If you’re thinking about starting a restaurant from scratch or buying an existing restaurant, you probably already know that the odds for success don't favor the unexperienced.
Restaurant failure rates are staggering during the first year of business and are an even higher during the subsequent 5 years of business. The restaurant business is tough and getting off on the right foot could determine if a restaurant will be a success.
What are first-time restaurant owners doing wrong? We’ve asked a panel of 37 restaurant professionals that very question to help you get it right no matter how much — or how little experience you may have in the field.
What are the 3 most common mistakes to avoid when buying or starting a restaurant for the first time?
We’ve graciously been handed insightful responses from 16 restaurant business consultants, 11 successful restaurant owners, 2 attorneys (with a focus on helping restaurant clients), 3 restaurant brokers, and 6 commercial real estate brokers.
The 3 most common mistakes as mentioned by the experts are:
- Being undercapitalized (18 mentions)
- Choosing poor location / not researching demographics of location (15 mentions)
- Lacking restaurant experience (11 mentions)
Other common mistakes mentioned include:
- Negotiating an unfavorable lease (8 mentions)
- Not hiring/managing staff effectively (8 mentions)
- Lacking solid concept or vision (7 mentions)
- Not realizing level of commitment needed (6 mentions)
- Not having a sound business plan (6 mentions)
- Poor understanding of restaurant financials/not monitoring financials (6 mentions)
- Not working with professionals (6 mentions)
- Not being realistic with an opening date or opening too early without properly trained staff (4 mentions)
- Marketing ineffectively (2 mentions)
Mistakes mentioned once are:
- Not having a consistent product
- Not being able to serve enough customers during peak hours.
- Not getting a good valuation of the restaurant for sale
- Not micromanaging
- Going too big
- Building from scratch
- Paying in all cash
- Not allowing enough time in your offer for due diligence
The responses conclude what the 3 most common mistakes are, while also giving some GREAT insight into starting and running a foodservice business.
This post ended up being close to 8,000 words long so we decided to divide into sections.
Clicking the links below will bring you directly to a specific group.
Chef Brian Duffy from ChefBrianDuffy.com and owner of CBD Solution, works with restaurants across the country ...
1. Being undercapitalized. Most don’t have enough money to sustain their business through the first year.
2. Not investing the time or money to train the staff thoroughly or properly before opening. Too often new restaurants will open too early without making sure their employees are well trained. Don’t try to save money upfront by bringing in staff later on after being open.
3. Not having a clear and specific vision for your restaurant. Write down a mission statement of what to expect and the core values you expect the business to uphold. Define the 10 things that you will not allow any exception for at your business.
Parts of a mission statement could be: Team Work ... Every position is equally important to ensure customer satisfaction and loyalty. We are a team, a united front- we all look good together, we all look bad together. We will take ownership of every guest issue. We will never tell a guest “that’s not my department.” It takes all of us working together to make this a success.
Commitment to Excellence ... We will continue to offer a memorable experience. Excellence is a habit and an on-going process that will allow us to be better than our best competitor.
Once these standards have been established, don’t allow for any exceptions or failure to adhere to them.
On buying a restaurant: 1. Get a good valuation from professional to determine what should be paid for. A certified business valuation professional will cost around 1000 dollars. They should give a valuation based on the percentage of sales, a multiple of discretionary earnings – earnings from the owner, or value the business based upon the hard assets.
2. Being unaware of cash position. Many people fail because they don’t know what their personal and business cash positions are. It’s extremely important to know what position you are in at the beginning of every month. Always know what kind of cash is coming in and out of your business and know what kind of cash you have personally. Its always good to know what kind of extra cash is immediately available to you if you were to need it.
3. Not micromanaging. If you want to be successful in the bar and restaurant business you must be a micromanager. Don’t delegate without following up on every detail. The guys that fail are those that feel they are above getting into the restaurant and working in every aspects of the business. You have to be able to outwork everyone around you.
