You have searched your soul, talked to your family and friends, and read and reread the previous chapter, and you are ready to take that first step into owning a restaurant.
Congratulations—how are you feeling?
You should be feeling excited, anxious to get started, and thrilled that you are following your dream. If not, reread Chapter 1.
If you just can't wait to get started (and have even skimmed through the whole book), you will read this word frequently throughout the chapter: research.
Before you commit to a cuisine, location, and scheduled opening date, you will research, research, and research. Are you prepared? Are you ready to study? Are you willing to make decisions? Let's open your restaurant.
Buy a package of yellow pads or notebooks to write notes. Yes, you can work digitally, but written notes will be needed as well.
You probably have an idea of what you want to feature in your restaurant.
Remember the fantastic recipe that all your friends said is terrific, which is why you're going into the restaurant business.
When I owned and operated my hamburger places, my chili ingredients included cola and cinnamon. People would come for the little mini burgers, but they would lose their minds over the chili because they had never tasted a flavor like that. It was a standout. I added the marketing line that it was a 239-bean chili because if one more bean were added, it would be too farty. Between the flavor and the humorous tag line, my chili was a hit—and that meant profit.
Using chili as an example, you need to build what it takes to make your chili, so break down your recipe. Will you offer a vegan chili? Will it be meat and beans, or meatless? What kind of cheese will you use? Will you shred it yourself or buy it already shredded? What kind of beans will you use? What type of meat? What other ingredients do you need? What spices will you use? You need to break down this one dish into precise details.
Let's talk about fries, which could be a staple of a restaurant featuring chili. They could be French fries, waffle-cut steak fries, skinny fries, shoestring fries, or sweet potato fries. How are you going to salt them—sugar salt or just salt, and what kind of salt? At my restaurants, I tossed the fries directly from the fryer with a seasoning combining sugar, salt, and vinegar powder. Customers would come in and, after trying our fries, would rave about the chili and fries.
What else will you offer on the menu? What about hot dogs, hamburgers, and nachos? You might say that the focus of this restaurant is chili. But the chili was simply a side dish to the burgers. What other items can you offer to make it a complete menu for your concept? Can you use the same ingredients, like the cheese or the meat, in a variety of menu items?
Look at all your recipes and list the ingredients just like you did for the chili and fries. What else could you make with those ingredients? I advise you to minimize the list and see what recipes use the same ingredients. That will keep your costs down and help to ensure that you never run out of inventory.
You need standouts on your menu. While you might offer other dishes, you need one or two items that bring the customers back. For example, Ben's Chili Bowl (benschilibowl.com) in Washington, D.C., brings in presidents and other dignitaries. Check out the menu and see what keeps bringing people back to eat there.
A lesson I learned from the menu developers of a well-known chain is that their menu looks enormous, with many selections. If you break down the menu by ingredients, most of the items use the same ingredients, and it is a very short list. The menu offers dishes that can mix and match everything, and the restaurant offers a big menu to capture and target its audience.
This is the beginning of working on your business using a menu as your tool, but this is not your final menu. You are in the process of compiling data and information, and deciding on the food and drink you want to sell and other menu items that complement your featured items. You're going to change all this later, but you need to start now.
Using the example of steak, let's say you love preparing and cooking meat, and your first choice is opening a steak house. You're finding that it is out of your budget to open the restaurant as a steak house. You don't have to change the menu, just the presentation, such as a fast-casual place serving steak. Another option is subleasing a kitchen in a local pub or bar. The current owners may not want to run the restaurant portion, but they may be required to offer a certain percentage of food to alcohol sold ratio. This is another way to start a restaurant business.
When it comes to alcoholic beverages, will you serve wine; wine and beer; or wine, beer, and spirits? That's going to determine your location, which is then the next step. You will also need a liquor license.
So whether it is a chili place, a steak house, or a restaurant offering burgers, pasta, or plant-based foods, you need to decide on the cuisine and what you want to offer. The key is the menu creation, because if you don't have a menu, you don't have a restaurant.
Determining the menu is the first step because the next question is, what do you need in your restaurant?
You first need to list the equipment—but don't research the cost yet. Just have a list of the equipment required.
