Looking to open a restaurant

[adegiulio]

We have a terrific idea for a restaurant in a nearby town. The location is perfect, the concept is proven, and we love the business. I have many years working in the business, but never got much of an education on the financial side of things. Thus, I have a bunch of questions dealing with the financial structure of a resto. Does anyone have any suggestions on where to look for info regarding the following...

1) One contradiction I keep coming across is the one of self funding. I hear everyone saying "never start a restaurant with your own money". On the flip side, I hear people saying that nivestors and lenders want to see a personal financial stake in your business.. I personally want control, but don't mind giving up a portion of the profits. What is the right approach?

2) In choosing between lenders and investors, which is the common way to go. Both have pros and cons. I don't mind paying interest to a lender so that I can retain and build equity, but I am also not against paying a portion of profits to investors, so long as I retain control. Is there an "optimum" split between debt and equity?

3) With regards to a lease, how do I know that the price demanded by the landlord is considered fair? I can't just go to nearby restaurants and ask them (or can I). It seems like I would be laughed out of the place. Is this kind of information readily available?

It's stuff like this that is weighing on me. If anyone has any suggestions (or any answers for that matter) please fill in the blanks in my brain.

Thanks!

[paul o' vendange]

We have a terrific idea for a restaurant in a nearby town. The location is perfect, the concept is proven, and we love the business. I have many years working in the business, but never got much of an education on the financial side of things. Thus, I have a bunch of questions dealing with the financial structure of a resto. Does anyone have any suggestions on where to look for info regarding the following...

1) One contradiction I keep coming across is the one of self funding. I hear everyone saying "never start a restaurant with your own money". On the flip side, I hear people saying that nivestors and lenders want to see a personal financial stake in your business.. I personally want control, but don't mind giving up a portion of the profits. What is the right approach?

2) In choosing between lenders and investors, which is the common way to go. Both have pros and cons. I don't mind paying interest to a lender so that I can retain and build equity, but I am also not against paying a portion of profits to investors, so long as I retain control. Is there an "optimum" split between debt and equity?

3) With regards to a lease, how do I know that the price demanded by the landlord is considered fair? I can't just go to nearby restaurants and ask them (or can I). It seems like I would be laughed out of the place. Is this kind of information readily available?

It's stuff like this that is weighing on me. If anyone has any suggestions (or any answers for that matter) please fill in the blanks in my brain.

Thanks!

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adeguilio, I can only offer my personal experience, which most recently included mounting the first French bistro in our region of the United States, to great acclaim - for the first several months, only to watch my livelihood crash and burn. Please take everything I say with a grain of salt, as if anything, I learned no one rule applies. Anyway, here it is.

1. If you can do it with other people's money, by all means, do it, with certain provisos in place. Firstly, you're right - most funders, whether equity investors or debt lenders, will not want to foot the entire bill. Most will want to see you are willing to put your butt on the line. The exception may be in something I may about to enter into - someone who knows your work, believes in your experience, tenacity, etc., and believes it will fly - a good investment, vanity or otherwise - and will float the venture. But this is very hard to come by. You are right to ask yourself - am I willing to risk this? If not, why? If not, and I am willing to divest some ownership to others - how comfortable are you listening to others, particularly when they may or may not know what is truly best for your business, though, with a high equity stake or debt-position, they may be fairly strident in their views (this happened in our case. In our case, our supposed BIDCO/incubation lender knew absolutely zero about the restaurant business, and only knew how to read a P & L statement - making strong recommendations re: cheapening costs to a formula they read - which would have killed our venture a lot earlier than it did. More on this, perhaps, another time). Bottom line, there are never absolutes, but tradeoffs. If you risk your own money, or credit, you have the right to be Imperial in your decisions. Other people's money, you have to be comfortable negotiating strategies, or being clear and compelling in dictating your own.

2. Again, no absolutes. But be mindful that a debt note has to be paid - and if you have a stronger than predicted seasonality, or egregiously bad exogenous shocks to your local economy (yes, again, personal experience), keep in mind you owe these notes regardless. Investors, especially "friendly" investors in for the long haul, have a much longer leash and are forgiving of the inevitable valleys in your climb to solvency. However, again, you have the split-ownership areas to negotiate discussed above. If I were doing it again? Knowing how tough it is to return a profit, especially over the first several years, I'd line up friendly investors and limit my debt funding. I never, ever want to be extended as I was in this venture.

3. Lease terms should be fairly standard in your area. Try to find a comparable - not necessarily a restaurant, but something with like square footage, like traffic, etc., - and estimate. It was our experience that we could tell when our Landlord was trying to gouge us. Also, if you have restaurants that are not in your same niche, generally, but have a rough comparability in terms of s.f., etc., I have found they are friendly to your needs - particularly if you are a customer.