1. Bad Lease Negotiations – Get an experienced commercial broker who has dealt with restaurant lease negotiations. More often than not, newbie restaurateurs are blinded by the address and location of a perspective site, and will gloss over important lease details. Many lease agreements are in excess of 200 pages, but there are a few highly critical sections that a good commercial buyer’s brokers won’t miss. Making sure that leased space has sufficient amperage, gas pressure, and no venting restrictions can save the restaurateur thousands.
2. Poor Development Budgeting – Before we get into the operating pro forma below, it is crucial that you have enough money to build your dream restaurant. This starts with having REALISTIC expectations.We typically see build-out costs for a “vanilla” space (just walls and mechanicals stubbed in) in the range of $300-$350 per square foot, so plan accordingly and don’t overextend yourself. With smart building, you will set yourself on the path to success.
3. Not Creating a Business Plan - This is an extension of your overall financial planning stage, so this MUST be done early on. With the increasing cost of labor and cost of goods, the best advice is to have a precise operating budget. Make sure the overall net profit line is acceptable. Remember, with pro forma you have to believe in your business plan before anyone else will.
1) Not knowing and regularly monitoring your critical numbers (food and labor cost #'s 1 & 2 and Overhead #3) is the kiss of death. Far too many talented chefs and aspiring restaurateurs get into this business because they're talented, love to cook great food or see it as a glamorous pursuit, but know next to nothing about running a business or what it takes to make the numbers work. First and foremost, a restaurant is one of the most challenging businesses to start and operate profitably and it has one of the highest failure rates.
2) Not training your staff to Serve and SELL. This business is all consuming and many operators become re-active and not pro-active as they find it overwhelming to put out the daily fires, manage a large staff, get the doors open and serve consistently great food and drink. Something has to give and usually training is the first to go. Restaurateurs need to realize that every seat and every table represents valuable real estate that needs to be optimized and maximized for profit. If training exists, it’s usually one the basics of service and how a dish is prepared… but training your staff to use their unique personalities to be "Brand Ambassadors", marketers and salespeople for their restaurants is often lost on the owner.
3) Hiring experience or for need versus attitude, approach and desire to serve the public. Unfortunately, the restaurant business is known for high turnover and operators will attempt to fill the need as soon as they need it. Experience does not always carry the day as bad habits abound and the warm-body syndrome leads to drama, policy abuses and lackluster performance. I have always hired for attitude and desire over experience with far greater staff chemistry and guest satisfaction as end results. Experience comes from experience, but the critical foundation is desire.
The first three mistakes that come to mind are Location, lack of funds and lack of experience and it is the combination of all three that ultimately lead to a new operators demise.
Choosing the correct location is paramount to any operator’s success or failure. Many times a new operator will overlook serious potential flaws with a location because they are enamored with the locations physical characteristics. Often as a first time operator you are lured by the quaint location on a sleepy tree lined street. The space has been upgraded throughout, the fixtures are new and the dining room is so cute. The issue is there is absolutely no parking, no drive by traffic, no foot traffic, or, business density to support a lunch crowd for example. Just this week I met with a potential client who is struggling to improve their sales in a location just like this. The restaurant has only two parking spaces, both of which are designated for Handicap parking. The space is beautiful but the location is lacking in so many other areas. In their failure to recognize the limitations of the space they are now forced to try and overcome these obstacles with marketing money to draw people into their establishment that they no longer have. Further, the location lacks the desired target market of their concept because they were in a rush to secure this location.
Failing to realistically evaluate your operations financial needs can lead to some pretty serious financial repercussions. All too often a new operator feels rushed putting together the necessary funds to secure their first restaurant. They are so convinced that this vacant restaurant is perfect and they fail to listen to that inner voice telling them to take a deep breath and slow down. They are convinced this location will not be available two months from now even though it has now been vacate for eight months. In the above scenario this couple falls in love with this off street location. It is already built out and will significantly reduce the amount of money they will need for remodeling. In their rush to sign the lease they fail to recognize the true costs of opening their business. In their projections they budget does not account for repair and maintenance, additional parking and more importantly the required cash to have on hand because they cannot secure any credit terms from their purveyors. They have also underestimated their marketing needs and have spent their cash on hand to secure groceries and the like because they are not on terms with their vendors. Most new operators fail to realize they are likely to be on COD terms when they first open. Additionally they fail to properly budget for expenses like their estimated quarterly sales taxes, workers compensation premiums, etc. Building projects also tend to be full of surprises and the initial three months rent seemed like a great deal at the time, but with permitting delays they are six months in and now paying rent with no income from sales. More times than not I see a new operator that has budgeted $150,000 to get the doors open and they come into that new business with $150,000 and they fail to plan on carrying the costs and losses of that business for the next 18 months. Because they have seriously failed to budget correctly and raise the necessary required capital, they fail!