On your list, you better have a three-compartment sink and grease trap and grill hood, because without the three-compartment sink, the restaurant won't be issued an important health license. Without a grease trap and hood, you can't fry or grill anything. It is all about options.
A lot of older restaurants don't have a grease trap, and that may be why they are on the market. If you have to put in a grease trap, it will cost thousands of dollars. There are portable grease traps on the market, but in most municipalities, they don't meet compliance.
Those are the first two things to look for in a possible location. You can contact your local health department and find out what other equipment is required to pass an inspection and get your health certificate. Be aware that walls and floors also have to be compliant, especially in the kitchen. More about the health department and compliance will be discussed in the next chapter.
You'll need other equipment such as refrigeration, ovens, freezers, and appliances such as mixers, food processors, and blenders. There are many websites that list restaurant equipment checklists. Type “What equipment do I need to open a restaurant?” in your search tab, and over 150,000 links will appear. You can create your list from these resources.
You can now begin to cost out equipment based on the type of restaurant you want to open. Research eCommerce sites and other sources, and then list just the initial costs for the equipment you must have to open a restaurant. After compiling your detailed list, you can start searching online restaurant equipment auction sites such as RestaurantEquipment.bid and classified sites including Facebook marketplaces and Craigslist as well as the classifieds in the local newspaper. You will eventually find the most cost-effective, used equipment.
We have all heard the saying—location, location, location. This is the very first thing people have told me as an entrepreneur all my life. I don't believe it. If you've got something good, I believe people will travel to you. However, there are still many considerations to research and understand when choosing a location.
Let me explain using three examples.
You are offered a key location in the food court in a busy shopping mall. This is not necessarily a winning location. You are competing with national brands and franchises. If your concept competes with them, you might not be allowed to offer that item under your contract; or worse, you might have to compete with them. You also need to consider that the landscape of malls in America is changing. Gone are the days when people just hung out at a mall and wanted to eat in a fast-casual environment. Malls are being transformed into places offering attractions, museums, and art galleries with a totally different demographic, and they include different casual and high-end restaurants.
Mesquite, Nevada, is 80 miles northeast of Las Vegas, and in the summertime the average temperatures are above 110 degrees with evening temperatures hovering around 80 degrees. A nationally well-known ice cream franchise opened a store there with its franchisees probably expecting a windfall and that they would make more money than they could spend.
However, they didn't do their research.
Mesquite is a snowbird community, meaning many residents leave around April and don't return until September. According to AreaVibes.com, the median age is 55, and only 28% of the population has children under the age of 18. The store, located in a freestanding strip mall, eventually closed.
This is not to say that the residents of Mesquite don't like ice cream. But half the population is gone during the summer months, and there was not enough business to sustain the store during the winter months. However, Mesquite is a gaming town with casinos. There is a small airport outside of Mesquite, but the majority of tourists drive into town, either in their own vehicles or on bus tours. This would have been a time that I would have recommended opening an ice cream shop either in one of the casinos or close to the casinos in a gas station, to capture tourists along with the locals.
Mesquite is 42 miles southwest of St. George, Utah, where there is a very successful restaurant, Hawaiian Poke Bowl. In fact, it is my favorite poke restaurant in the country. It is sold out of poke every day by 2 p.m. and has to close until the next day.
This restaurant became part of the big trend in poke bowl-type restaurants across the country. My friend, actor and comedian Jon Lovitz, was the first person to tell me about this trend. He traveled to various places in the country for different movie roles and saw these restaurants popping up everywhere.
For those of you who have never tried poke, the word poke is Hawaiian for “to slice or cut crosswise into pieces.” Poke or poke bowl is diced raw fish served with rice. The fish used include yellowfin tuna, salmon, and shellfish seasoned with salt, soy sauce, sesame oil, and chili pepper.
But in the middle of the southern Utah desert, a successful poke restaurant is an unexplainable phenomenon. I was introduced to this amazing place by one of my family members, Shelley Fitzsimmons Turner, and Ben Schouten. Consider that an ice cream store in the middle of the desert in a town just southwest of St. George had to close because it couldn't sell ice cream in the summer when it's 110 degrees. The Hawaiian Poke Bowl is in a nondescript strip mall. But the owner, Roberta Gilbert, a Hawaiian native from the island of Oahu who knows her community and demographics, offers the best homemade poke. People driving on Interstate 15 between California and Salt Lake City make it a point to stop there, including people who are not fans of poke but love the Hawaiian Poke Bowl.
