you could visit for a whole day? Or week? Putting in those hours could be very, very educational.

The thrill of starting a restaurant is one thing - running it - working it - day after day - night after night - is another.

Do you have the need to do it?

[Bond Girl]

Formally visited a great restaurant tonight, saw the kitchen in full swing, want to go into the business more than ever.

Loufood, that was great advice, but I have been to culinary school.

Joe, a mezzanine debt is a loan that carries high risk but also high interest rates, and the people who lend you the money usually end up owning you if you didn't pay them back.

[Bux]

Just heard that the new Thomas Keller place is $12 MM in investment....I want to know who's investing in it?  And, how does Thomas Keller plan to turn a profit on $12 MM.

Don't ask me. I've never made a profit where I've intended to do so. Fortunately my good luck has almost balanced out my bad luck, but that's another story. Whenever I hear the numbers required to get a restaurant off the ground, I'm surprised any of them ever make a profit before the initial lease runs out.

My recollection is that when Daniel Boulud redid the space on 65th Street, the figure that was mentioned in the press was 12 million dollars and of course, that was when a million dollars was worth a million dollars, or if not that much, then at least more than it is today. Of course not every restaurant has to make that kind of investment. According to the article in the Times the other day, it seemed that Per Se was the bigggest restaurant in the new complex and also the one with the least dining space. Some reasonably successful restaurants, albeit not those as spectacular as I expect Per Se to be, operate out of remarkably small kitchens. Blue Hill is a good example. L'Astrance in Paris is a great example.

Still it's a major investment and I wonder how restaurants actually make a profit, although clearly some do. One of the things that would also trouble me is the public's fickle taste. There are a lot of restaurnats around and there always seem to be more opening. They're all your competition for what's probably a static market. I mean I don't think many restaurants are going to be able to draw people who weren't already diners out. Everytime a new restaurant opens, there's not a new set of customers. Each new restaurant has to feed from the same group of diners already eating out. At best, you can hope to open when the ecomony is good as the pool of diners does fluctuate with the economy.

[JosephB]

Joe, a mezzanine debt is a loan that carries high risk but also high interest rates, and the people who lend you the money usually end up owning you if you didn't pay them back.

OK, I've seen this on the Sopranos.

[Louisa Chu]

Bond Girl, sorry I somehow misunderstood - my brain can be kind of fried these days. You know I'm rooting for you girl. But can I just say that service - especially in a great restaurant - is the high - it's the rush. But that doesn't always happen - even at a great restaurant, a slow service can just kind of kill you - kill your spirit. And then there are all those other long, long - LONG - hours outside of service - with no rush. If you were just the money person, that would be one thing, but since you want more - and I know how you feel - you will have to endure a lot of long, hard hours outside of a good service.

[alacarte]

Bond Girl, it's a good thing that you are savvy about the financial world. I bet more than a few restaurateurs get taken by their would-be financial saviors. And I'd bet that more than a few are forced into near-bankruptcy because they don't know what they are getting themselves into.

Do culinary school programs/ restaurant management programs typically include a finance module? If not, then it should. Though lots of culinary school graduates go on to work for restaurants, hotels, and other organizations, a high proportion seem to go on to entrepreneurial careers.

[glenn]

Just heard that the new Thomas Keller place is $12 MM in investment....I want to know who's investing in it?  And, how does Thomas Keller plan to turn a profit on $12 MM. [

An investment, no matter how large, is (mostly) irrelevant to profit. From an accounting standpoint, the investment is capitalized and in no way affects the profit and loss statement except for interest expense, depreciation and amortization. From a practical standpoint, a portion of the investment would be recouped upon the sale of the business.

[Bux]

From a practical standpoint, a portion of the investment would be recouped upon the sale of the business.

I wonder how many restaurants sell the business and at how much profit or loss. My uneducated guess is that most sales occur when the restaurant goes out of business and is forced to sell the assets at a loss. Is this a fair assumption? How often has a new restaurant evver moved into an old restaurant location without renovating the dining room extensively? I wonder how much kitchen renovation is done as well.

Wear and tear on chairs, carpets, tableware, etc, is very high anyway and successful restaurants look shabby rather quickly anyway. It would seem that a good part of the investment much be depreciated and affect the real bottom line, but I don't really know about this.

[glenn]

I wonder how many restaurants sell the business and at how much profit or loss. My uneducated guess is that most sales occur when the restaurant goes out of business and is forced to sell the assets at a loss. Is this a fair assumption? How often has a new restaurant evver moved into an old restaurant location without renovating the dining room extensively? I wonder how much kitchen renovation is done as well.

Wear and tear on chairs, carpets, tableware, etc, is very high anyway and successful restaurants look shabby rather quickly anyway. It would seem that a good part of the investment much be depreciated and affect the real bottom line, but I don't really know about this.