The 3rd most common mistake is a new operators lack of experience. They fail to adequately plan because they lack the proper experience and background in this industry. I am always shocked when people tell that they are willing to invest their entire life's savings and the savings of those closest to them in a venture that is so poorly planned for. There is a mystique about owning your own restaurant that lures people into believing that anyone can do it. The reality is, just because you are a great cook doesn’t mean you will be a successful operator. If you have been a successful Dentist or Lawyer doesn’t mean you will be a successful restaurateur. If you have worked your whole life working for someone else in an industry completely unrelated to the restaurant industry, don’t assume that you can just change careers and expect to be successful. Staring a new restaurant takes a great amount of planning and the more experience you bring to the table will help to ensure you plans are more comprehensive in nature. When you fail to adequately plan in the beginning you end up choosing a location that does not support your concept. When you fail to adequately plan, you fail to raise the necessary capital needed to give your operation a fighting chance. Failing to plan places you and all of those who invested in your concept at serious risk of loosing their hard earned savings and financial security.
It is important for anybody thinking about opening a new restaurant to seek proper council.
1) Lack of a sustainable and strategic business plan – without a plan, your project is just an “idea.”
2) Lack of adequate funding – take what you estimate it will cost and add at least 25%.
3) Don’t use a network of “friends” to help with this endeavor – it’s a business and you need professionals to guide you (all with firm deliverables).
1. Lack of, or non-realistic business plan and pro-forma - this is caused by enthusiasm and naiveté leading to overstated sales and performance ratios which in turn leads to pour returns, pour financial performance or underfunded projects
2. Signing a lease without securing the *proper funding first*, including a cash reserve of 12 times the rent.
3. Lack of skill sets related to starting, running and sustaining the business - This not only takes a great idea, or a great family recipe, but success requires a concept that resonates with the market place, in conjunction with strong negotiation skills, strong people skills, accounting skills, sales skills, an understanding of laws, regulations and compliance, production and operational excellence and a little luck.
Supposing the project has a sound business plan and adequate funding, which should be a given before one gets involved in any new venture, specific to the restaurant business:
1. Food Quality: This should be a given. There is no excuse now days for badly cooked or held food. Just because somebody has a great recipe from their grandmother for Italian meatballs, it doesn't make a great food restaurant.
2. Location: If you are starting a new concept or buying an existing one that has not a known name, having the foot traffic and exposure is essential to getting the numbers. I know places with great food in NYC that to decrease the lease cost, go half a block of the main drag, and they just can't get the customer numbers. If you are Chipotle you can do this, as they are a sought out destination.
3. Layout and throughput: You have to be able to do the numbers, serving quality food consistently, and if lunch is main part of business, serve time has to be under 5 minutes, be able to do 200 customers an hour for a fast casual, and turn your tables a couple of times at lunch if you’re a full service restaurant.
1. Take the time and make the investment to work with a consultant to create a detailed business plan with concept developed and financials projected.
2. Understand the need of three key talents: Back of the house-culinary, front of the house-guests and a financially focused hospitality guru.
3. Choose a location with an understanding of the demographics needed for the concept to be popular and profitable and a realistic lease.
1. Not having a solid brand identity. Too many first time restaurant owners open a restaurant based on what they think the market needs without doing some good market research to see if the concept is feasible.
2. Don't fall in love with the location. You need to be subjective when looking at property. Letting yourself get attached to a location will get you into a higher rent than your budget might allow. If you are paying over 6% for rent you'll be working for the landlord.
