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Starting a small business – Restaurants – UPDATED

November 30, 2012

Just don’t.  “When I save some money (or inherit it or win the lottery), I want to start a little Uzbek restaurant where all my friends can come and hang out.  It will be like a party every night.”  How about: “I can cook so I can open a restaurant.”

A successful restaurant might be the toughest business.  King crab fishing seems easier.  I’ve had many restaurant clients.  None of them made made any money and most of them failed within a year.  It is hard 24/7/365 work.  Here’s why:

It takes a special, learned skill to plan a menu.  Food spoils, quickly.  People’s tastes are fickle.  There is plenty of competition out there.  Math skills are necessary to determine the proper inventory of food – constantly.  You need business planning skills to guesstimate how much food is needed each and every day.  This is daunting and amateurs are guaranteed to fail at it.

Margins suck.  You will be lucky to break even on food – very lucky.  Do you think McDonald’s makes any money on its Dollar Menu?  The price of your plate barely covers the food and prep costs let alone the service cost and overhead.  I used to recommend that aspiring restauranteers calculate how many plates they need to serve each hour to reach break even.  I don’t think anyone heeded that advice.  Liquor sales are used to offset poor margin on food, plus it doesn’t spoil as quickly.  That’s why a $15 bottle of wine costs you $45 at your favorite restaurant.  Even McDonald’s can make up for its Dollar Menu losses by marking up soda and McCafe drinks by 300-500% of cost.

People suck.  Restaurants need to reinvent themselves constantly to stay on top.  Restaurants are a form of entertainment.  People’s tastes in food and entertainment are constantly changing.  It takes money to constantly change the look, feel and taste of a restaurant.  If you can’t break even on food, you’ll never generate enough capital to keep up with your customers changing tastes.

Friends suck.  Don’t count on them to carry your business.  They expect discounts, especially on booze.  They know you’re marking up the Chardonnay so they expect a special price from you.  They may not realize that you’re losing money on their calamari or casually forget the last time you told them.

Competition will crush you.  There is usually room for only a few successful restaurants in any area.  Smaller towns may only be able to have one.  That local restaurant that everyone goes to all the time shouldn’t be held up as an example for success.  They have years of gut wrenching experience under their belts and low overhead that you can’t compete with.  Large chains have economies of scale, distribution systems, and planning systems to beat you on the cost of everything.  (Even with the advantages, are any of your local Quizno’s still open?)

You suck.  Maybe, I don’t know you.  But are you willing to put in the work to make a successful restaurant.  There are no off hours let alone off days.  You need to work every day and watch everything.  I couldn’t do it.  I like the occasional hike or Sunday morning soccer matches.  You won’t get to enjoy anything until your restaurant starts making money.  By then, you’ll need to worry about how to keep it making money.

Franchises suck.  Look up Quizno’s.  I used to love their bourbon chicken (for no other reason than I really like bourbon).  I’d eat at my local Quizno’s a few times a week.  It always seemed packed at lunchtime.  Then it was less packed.  Then it closed down.  Franchises don’t guarantee success.  They take a whole lot of money upfront to purchase and start.  They also get a cut of every single sale so you have a higher break even point.  You’ll have high capital requirements, a vig, and many of the same headaches as a private restaurant.

So, still want to open a restaurant?  Sign here ____________________ acknowledging the fact that you’ve been warned.  Better yet, here’s a link to a sample business plan P&L for a restaurant.

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