This is a phenomenon, not marketing. It is hard enough to find the right place, and many times that includes the luck of the draw. But Roberta offers great recipes and knows what she is doing. This is part of choosing your cuisine and people coming to your location. This is what everyone's trying to re-create, and it's almost impossible.
I am going to focus on researching and obtaining the best location for a brick-and-mortar restaurant. There are the options of ghost kitchens and food trucks, but those come with its own set of challenges.
There will be several commercial realtors that represent different properties. Their names and contact info should be on the leasing signs in front of the shopping centers. Feel free to call them; it doesn't cost you anything. Sit down with them, but be wary of what they're saying, because their objective is to lease the property to you to make a commission. Make sure you tell them what you're looking for, and get options. There may even be places where some of the realtors know the business is about to close or wants to get out of its lease. Realtors know landlords who have restaurant properties they want to lease even though the property might not be listed yet. These are called pocket listings. It is always good to reach out to several realtors to get many options.
When you are meeting with realtors, you need statistics. You can go online or the library and get crucial demographic statistics. These include:
Meet with two or three different realtors, and even go to lunch, since they will probably buy because they want to make the sale or lease the place. Remember, they are not doing you a favor. You are their client now and in their database, whether you use them or not. If you're successful, they will give you a lot of information about the location, area, demographics, and traffic flow. They will also provide you with information outside of what is available on the internet, like a secret of the trade.
You may want to open a new restaurant built from the ground up. As detailed in Chapter 1, if you have $25,000 to over $100,000 to open a restaurant, a third-, fourth-, or fifth-generation restaurant space for lease is more feasible and will save you thousands of dollars if it is the right place for you.
What about parking and accessibility? Years ago I consulted with a restaurant on Tropicana Avenue, north of the airport, in Las Vegas. It was located next to an off-strip hotel in a strip mall, but accessibility was difficult at best. If you drove west on Tropicana Avenue, you could enter the parking lot easily. But Tropicana Avenue in that area has a cement median with no turn lanes into the retail center if traveling east. You would drive east past the restaurant past the next major street, Paradise Road, which is southbound only. You would have to drive to University Center Drive Street to turn north, then drive half a mile to Harmon Avenue, turn north onto Paradise Road, and then drive south on Paradise Road to pick up Tropicana Avenue going west. If you thought that was a lot to read, try explaining those directions to someone over the phone or in a text.
What about valet? There are some places with restaurant space to rent that is only valet and other places that don't offer valet. Is the location safe, especially if people need to park and walk? While people love the proverbial hole in the wall, they want to feel safe and be comfortable during their time there and while parking their car.
What about restrooms? How do you feel about sharing restrooms with other businesses, which is part of the design of malls and other multi-retail centers? If it is a private restroom, is one compliant with the Americans with Disabilities Act? You want to find a location that is ADA compliant with ramps and restrooms, since that is part of the certificate of occupancy. Also, another trend is a diaper-changing station in restrooms as well as gender-neutral restrooms.
These are considerations, and areas you need to research and really get information about before making a decision. For example, the Arts District in Las Vegas has become a thriving culinary community, but parking is limited because of the age and infrastructure of the neighborhood. Since rideshare is very popular with the demographic groups that go to the neighborhood and eat in these restaurants, parking is not an issue. The area is always busy and bustling, whether on a Sunday afternoon or a Wednesday night. Actually, every day of the week, the places are filled with customers, and these restaurateurs made the right decision for what they are offering.
Realtors can help with information about traffic flow and foot traffic. Remember, just because the location is in the middle of an area with thousands of people driving or walking by, that does not mean they're going to stop.