3. Not having a budget. This is more common than I want to admit. You need to know your numbers inside and out. Not enough tables and turns and you won't be able to hit unrealistic sales goals. Knowing your numbers is a must! I have a saying, "If you don't know your numbers, then you don't know your business."
Also, there is a big difference between running a restaurant and building a business. Both skills are needed to be successful in today's market.
1. Understand how to market a restaurant business - this includes pricing
2. Understand the impact of the culture he creates.
3. Understand who his guests are or what they value.
1. Selecting a location without knowing the demographics of the potential customers in the area. Things to consider include where they live and work, or whether they are retired? You need to know how much money they make a year and what kinds of jobs they have. You also need to know whether they live in an apartment or a house, own or rent, own a car or take public transportation. Also, does race or gender play a role for your business’ success?
2. Selecting a location with a price per square foot that is too high. Getting in over your head with real estate will start your business down the road to failure. A good rule of thumb is to try to keep your total debt service and occupancy cost down to 8 percent of sales and no more than 12 percent for a multimillion-dollar business.
3. Not soliciting the help of qualified professionals. Make the investment in hiring both a commercial real estate broker and a real estate attorney. They each play an important role in finding and negotiating a lease or purchasing a property.
1. Undercapitalized - New restauranteurs love to find those areas to cut corners and save money, which is not a bad thing to do. Paying full price for anything is tough when you are on a tight budget, but if you’re going to spend money on anything, it’s working capital. Have enough put aside for 3 months rent, 2 quarters of payroll and payroll taxes, 2 quarters of sales tax and enough to pay yourself!
2. No Business Plan - Business plans are “roadmaps” for new operators. Marketing plan, growth plan, menu spine and most importantly, your brand definition. It’s easy to get off track when you’re trying to boost sales, but veering off your plan causes one to lose focus on what you de best.
3. Unclear brand - Common misconception…a brand is not just a logo and interior design. A brand is “who you are”, “what makes you unique” and how you communicate this to your target market. This is where the old adage “You can’t be all things to all people” comes into play. Focus on what you do well and don’t try to do what your competitors are doing, or you’ll be like everyone else!
1. Having an idea and not a CONCEPT.
2. Moving forward without a business plan including a thorough Financial Forecast.
3. Thinking that you can do it ALONE.
1. Build your brand first. Work on building your idea and concept prior to signing a lease. Keep it simple. Don't try to do everything.
2. Research your location. Usually there's a reason if the same location has turned over businesses every 3 years.
3. Set goals with timelines and stick to them.
1). Under capitalized, 6 months operating capital is needed after opening.
2). Good location for the type of concept they want to open. A lot of people go cheap on the location and suffer later.
3). Realize that operating a restaurant is a tough business. A restaurant is a living thing and changes constantly and requires many, many hours of their life to be successful.
1. Thinking you will be protected by your lease. Before you sign one, make sure you are protected with in reason, make sure you have the option to sub lease if your concept does not work.
2. If you have an investor, have your attorney to write up something that clearly explains what the investor can and cannot do i.e. % off on dining, do you even want them to enter establishment, access to financials.
3. Find out your weakness and hire accordingly, remember you are building a team you do not need people who think like you. Think of how sports teams build i.e. San Antonio spurs, you are the Coach Popovich.
Chris Kozlowski - owner/operator at OrchardStreetChopShop.com
1. Going too big. Keep the restaurant small and filled up.
2. Going too low on your opening budget. Most restaurant start-ups go way over their estimated budget so whatever you think you are going to need to open, go up by 20%.
3. Hiring too many opening staff. Most restaurants cut back about 50% of their staff once the restaurant opens because the over hire “just in case.”