Good point and that is certainly the experience I've had with almost every place I've worked for. They've all gone under, so I guess you have to depreciate the business 50% once I get hired :-).

HOwever, just sort of thinking out loud, a restaurant built from scratch should retain much of the value from the contracting expense, i.e., plumbing, kitchen construction, electrical, HVAC and other miscellaneous construction. And I wonder how much of that $12 million Keller is spending is being spent on such things.

Furniture is probably almost worthless to a potential buyer, but it is not a major expense compared to other items.

[JosephB]

From a practical standpoint, a portion of the investment would be recouped upon the sale of the business.

I wonder how many restaurants sell the business and at how much profit or loss. My uneducated guess is that most sales occur when the restaurant goes out of business and is forced to sell the assets at a loss. Is this a fair assumption? How often has a new restaurant evver moved into an old restaurant location without renovating the dining room extensively? I wonder how much kitchen renovation is done as well.

Wear and tear on chairs, carpets, tableware, etc, is very high anyway and successful restaurants look shabby rather quickly anyway. It would seem that a good part of the investment much be depreciated and affect the real bottom line, but I don't really know about this.

I have my doubts as well. Selling a restaurant is not like selling income producing real property.

[Bond Girl]

Not at all, especially if it's a liquidation sale. I have been approaching this from an investor's point of view, if I am on the other side, what does it take for me to put money in it..... I think Keller is spending a lot of money on things like expensive china, silverware etc. It's important for a place like that, but it also makes the stakes a lot higher.

[herbacidal]

I have my doubts as well. Selling a restaurant is not like selling income producing real property.

Most true.

If you think about it, when have you ever heard of a restaurant sold from one person to another?

A partner may buy the other partner(s) out.

Short of that, restaurants tend to be operated by the same people that started it.

Unless the next generation takes over, as in older restaurants.

Or it goes out of business and is sold in bankruptcy.

[beans]

Not always in bankruptcy, but the bank will come in and auction off the assets in an attempt to satisfy some of the debt and those that still require full payment for a new stove, impinger, turbo-fryer, etc. come in and wheel them right back out the door before those pieces of equipment disappear. Hopefully before this becomes that sort of situation, the owner is able to sell off booths, tables, chairs, fixtures, etc. fairly easily -- but not always at an optimal price.

My former fiance, and his buddy that went on from banking life to Great Lakes Brewery that I mentioned upthread were AVPs of Huntington National Bank -- my fiance in the "Special Assets" department that often conducted these sorts of sales.

Last week I toured the remaining empty space from a restaurant (corporate chain) that did go belly up. Many wires and plugs hanging all over the kitchen with some sinks, a few beat up coolers and "free" soda dispensing pieces were left behind. The place was hideous, inclusive of the a dirty food film grime that was left from the moment the plug was pulled. Yuk.

A new restaurant tenant is moving in and will be open by April.

[Bond Girl]

Went to see a VC veteran about the ins and outs of restaurant funding. Apparently, this is big business in asset based lending. I wonder how much does a bank examine the business plan.

As for private investors, the clawback structure is a norm. They key here apparently is in the negotiations. Hmmm, looks like I need to crack the finance text books again.

[herbacidal]

As for private investors, the clawback structure is a norm. They key here apparently is in the negotiations. Hmmm, looks like I need to crack the finance text books again.

I know most people here are wondering what the clawback structure refers to.

[Bond Girl]

It refers to a structure where the investor expects the entrepreneur to pay back a certain amount of the initial investment each year in exchange for a reduction of equity interest. So say if someone invest $1MM in my restaurant and initially he or she has 70% of equity, each year I pay them back, their equity interest reduces incrementally until I completely repay the entire investment, then the equity interest of the investors reduces to a certain percentage (usually 49%) and stays there. But, if I fail to live up to my end of the bargain, then the investor's equity interest claw back upward.

[herbacidal]

It refers to a structure where the investor expects the entrepreneur to pay back a certain amount of the initial investment each year in exchange for a reduction of equity interest. So say if someone invest $1MM in my restaurant and initially he or she has 70% of equity, each year I pay them back, their equity interest reduces incrementally until I completely repay the entire investment, then the equity interest of the investors reduces to a certain percentage (usually 49%) and stays there. But, if I fail to live up to my end of the bargain, then the investor's equity interest claw back upward.

That sounds ideal as far as my concerns with regards to restaurant financing, except for the fact that the investors' percentage doesn't go below 49%.

I'd prefer starting at a rate of 50-60% and going down to 20%.

Of course, that may be unrealistic.

Ah well, on to creating other financing structures for starting my restaurants.