Let's look at a strip mall, well maintained, on a busy street with a beautiful space that was leased as a restaurant. Businesses in the mall include a dry cleaner, a postal store, and other retail outlets. Are they comparative to the clientele you want for your restaurant? Realtors can tell you how many people come to the shopping center and how much foot traffic there is. But the businesses are closed around dinnertime. You see unlimited parking spaces. Let's say 75,000 cars drive by—that doesn't mean they are stopping. If the speed limit is 40 miles per hour, people are not going to stop on impulse. Is this still the right location for you?
Another important factor is what direction the location faces in terms of the sun. If it faces east or west, does the sun shine directly into the restaurant? If it's shining into the restaurant all afternoon, it can become hot and affect customers. Nobody likes the sun in their eyes, so find out that information.
Let's use the example of opening a Filipino restaurant. You find a great location in a shopping center with a seafood market that caters to Filipinos and other Asians. Your intuition tells you that it makes sense to open an international restaurant in a shopping center that has an international market. Still, meet with real estate professionals who represent commercial properties, to find out the statistics.
Something else to consider is that just because there was once a very successful restaurant in the location doesn't mean your restaurant in that same space will be successful.
A perfect example was the updating and rebranding of a successful Mexican restaurant that had been operating as a staple in the community since 1935. A new owner took over the property in 2014 and revamped everything. The owner was connected politically and knew congresspeople, senators, the governor, and others in the political arena. The plan was that it would become the new hot spot for movers and shakers to meet and eat.
It didn't happen.
For every old-school place in the country, duplication doesn't always work today. What made The Rainbow on Sunset in Hollywood, Katz's Deli in New York, and The Pines of Rome in Bethesda, Maryland, special can't be transferred automatically.
One of my favorite Italian restaurants is a place called Amalfi Restaurante in Rockville, Maryland, that is an anomaly in a commercial district. The restaurant itself is on the back end of a warehouse building. There is minimal parking. Customers have to park in front of somebody else's building or on the street. Sometimes customers block each other with stacked parking. But the restaurant offers the most phenomenal white pizza and pasta dishes.
The glasses are the little juice-size cups, and the décor is old maps and fake plants. Still, I learned a lot from the owner, Moe, and his wife, Teresa, who spent hours with me. It is just an unbelievable place. It has warmth, service, and the greatest Italian food ever. I conducted meetings, celebrated birthdays and special occasions, and even brought dates there—and if my date didn't like it, I knew she wasn't the woman for me.
Unfortunately, you can't re-create Amalfi Restaurante. The reason it is so good is that the food is terrific and the service is excellent. You walk in there and feel like you are the most important person in the world.
You have to make your own magic.
One demographic to consider are neighborhoods with residents.
For example, if you want to open a kosher restaurant, you need to find a location close to the Orthodox Jewish community. But if you want to open an Irish or Italian restaurant, people of all ethnicities eat the cuisine. Look at how many people become honorary Irish on St. Patrick's Day and proud of it. If it is a working-class, meat-and-potatoes neighborhood, upscale vegan food might not be what the residents want when they dine out.
My degree is in urban development, but the reality is that statistics will not tell you what's going to be successful. So let's talk about demographics, including potential places surrounded by offices, sports arenas, and convention centers.
I was working on a deal where the principles operated private airports with multiple locations in Florida. They approached me about needing a restaurant in a private airport. Patrons could look across the field and see all the planes flying in and out. My thought was that the concept was fun and the restaurant had a unique view. But then I realized that people who are using a private airport either board their planes and leave, or disembark and go home. As for the community, patrons would have to drive out of their way to an airstrip to have dinner. The destination would have to really ramp up its food and service to be successful.
At the time of publication, a new stadium for the Raiders is being built in Las Vegas. People are approaching me about opening a restaurant with a drive-through close to the stadium. It is not guaranteed to be the moneymaker everyone assumes it would be due to location. Out of 365 days in a year, there will be 18 games, possibly 20; so doing the math, there would be only 20 days to grab customers coming from the stadium. Another point is that this particular stadium is being designed for guests to come by rideshare and public transportation, so that cuts your customer base if you are depending on people driving to and from the stadium.
Convention centers are another demographic. In Sandy, Utah, there's a convention center with a professional soccer stadium and field in close proximity. When I drive past it, I see the restaurants, and usually they are empty. Just because the location is close to a convention center doesn't mean you will have a steady stream of customers. You will really need to calculate how many days a week the restaurant will be busy.