1. Not Understanding The Depth of This Commitment: So many people LOVE cooking in their own home for their friends and family. After years of compliments and accolades they finally decide to "make the jump" into opening their own place, because they are so good at cooking. Consider the whole picture before you do this. If you are a lawyer by day who has never set foot in a restaurant before, do your homework. It is not as simple as finding a vacant restaurant space, putting together a few recipes and turning on the open for business sign. It is hard work. You need to make sure that you are prepared to give up A LOT for quite a while. Time with friends. Time with family. Hobbies. Vacations. Days Off. Your restaurant becomes your #1 focus. It has to be because that first year is crucial. Each and every day is filled with unanticipated surprises. Plus, it will take time to start making money, and until that happens, you will need to be there all the time. You need to be there so you can establish your environment. Teach your staff. Build a culture that you stand behind. Foster a loyal clientele. The success of it all is based upon your vision and leadership, making your presence crucial. So, thinking that you can open a place and not be there much, or thinking that it will be easy as long as the food is good is not true. This type of mindset will slowly send you down a road of disappointment with your business, and potentially failure.
2. Not Know Where You Are Going and What You Are Selling: Not understanding your surroundings. Know your neighborhood. Make sure that your concept fits into what your environment is hungry for, no pun intended. Maybe the neighborhood is still developing. If that is the case get a good sense of what it is turning into. Is it gentrifying? Is it already established with many other restaurants? Is it surrounded by lots of corporate restaurants with recognizable names? Think about all of these things before you open your Burrito shop next to a Chipotle. Is it the right time to open a trendy tapas restaurant because five new condos are being renovated in the area? If after doing your research your gut is saying, yes, then go for it! But, if there is no sign of life in a neighborhood and you are just getting your feet off the ground, make sure you have a good sense for who your clientele is, or could be. Is your concept one that could flourish in this area? Or, is your idea so unique that it doesn't matter where it is people will seek you out to have it - let's say the cronut for example. You could sell a cronut out of a dark doorway in an unmarked alley and people would come for it because it's awesome. I own a restaurant in a college neighborhood. It is important that my menu is well rounded. Yes, my family specializes in Greek Cuisines, however, we learned early on that this would not be sustaining in our environment. So, instead of focusing on only Greek food, we have select items on our menu which are loved by our guests who want Greek food, but our focus is on food with a broad appeal. We offer lots of sandwiches and pastas that appeal to university students, as well as to professors and faculty. This is a prime example of us remaining true to what we know and love, but listening to what our guests (and our sales prove) are in demand. The moral of this is that you should think about the overall appeal of your concept, think about it long and hard before diving in head first and understand what your neighborhood and community could support.
3. Choosing the wrong Business Partners: Watching friendships fail once becoming business partners is a disappointing truth of this business. Start out on the right foot with each other. Be certain that your goals aline. Understand each others' strengths and weaknesses. This is a stressful business making sure that you have made the right choice for who to walk down that road with is so important. It has been difficult to anticipate the up's and down's of the the hospitality industry, and it is easiest to take the downs out on those who are closest to you. And often it is personal relationships that suffer, or, your relationship with your business partner. Think about this before you start. Be honest with each other. If need be work with a business consultant so that you can be on the same page. Disagreements are normal, it is how you move past them which is key.
Find A Mentor: Whether you have worked in the restaurant industry for years as a server, manager, cook, chef, etc....Or, if you are a regular person with a great concept. Find a mentor. Through social media and other networking outlets there are many ways to meet others who have much to offer when it comes to running a restaurant, deli, coffee shop, etc....Find someone who you connect with. Or, several people who you can learn from. Spend time in someone else's kitchen. Stage. Get to know the business. Many of us who are successful have made lots of mistakes which we have learned from, or, we have had great mentors of our own, who's lessons we are happy to share with you. Create your own hospitality and food business support system. Learning from each other and supporting each other helps to keep us all going.
The one that stands out to me most is having a lack of vision. Many new restaurant owners either want to appeal to everyone or solely concentrate on the food menu while neglecting the importance of the rest of the skills it takes to have a great restaurant.
Choose what your restaurant brand will be. For example, whether it will concentrate on casual Northern Italian Street food or be a fine dining local fish restaurant that has a French flare. Understand your brand, believe in it and make sure that every aspect of your business fits into the concept of that brand. When a customer walks in everything from the employee uniforms to the water glasses to the dessert menu should align with the concept you have chosen.
1. Lack of understanding in how much work it actually takes to build a successful restaurant. It's not a fun side project.