Keep in mind, too, that things like included equipment, assistance with buildout/renovation, etc., will affect the final figure. One thing you might try is a graduated lease, or, if you and you're landlord are game, a base lease with increases pegged to profits. You may or may not realize the profits, but if your Landlord is willing to risk such an "investment," during your first critical period, your lease will be lower.

[chefadamg]

Well...good luck w/ the venture. As with anything financial, you need to educate yourself. And that includes talking to every restauranteur you can. You say you've found the "perfect location"? Is this an actual restaurant site..or do you mean a specific town that will work? Remember that sometimes things don't work out. Some reasons might make your "dream site" unpractical. And that practicality will be determined monetarily (i.e. some areas..NO..many areas now, due to MONUMENTAL increases in propery values, cannot profitably sustain a restaurant...PERIOD. You might need to move on)

I see you mention the word "profit" quite a lot. First, realize that that word is a rare one as a restaurant owner. It is NOT going to be a cash cow and its important that you and your investors understand thatl... It's barely a sustainable business, unless you're very fortunate, and I hope you are.

If you need a complicated array of investors and lenders, perhaps you are not ready financially? Of course, that depends on your venture. If you're serious, your first step is to find a great accountant and lawyer who specialize in restaurants. The accountant will run you through most debt/equity formulas you might need depending on the lenders etc. He'll also provide input as to your finances as well. Does he think you have enough cash to go it alone? He will be able to make recomendations based upon your cash position as to investors and debtors. I would strongly recommend always buying an asset as opposed to leasing. The equity you build will be the life blood of the business..helping you to survive in times of troubles, and providing a blanket when/if the business folds or is sold.

[johnsmith45678]

We have a terrific idea for a restaurant in a nearby town. The location is perfect, the concept is proven, and we love the business.

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May I ask what the great idea and concept are?

[adegiulio]

Thanks to everyone who responded. You make some excellent points and offer good advice.

May I ask what the great idea and concept are?

Sorry, can't let the cat out of the bag yet!

[adegiulio]

  I see you mention the word "profit" quite a lot.

←

Having not received any responses to this thread in a while, I decided to re-read it. While I saw this statement the first time through, a second reading highlighted it for me. While it is true, I did mention "profit" multiple times (twice), I'm not obsessed with it. I understand the business and all of its difficulties. And, of course there are the cliches about the restaurant business being the most failure ridden of all businesses. It's important to note, however, that my questions relate to financing, making the discussion of profits quite appropriate. More significant, though, is a principle an old baseball coach instilled in me...You have a better chance of winning if you believe you can.

What's the point of opening a business if I don't truly believe I can make it a success?

Again, thank you for your comments.

[TheFoodTutor]

1) One contradiction I keep coming across is the one of self funding. I hear everyone saying "never start a restaurant with your own money". On the flip side, I hear people saying that nivestors and lenders want to see a personal financial stake in your business.. I personally want control, but don't mind giving up a portion of the profits. What is the right approach?

You answer yourself with your own question:

I have many years working in the business, but never got much of an education on the financial side of things.

With the amount of experience you have, you still question your knowledge of the financial side of things. I'd say, from an informal knowledge of what you write here (though I've read many of your posts), that you'd benefit from consulting a half-dozen or so investors, to see if any of them approve of your business idea enough to finance it, which is, also, exactly what I'd suggest of most people with the same idea. Your location, your concept, your knowledge of staffing a kitchen and front of the house, etc. would come into play, of course. . .

People can lose several years of income, gross, and even more than that, on opening their own restaurants, so I'd hate to see you do that with your own money, and a good investor will likely have some helpful ideas about what that location will do, real-estate-wise, or with a certain restaurant idea.

I hope this is not negative, since it can be a great way to make a living, but just go into it with both eyes open.

[BonfireCuisine]

Failure ridden….

That’s an interesting issue… I own a bistro in Seattle, WA and I can attest that yes there are some mistakes that can cost you the restaurant and there are some mistakes that can be covered up. For example I had a manager that I “trusted” to run the front of the house and make the right decisions. After reviewing the situation; misc.. detail related to this issues left out, the right decision was to let my manager go. In short “Performance is a continual improvement”… If I would have continued with his employment it might have cost me my bistro. So what does this mean in this thread?

1. Funding… Personally I believe in using your own funds. Why? I pay the money and when I get paid by the customers it comes to me. I don’t have a large “payment” to a bank or investor to pay at the end of the month. No I didn’t put my house on the line but I did put my money up. For me – it means more. The more hands you have in the pocket the more “voices” you have in the day to day decisions (read direction of the restaurant).