There are restaurants that make their profits off the convention trade. These restaurant owners don't care if they're dead in the off season. They don't reach out to the locals because they make bank with all the conventioneers. But the restaurants have been in business for a very long time and have a customer database of returning conventioneers.
Locations like sports arenas and convention centers present the problem of running out of food on the days with patrons. Personally, I'd rather have a slow and steady business. It's challenging to maintain a thriving business in a location catering to high numbers of patrons for a few days.
I have always calculated that you need to have 3,000 paid customers in your database to keep a business going with any chance for success. Those 3,000 customers need to remain consistent, and with seasonal locations, you can't build loyalty for customers to return. It would be hit or miss instead of building a steady business with a chance to grow.
Do not sign any lease or exclusive contract. Do not get locked into a contract with a realtor looking for a place for you. Again, I am going to repeat it: do not sign any contract or lease.
Right now, you should have a list of five or six places. Take that list and dissect the details such as traffic flow, parking, accessibility, cleanliness, and the community.
If you are opening a pizza place, is it close to an Italian restaurant? Do you cross that location off your list? Just because it's a beautiful place full of restaurant equipment, if one of the busiest Italian restaurants in the city is two doors down, it won't work for you. Or will it? Have you checked their menu?
Beyond all of your research, use your intuitiveness. Your gut is going to tell you whether it's right or wrong. Don't avoid that. Listen to what you're telling yourself. You will find every reason in the world to contradict what your intuition is telling you. Do not do that. Listen to yourself.
When a place is not right, walk away, no matter how awesome the deal is or the place looks.
Don't try to come up with another concept to compete, such as an Italian steak house. Do not change your plan over a location.
Some people get stuck on the location concept of “I have a restaurant concept, and I want the location in a specific area of the city.”
Then do it.
In that case, you don't need this book; you need more money. But sometimes you can find a great restaurant in an expensive place because the landlord or realtor is not able to rent it; it's just sitting there, and the landlords/property managers want to get somebody in the space. Your idea might be what they want, so it doesn't hurt to ask.
Now you need to pick three locations.
You know the whys; you have narrowed down the locations based on demographics, what people are saying, research, and what the health department has advised, because they have excellent insight on locations. Friends, realtors, liquor distributors, vendors, and many other people in the hospitality industry can help with your market insight and location.
For example, there was a fantastic restaurant space in an upscale retail center surrounded by several upper-middle-class and luxury neighborhoods. There was plenty of parking, it was easily accessible, and the building was beautifully designed. When the first restaurant that opened in that space failed, a restaurateur snapped it up and opened a totally unusual place with a different vibe and cuisine. That restaurant also closed in a short period of time. Then a chef found the space, leased it as a third-generation restaurant, and launched his place with a huge grand opening. Within a year, the chef changed the name of the restaurant because the original name was too similar to another restaurant in the community and customers went there instead. He also changed the decor and cuisine. His restaurant closed within a short period of time. Today that space has been transformed into an animal hospital.
Had the restaurateur or chef researched the space, I am certain realtors, liquor distributors, vendors, and people also leasing in the retail center could have given some insight to why the first and second restaurants closed their doors after a relatively short time.
Talk to everyone who can give you input on your top three selections. You have a list of yes, why, and why not. This is where you need to listen to your intuition. Calculate your risk, and say okay; this should not fail because of the information you have analyzed.
Go for it.
You have more research to complete.
Now that you have selected your top three locations, what do you do next?
Check out the competition for your cuisine in the three locations. Do not make the mistake of saying, “There's a hamburger place three doors down, but I am better.” That is the path to failure.
Go into that place and any other place that is competition for you, and eat their food. Look at their prices, the quality of food served, the portion size, the presentation, and the décor. Check out the cars in the parking lot. Get their menus. What do they serve the food on—paper plates and disposable silverware, or china and metal silverware? Observe their customers. What's their service like, and do you feel that they are of service to their customers? Do you feel warm, welcome, and fuzzy when you enter the restaurant? Is this the demographic you want to reach?
Go on Yelp and other social media, look at photos of the food, and print them out. While you can take pictures of your own meal without being creepy, taking photos of everyone's food might raise someone's suspicion.