2. Not knowing how to properly manage/hire employees. People either hire, and are unsure of what they are looking for, how much a good employee is worth, and inversely, how detrimental a bad employee can be on the entire organization.
3. The importance of having a consistent product - food, bar, atmosphere, marketing .... Consistency is key.
1. Opening too early. Don't open until you are ready, reviews happen early, and and they exist on the internet forever.
2. Cost out all menu items, food and beverage before opening. You should know where you stand cost wise before receiving a bad P&L.
3. Not having a team of professionals ready. Surround yourself with a team of professionals: accountants and attorneys who can protect you before things happen.
1. Location, location, location.
2. Not having enough Capital to get business going (need at least 6 months operating capital)
3. Not having enough experience to know how to price menu, and control loss for over ordering and spoilage. Hands on OWNER HAS to be directly involved day to day until baby is born which is usually 1 to 2 years. Set up controls. 90% of employees will steal if there is no system. Only 10% or so will steal in there is a GOOD control system in place with video and purchasing. You can fire 10% but not 90%. DRUG TEST ALL EMPLOYEES including management
1. Always make sure you put equal weight on front of house and back of house management focus.
2. Do not underestimate how much training you need. In the rush to create some revenue too many folks open the doors the day after construction finishes. Spend the money now it will save you later.
3. Everyone thinks they want to own a restaurant. Choose your partners wisely. They have to bring more than just a financial upside to your business.
1. Lots of people make the mistake of being understaffed. Too often restaurants open with large staff and then cut back. We typically run in unusually high labor costs for the first six months to create a good first impression and ensure a good first experience.
2. Not enough staff training before grand opening. Lot of people just open and train their staff on the job instead of effectively training staff before opening night. There should be time set aside not only for wait staff but also your staff in the kitchen. You want to do 5-10 mock services, like having a family and friends night to simulate an opening. Allocate a portion of your budget for training labor hours to properly train everyone before opening.
3. Marketing ineffectively. New restaurants make the mistake of spending marketing dollars poorly. Instead of spending 3k on traditional means of marketing, that money is better spent giving away some free food. This gets people trying the product that you are selling, while also creating a buzz.
1. Not having extensive experience in all positions and aspects of a restaurant is the most common mistake. Restaurants have the highest failure rate of any business, and this is partly due to a dream coupled with lack of experience.
2. Take what you think it will cost to open and multiply by 2-3. The same goes for how long it will take to open your doors. I have seen restaurant owners scramble to find multiple investors in order to open their doors half way through their build-out. Set your budget high, and stick with it. Avoid too many investors, and always maintain majority control.
3. Work your restaurant, run your restaurant, manage your restaurant. If you are not willing to work the hours, or do not have the experience to truly run your business, it might not be the right move for you.
1. Being undercapitalized. – You need at least 12-18 months of operating capital – to many people open the doors need the business to pay off in 90 days – WILL NOT HAPPEN – that is why 8 out 10 fail – but you say they could never get in the business if they have to have 18 months of operating capital – I say EXACTLY.
2. Not understanding the lease they signed. Mostly, not having an exit strategy.
3. People do not understand the level of commitment necessary. – Think of your new restaurant as a NEW BORN baby that is living and breathing – how much time does a GOOD new mother spend with her new born? How long is it before she will leave it alone? And when she does leave it alone how long does she? And when she does leave it alone – how many times does she call to check on it when she is out? Does she just leave it with anyone – or is it someone that is TRUSTED that has experience? Your restaurant is a living and breathing baby that will grow up just like an infant to a child and child to teenager and teenager to an adult, ALL the same trials and tribulations. Understand you will work 18 months before you even START to think about a day off. Many people don’t understand the difference between owning your own business and working for someone else. It’s like High School and College – In High School you don’t show up someone calls your parents – in College you don’t show up they just fail you and take your money – people have no idea how programmed they are, they are told when to be at work, when their days off are, their sick days, they have vacations, etc.Just because you can cook does not make you a restaurant owner – you have to be a business owner first – you can be a bad cook and still make money if your good with your books, - you can’t be a good cook and an bad in business – you will go broke. If you can’t balance your checkbook – don’t go in business for yourself.Be afraid – not excited – fear motivates.