2. Investors verses Bankers… Personally I don’t like either but “my experience has been” investors want more money back (interest) and are more flexible while bankers have lower interest but aren’t as flexible. Which is best? Well if your ideal restaurant is really successful then a bank is the way to go. But if you have “mistakes”, “off seasons” or something just doesn’t go right and the money isn’t where it should be – then an investor is the way.

3. The grand ol’lease… What is fair? A lower payment with no triple net or a higher payment triple net (NNN)? In case you don’t know, triple net is considered your portion of the utilities, insurance and maintenance of the building added to the lease payment. My lease is lower but I pay all of the utilities, trash, etc…. Yes it’s ok to talk to your neighbors. I image a conversation going like this …”Hi there (talking to the owner), how is the business around here? Pretty good? Like the landlord? I’m thinking of opening/taking over that restaurant/spot over there and was curious of what your lease is like. The landlord has started the negotiations at [insert value here] a foot/a month and I’m wondering how it compares to yours” Now of course you can modify it to your personality but I feel there is nothing wrong with asking respectfully.

For me I say I’ve spent more then I originally budgeted for. But it wasn’t all in one payment, it was a little at a time. It was that case of leeks that went bad even though the supplier said it would last. It was that extra inventory of wine that your manager ordered that you really didn’t need. It was that labor overtime because your lead cook decided that it was a good idea to stay late to do prep because the next day he was going to be late – but failed to realize that he was staying late at the end of the pay period.

And lastly – There is nothing wrong to say that you will be the next biggest success next to Gordon Ramsey. The only thing I’d add is to at least be realistic.

Jason

[Juanito]

Know that according to the NRA, the average profit margin of restaurants is 5%

Granted, that takes into account all the money losers as well as the wildly successful ones. From what I've observed personally, a well run operation will yield 10% and perhaps as much as 20% of sales - but you should be prepared to see less...... a lot less. And so should your investors. Again, from my experience (20+ years as a food distributor - watching people do again and again what you are contemplating) investor funded operations are a bad idea. All but the most savvy investors, schooled in the lean margins of the restaurant biz, soon want to see a return on their investment which you may not be able to provide. That's when the arguing starts, and big problems follow.

I've seen it scores of times, and it isn't pretty.

If you can use your own money, do it.

[BigboyDan]

In order: your own money, investors, lenders. If you use the latter two, you'll only get one shot it. Remember, more than anything else, your food must taste good to your customers, everything else is secondery...

[MarkIsCooking]

I am an entrepreneur and I've invested in several businesses. Most of these I actively participated in, but for the ones where I did not, I would not invest money unless the lead operator had some 'skin in the game'. So, whether you invest your own money or not does not have to be an all or nothing thing, but I'd be surprised if you'd find investors willing to pony up bucks if you have nothing riding on the venture. If you really do your homework and are realistically convinced in the merits of the business, it would be nice for you to preserve as much equity as you can. Most pure investors don't want or need control unless the investment is very significant. I have no idea what your concept will cost. If you need 1/2 million and you're getting it from an investor group or 10 people, control is probably not a big issue. If you need $5M, it could be a different story.

In terms of investors vs banks, I think you're probably better off with investors here. As someone said, banks cost less, are more conservative and are more rigid. You need a sophisticated investor group that is astute enough to know that they might lose their whole investment. Risking complete loss is not really a bank's game; and new restaurants are certainly a high risk proposition. The only way I think a bank would make sense here would be if you want to retain complete ownership and are willing to take the full capital risk. In that case, you could leverage assets you have (if you have them) and borrow against them, allowing you to keep those assets and fund some of the business with debt.

No matter what route you go, please do everything you can to make sure you have access to capital beyond what you think you need. One of the leading causes of business failures is inadequate capitalization.

Keep in mind that debt - whether from a bank or others - must be serviced, meaning that interest must be paid. Banks will typically want their interest real time (i.e. monthly), but private investors will sometimes agree to have interest accrue but not be paid for a certain launch period.

In terms of leasing, if you are unsophisticated on this front, seriously consider using a broker that YOU pay for. S/he could more-than pay for their work by negotiating terms you wouldn't think to look at. Any good broker would certainly know what the market will bear for a property you're looking at (and perhaps was involved in other similar business leases).

In evaluating locations, think about who your target customer is and look at national chains at/near your chosen location. For example, chains like Starbucks have a tiny failure rate. They carefully research every location based on demographics before they open a new location. If you're in a shopping center with Starbucks and if your customer is similar to the Starbuck's customer, you are least reducing your risk for location being a source of failure.

If you want to chat more directly, please feel free to email me.

All the best!

-Mark-

[jackal10]

If you don't have financial experience, for heavens sake find someone who does, or the money will walk out of the door.

Remember it also takes up to 3 years to get established in the guide books, reviewed in the papers etc, and you need to allow funding to cover the ramp up.