Create a war room. Buy a roll of tape, get everybody's pictures and menus, and tape everything on the wall. Study them; see what is right and what is wrong, and how you can do it better.
Next, check and print out the reviews, because this will become your handbook to success. You can read what people don't like, and plan to do it differently. This will be a lot of work. But if you take a wall, add your menu, and then track the competition and photos of pasta, fries, burgers, soup, salads, and steaks, you will get a good idea of what you need to do. You should have five or six different photos from the restaurants that are your competition for customers.
The big companies with franchises and chains are successful because they research everything, including the competition. Then they research it again.
Remember when you purchased your first car from a dealership? You did your research and found the perfect make, model, color, and upgrades. You negotiated a fair price, got some extras added at the dealer's cost, and were happy with the price and monthly payments. Then came the paperwork with additional fees such as sales taxes, documentation, registration, extended warranty, and other state fees. You were sitting there ready to take the keys and walk out to your new car, and suddenly your payment increased by $200 if you rolled it into your loan, or you had to pay the additional fees up front.
If you think there are extra costs when buying a car from a dealer, then you are in for a rude awakening or big surprise (depending on how you look at it) when leasing a space for a restaurant.
The first set of extra costs includes utilities, garbage, water, and sewage. With your list now down to three locations, this is when you need to check out those details.
Realtors will quote the rental price broken down by the foot, and then there's the debt, or triple net as they call it. Triple net means you have to pay the bottom-line price. For example, if the quoted rent is $1,200 a month, there is an additional cost of CAM fees (community fees), which includes the cleaning of the building and parking lot and possibly water fees. Sometimes your trash is part of the CAM fees, but you're going to be paying for it. Many times you need to lease your own dumpster and put it behind your restaurant. Fees can add up to 15% more, not including the utilities you are responsible for, such as electricity.
If you can build out the location, landlords will pay for some of the remodel and buildout. I have worked on deals like that, but you can't go overboard. Don't ask for marble floors, but many landlords will help you because they want a successful business operating for any profit sharing or to raise the rent on other places if not freestanding.
I was recently offered a percentage deal. They wanted 20% of the gross, which is a lot of money, but this was in lieu of rent. I needed to look at the average rent percentage of a business. Find a good accountant, because every city's different.
So what is the percentage? When you're looking at the rent, typically it shouldn't exceed 6–10% of your gross sales. For every $100 you make (gross), then $10 is the highest amount to pay toward rent. For every $1,000 you make (gross), $100 is toward rent. So if you are looking at a place that wants $5,000 a month (before other fees and no profit sharing), you need to make $50,000 to justify that cost. Also remember that real estate and labor combined can make up 40%, which means that for every dollar you're making, 40 cents is going to cover labor and the real estate expense.
This is just the beginning of costs. Now let's look at the cost of foods, which you need to plan to keep at 20%. You are doing your research and moving forward to make sure you are doing this correctly. There are membership clubs that sell in bulk, Restaurant Depot, Chefs' Warehouse, Sysco, US Foods, and other broad-line distributors including local distribution companies. They may require you to have a reseller's license and business license. Plan on getting one, but not yet, since you haven't made a full commitment. But you still need to meet with their salespeople, bring your menu, and go through costs.
Remember, these are salespeople. They want your sale. It's not going to cost you to meet with them and get information. Get a day membership for membership clubs to check on prices; and, depending on your location, you may or may not be able to walk into places like Restaurant Depot without your license in hand.
Here's one example of food costs to consider. While making your own fries from potatoes is less expensive, what about the time and labor to required? Compare the two costs.
You now look at your expenses on a worksheet with your starting menu. Set it up as a spreadsheet with ingredients, and list your ingredients down one side of the column. List your vendors across the top, and write down the prices in between. Fill them in so you can see who's got the best prices for what you need. Eventually, you'll have to look into plateware, silverware, and equipment. But begin with food costs. Everything will go on the same spreadsheet.
As for labor costs, restaurants commonly aim to keep that expense between 20 and 30% of the gross revenue. This needs to include worker's comp insurance (required), health insurance (if you are offering that benefit), social security, and other taxes. I would advise talking to someone knowledgeable about human resources requirements in the restaurant business.