Attorneys (on buying a restaurant)
1) Allow Enough Time in Your Offer for Due Diligence: When you submit your offer, make sure to include enough time to conduct due diligence. At a minimum, you will want to have the restaurant inspected for zoning and building code issues; meet with the landlord to discuss lease terms; and have an asset (and liquor license if applicable) purchase agreement carefully drafted and executed. Generally, thirty days will give you enough time to accomplish these tasks.
2) Get as many Contingencies As Possible: When you buy a restaurant, you want several “fail safes” to allow you to terminate the deal if certain contingencies are not met. These include (a) entering into an acceptable lease or assignment with the landlord; (b) approval of a liquor license transfer by local and state authorities; and (c) seller providing you with proof that all state taxes and other liabilities have been paid prior to closing. Also make sure that your lease is contingent on your deal closing with the seller.
3) Be Realistic with Your Opening Date: There are dozens of issues that pop up during the development stage when buying a restaurant. Delays in financing and regulatory approvals, along with building code issues and construction delays can prolong opening your restaurant. Give yourself a reasonable timeline for opening and keep it flexible. Make sure you have a financial cushion for added costs of construction, legal expense, and delay in revenue.
1. Paying all in cash: Deferred purchase money, aka, seller financing a portion of the purchase price (provided the buyer gets the right of offset) is a very important protection for buyers to get. There are untold numbers of vendors, taxes, utility bills, etc. that can pop-up after a person buys a restaurant and those can really add up. An offset gives the buyer the right to pay off those creditors and then turn around and deduct all those payments from the money due the seller under the promissory note. If you pay all in cash, the seller takes all your money to Vegas and you never see him/her again.
2. Not hiring an attorney to negotiate the purchase agreement, just relying on “broker agreements”. The only person that brokerage agreements protect are the broker. Brokers should only be drafting and negotiating “Letters of Intent” which are non-binding recitations of the proposed terms of the contract. Lawyers will then take those terms and draft a formal (hopefully thorough) agreement which reasonably protects both buyer and seller. Brokerage contracts normally omit important protections, omit important warranties and representations of the seller, and omit important remedies if the purchase does not proceed as planned.
3. Entering into "management agreements" to manage the location before the formal purchase closing occurs. Usually these agreements are entered into while the buyer is waiting for the formal approval of an ABC license (to sell alcohol). The buyer theoretically can buy the restaurant and just wait for the “formality” of the ABC license issuance. Of course, once the purchase price has been paid to the seller and the buyer takes over, there is very little protection for the buyer if it turns out that the ABC license is not approved or if other problems are discovered with the restaurant which could have been uncovered during a traditional due diligence period.
Mistake Number 1: Buying a restaurant without understanding that it is a lifestyle. That lifestyle includes long hours and missed holidays so your family and significant others have to be as committed as you are to the idea.
Mistake Number 2: Buying a restaurant without relevant industry experience. Buying a restaurant should not be your first “at bat” in the industry. Work in the business -- even if it’s for a short period of time before making the decision to buy.
Mistake Number 3: Buying a restaurant because you’re good at the food. A restaurateur today is required to be great at a lot more than food including marketing, front of the house, and the financials. Ideally a restaurant buyer is good at food and better at understanding what it takes to drive the overall business. You’ll be out of business with good food pretty quickly but with the other skills, you can hire a chef and still have a great business.
1. One of the key mistakes to avoid is to be under capitalized. So many would be restaurant owners jump into the fray with less money behind them than they really need. While you may think you can buy a lease or lease a space that looks like it needs only a face lift", one never knows what's lurking behind the walls. What if the renovation runs longer than you think and you're paying more rent before opening than you planned for? What if you find asbestos behind walls? The lead-time for removal is unpredictable. If you are short funds when you sign the lease, you might never catch up.
2. It goes without saying, that location is critical. Your concept might work best in a certain part of town than others. When balancing the rent issues with location, you need to really understand YOUR customers and where those people spend their time. You need to consider the look of the block in its entirety. If your space is great but the rest of the block is not, you had better be a name that will attract destination diners.