The question of debt (loan) or equity (share) finance depends somewhat on you long term goals and exit route. As Bonfire Cuisine noted, Investors want their money back, and equity investors want several times their money, usually from a sale of the business. If what you plan is a lifestyle business, say a single restaurant, then you will do better with a bank loan, assuming you can pay the interest or have negotiated interest free holidays to cover bad times. Since you never plan to sell, then the equity has no value.

If you are more ambitious and plan a chain of restaurants that you will sell in 5 years time, then equity is a better route, and you and the investors get rich when you sell. There are various half-way houses, like convertible loans and redeemable shares, but they are probably too complex

Whatever the funding, you will need more funding along the way.

pick your investors or bank with enough strength so that you can go back for a second bite at the cherry at reasonable rates. All investors will want to see you have some "skin in the game", enough to hurt if it goes wrong.

Restaurants as such rarely make money directly. If you are lucky they break even. In my more cynical moments I think restaurants are basically disguised property speculation, with the trading just keeping the premises warm. Thus you want ideally to own the premises, or if you lease them ensure the lease is long enough term with long intervals between rent increases so that you have some value to sell.

[CFO999]

Starting a venure without the financial knowledge or proper capitalization is destined for failure.

Placing debet service on a new business is very risky.

The amount of control you get is directly related to your investment, so if you want control you must consider putting your money where your mouth is.

[Reefpimp]

So where would that leave me vis-a-vis my idea for putting a restaurant on a ship? If I shop around, I can get a ship in the 180-200 foot range for around a thousand bucks a foot. The problem comes back to the old bugaboo: location. I need something fairly specific: I need seawall access, not too scabby, I need electrical and gas hookups available, sewer out and water in. And that's before I put any food on any plates.

Now, I'm the son of two people who both served on my hometown's city council's; i know how to pitch myself to a municipality. The problem for me is negotiating the USCG regs (Because their regs take precedence: It does me no good to comply with local code if the USCG says I can't have "passengers"--i.e., customers--on board) and making upgrades to the vessel itself.

Mind you, I think it's a good enough idea that I invest an hour a day into my business plan, and I'll soon be returning to sea to get enough time in to qualify to be able to test for my 600-ton Master's papers. And although everybody I've talked to says it's an absolutely stellar idea, I still come up short on money. I'm willing to take on ownership of the vessel itself (I really wouldn't have it another way) and that's nice, because it gives me, under Admiralty law, sole control of the ship itself. If I want to refit the bridge and the chartroom as my personal apartments, then I shall. So I'm obviously willing to put what will be my primary domicile up along with whatever investors want to chip in with. I really don't see a bank coming on board (heh heh) with this--it's a little too Out There for most banks I've spoken to. I am in very preliminary opening negotiations with a restaurant group, but they're 300 miles away; I may even think of adding a small floatplane into the budget so inspecting investors don't have to dick around with commercial travel.

What amazes me is how expensive everything related to a restaurant is. It makes me feel like I'm free-falling through a Big Heist crime story! Forty tables and a hundred sixty chairs; all the stainless for the kitchen; the china, the glassware, and the silver not to mention the salt and pepper shakers; handicapped-accessible, woman-friendly bathrooms (Thank Crom I've worked as a welder, a tiler, and in general construction). Lord above, the kitchen (galley) revamp is just a drop in the bucket, even with the two 8-top Wolfs and the convection range. Plus hiring plus advertising plus liquor license plus inventory.

Still and all, I learned a few things over the years; the salient point here is that you can move anything, if you're willing to move one corner of it at a time. If I get it together in two years, great. If it takes five, that's okay too. Ten years is stretching it, but I'll be ten years older any damn way, so why not?

[larousse]

Lets say your able to get a resturant going that is just breaking even but what about you salary. how do you work in what you need to get paid or do you work, originally, off a budget that includes a month of salary or a year...

also whatabout the business plan. what resources are availible other than school, which nowadays I cannot afford.

[Michaeltheonion]

Look into sustainability. And build your place from the ground up. Literally. there are many way sto actually construct a building using reclaimed materials (such as tires and straw) that are viable and can save you hundreds of thousands of Dollars. Look into alternative engery sourcs like solar pannel and recycling water. I have loads of online resources on these subjets if you want them. Im planning a model that I want to impliment in 7 years or so, that is based around these issues. Not having a lease or worrying about energy costs can weather you through a long dry spell.

[Joisey]

-Have enough money in the bank to make payroll for the first six months.

-Have enough money in the bank to take a loss the first year and not lose your shirt

-Have a bulletproof business plan

-Do what Thomas Keller did and cook for your investors. Your food is your biggest connector to potential money

-Never buy new equipment if you can get away with it. Auctions are your friend.

I'm going through all of this as an employee, but seeing what the owners are encountering first hand. It's been a great education to say the least.