Let's talk about investors and investment. When you're planning your restaurant concept, a lot of money is involved. You are reading this book to find out ways to open a restaurant without needing a lot of money.
Many people will recommend that you find an investor or investors (look at the popularity of television shows such as Shark Tank). One huge plus is that you receive a sum of money to open your restaurant. But there are disadvantages, minuses, and warnings when using investor money.
So you have an excellent idea for a restaurant, you need the money to open it, and you found someone who will potentially finance it.
Do not make the mistake of thinking that as long as you own 51%, you are the owner, and you make all the decisions—or worse, if you own an equal percentage as the investors, that all of you will make decisions together. It will never end up working that way, even if, and I mean if, the investor agrees to be passive.
Remember, an investor's decisions may not align with your choices. Let's look at this from a debit and credit standpoint. The investor may make better decisions than you would personally make, for whatever reason. The investor can also make bad decisions. It is imperative, if you include investors, that you both understand what percentage of ownership the investor wants for their funding and what their role will be in the operation of the restaurant. Are they willing to be passive investors, or do they want to take on an active role? Are you ready to have the investor take on an active role?
Here is a perfect example of investors and expectations. Restaurateur Steve Kennedy opened a new restaurant with celebrity chef Wolfgang Puck. Each investor bought a certain amount of points in the restaurant, and each point equals 1% of 100% of that particular restaurant corporation only. A few of the small-percentage investors started to input ideas and dictate terms, and immediately wanted to see all the financials.
I have always been told that the smaller the investment, the larger the complaint rate. So it's the 80/20 rule, meaning 80% of the smaller investors are going to complain more than the 20% with the more significant investments. There is an aggravation factor that could derail you. Be aware of your opportunity cost in terms of time that you are using to simply manage the investors.
When you deal with investors, you need to know the percentage they're going to want for the investment and what the value is. How do you determine the value?
For example, let's say you want to spend $100,000 to open your restaurant. You find an investor to invest $10,000. Do they own 10% of the business? What is their role, whether you determine they own 10% (which is not necessarily the case) or a lesser percentage? While on paper (contract), they might not have the right to demand input for decision-making, this will not stop the investor from contacting you, the owner, and inundating you with questions, concerns, and complaints. Is that $10,000 really necessary to open your restaurant, or can you find another way to cut the budget and maintain the entire ownership without answering to anyone, even if they don't have the legal right to question you?
What about reimbursing investors, and the profit structure? Another question is that if the business fails, do you still owe the money to the investor, depending on the legal setup?
What if you personally know the investors? Many people raise capital, the business doesn't work out, and they find something else. Well, I would feel very guilty if someone I knew invested in one of my companies, and the business failed.
Another consideration is that many times, the landlord of the property being leased wants a percentage of the profits. Suddenly, your 51% is no longer over 50%. What about ongoing expenses? Does the investor agree with your technology or marketing expenses? What about your salary? You need money to live on, and investors may complain that you can “cut back” on your salary and put that money back into the restaurant.
For example, if you have 20 investors who have put their own money into the business, this makes them owners. Even at 1%, they're still an owner. My advice to you if you are considering investors is to talk to both an experienced accountant and an attorney.
I am not an advocate of using investors.
Yes, borrowing money is another option, and you need to be prepared to pay that money back, whether you are successful or not. You need to have a plan. I'm not saying you're going to fail, because that's entirely against everything I believe in, and that is why I have written this book. But things happen.
If you've done all your planning and research, you should be successful. But even if you're not making as much money as you thought, sometimes it's hard to pay back a loan. Keep these things in mind, and do some heavy soul searching. Don't spend your entire inheritance to pay back loans when you can find other ways to open your restaurant.
I know you think you are ready, but you are not. You still need to read Chapter 3 about regulations and compliance. Once you have completed that chapter, then you will select the final location and sign the lease!
My philosophy is that if you are willing to take the time and make an effort, you will have a plan and can open that restaurant with a stake of $25,000 to $100,000. I have outlined some strategies in the previous chapter and will guide you in the upcoming chapters to make that dream a reality.