3. The people you hire to build your space and the ones you that will form your operation team need to be seasoned and conversant in how things need to be done in your location. If you bring in operations managers with experience in New Jersey and your space is in Tribeca, you might find out too late that you are trying to squeeze into a size 6 dress with a size 8 body. You better make sure you build a team that truly knows your locale and what it takes for them to do their job.
1. People underestimate time commitment required for running restaurant business.
2. People underestimate required working capital and run out of cash.
3. People think that if they love to cook and entertain guests, they're qualified to run a restaurant. Restaurant is a business first and foremost.
1. Don't get in the restaurant business because you think you are a good cook at home or someone told you you are a good cook.
2. Under financed, need at least 3-6 months operating reserve fund upon opening.
3. Location, location, location.
Mark Chase – President and restaurant real estate specialist.RestaurantRealEstateAdvisors.com
1) Not using a knowledgeable broker and attorney that specializes in commercial leases & restaurants
2) Not securing your financing and money from investors prior to looking for space. (investors back out or delay far too often)
3) Not clearly defining condition of premises and confirming there is enough HVAC, electrical, water, gas and parking for restaurant use.
4) Not negotiating assignment rights properly. Your options should be transferable to buyer and the landlord should not share in profits ( key money). Also, whenever possible, assignor and guarantor should be released from liability upon assignment.
5) If you are buying, reading lease early to make sure options transfer to buyer. If there is a liquor license transfer involved work with expediter, make sure your entity has been formed prior to submitting applications.
6) If you are buying and plan to make significant improvements, check with City to determine if major improvements will be required to meet current building codes.
1. Not having enough capital. This includes capital for buying the business, tenant improvements, and/or working capital after the business opens. Restaurant will not make money right away. Some won’t make money at all. An owner needs to be able to cover the expenses for at least the first 6 months of operation if not longer.
2. Not doing research and underestimating the competition. Just because you think you can cook because you have your grandma’s recipes, that doesn’t mean your food will be well received. Competition is brutal and if you don’t have a concept that has legs, then you are doomed for failure. Best to do your research and then some before opening a restaurant.
3. Building a restaurant from scratch or building a restaurant from the ground up. Taking a raw shell space and doing all new construction for plumbing, electrical, ventilation, takes a considerable amount of capital. It’s also an extremely long process due to permits and the actual construction process. It’s better to find a second generation restaurant (one that has gone out of business and that the restaurant improvements are in place) than to build from scratch.
4. Negotiating an unfavorable lease. This includes everything associated with a lease such as rate, term, options to renew, personal guaranty, etc. Leases always favor the Landlord. Sometimes buyers are in such a hurry to get into the space, that they overlook many extremely important items on a lease and that always comes back to haunt them.
1. Don’t be under-funded. When planning your budget double-triple check your start up costs and your estimated income and expenses. Keep some money in reserve. I like to have at least 2 models for expected cash flow, one of them is called “worst case scenario” this is the absolute minimum you can make and still pay your bills and stay open. Also, you can save some expense purchasing good used equipment and furnishings. Don’t skimp on the quality and freshness of your food.
2. If you’re buying an existing restaurant and it’s successful be sure and get plenty of hands-on training from the current owner, not just on preparing the food but also the books and accounting. Keep some money in reserve.
3. If you’re starting your own restaurant, you’re probably an excellent chef with a great restaurant concept. Don’t forget about the financial end of it. Serve a consistent quality product, have a well-trained staff and keep your eye on the cash flow. This is your dream-Have fun!
From the real estate industry side of things, I can say the following:
1) Don’t buy a restaurant unless you absolutely have to. Take over a second generation restaurant space where a former restaurant went out of business.
2) Unless your food is absolutely better than others (and all chef’s feel their food is better than the next guys, right?), try to locate your restaurant where you can get market share for your type of food. Simply locate where there is demand but no competition. Or, try to get an exclusive use provision in your lease to prevent competitors from cannibalizing your sales.
3) PARKING. Make sure you have MORE than enough parking.