Opening a Restaurant – How Much Should You Pay for Your Rock-n-Roll Lifestyle?

[EDITOR'S NOTE: The full version of this post was originally posted on the Blue Orbit Hospitality Consulting blog, which you can view here.]

So, you think you want to quit your job and open a restaurant…or become a rock star. Those are pretty natural instincts when you’re trying to figure out where your life is going if you’ve made a wrong turn. Possibilities for becoming a rock star are a little easier to contain as talent is somewhat of a prerequisite. Maybe you played a little guitar in college but could never quite bring yourself to sing out loud… but if you have not at least played at your local pub or jumped on stage at an open mic night, well… you can restrict your dream to singing in the car or the shower.

Owning a restaurant, as far as far-fetched dreams go, is a close second. But this one feels doable! You’ve saved a pile of money, maybe $100k to $300k, and can probably borrow another $100k from family or probably even the SBA.?After all, you might make a mean Chicken Cacciatore or BBQ Ribs, and you know you can actually sell them…because they’re better than what you get at that busy restaurant. Your whole house – with the three-car garage – cost you $400k in the early 2000s and renovating that perfect little restaurant spot down the street couldn’t possibly cost any more than half of what you paid for your house. Easy.

But restaurants have high failure rates, so they must be risky right? Stats don’t lie and roughly 1/3 of all restaurants do, indeed close within the first two (2) years of opening. The real tragedies are restaurants that manage to survive for 4 or 5 years before closing because it usually just means the owner has been able to tap into other funds to keep it going, hoping it will someday turn the corner. When the restaurant closes after 4 or 5 years, it has wreaked havoc on the owner’s life as the owner is now 4 or 5 years older, their kids are 4 or 5 years older, they are 4 or 5 years removed from their former jobs (tough to go back), and they have amassed 4 or 5 years more of debt. Quite insidious, actually (I’d rather see restaurants close in year 1 vs year 5… much more humane). Much of what we do is to fix restaurants that are in trouble…or we try our best to. What do we see? Why are there so many restaurants in trouble?

An ounce of prevention is worth a pound of cure. The number 1 reason restaurants fail is because they’re undercapitalized. Dentists cash in their savings, middle managers cash in their 401ks, children of wealthy parents drain their parents’ wallets – all to open restaurants that are poorly planned. Being an owner-operator takes discipline and that discipline starts with recognizing that you need to plan your sources and uses of funds. Most restaurants cannot – or should not – open with a budget less than $650k. I don’t care what the concept is, if you cannot get your hands on at least $650k, you should treat your restaurant dream like your rock-star dream.

Getting the numbers right from the beginning is, in itself, a feasibility study. If you’ve never opened or run a restaurant, then you’ll need help putting together a conservative plan for a concept. You need to know how much it will cost to open (budget) and once it is open, how it will perform. We run into so many restaurateurs who are exhausted and whose restaurants on the verge of collapse because they neglected to understand these two things. They just thought their killer BBQ Rib recipe was enough.

Once you’re open, unless you want another job, you need to hire a competent manager. But hiring a good manager is not enough. That manager is your employee, so you need to become a good boss. You need to know how to run your restaurant like the back of your hand, so you know what systems to hold your manager accountable to. Most owners with managers are newbies at managing managers. They focus on results and not systems. Without sane, organized, and competent owner-led leadership, managers get lost. They write their own systems using memories of their old jobs…but they hadn’t written those systems either, so they struggle. The owner blames the manager. The manager, who may have a family and a mortgage, gets scared and fears being fired…so they do whatever they can to please the owner, but in the end, results don’t come and the owner bangs on the manager until they quit or need to be replaced. This cycle repeats itself for a while – even years – while customers smell something isn’t right.

What’s the problem? Poor planning. What’s the answer? Good planning. Whatever you think it’ll cost you to open a successful restaurant, triple it! Or, instead of guessing, spend a few thousand dollars on the front end to see your journey clearly. Know how much money you need. Know how many employees you need to hire and all of the costs that will hit you as you put it together. And know whether the concept will work and how it will work. Do all of this before you start looking for locations, creating logos, or swinging hammers. And as you approach opening day, get some training on HOW to be an owner. Being an owner is about providing a sane and calm environment for your management team, setting reasonable expectations, inspecting what you expect, and rewarding performance. If you don’t have 1 or 2 years to immerse yourself in a mini restaurant management career, then hire someone who can teach you how to be a manager of managers as you are opening your dream restaurant.

A 4,500 square foot restaurant will cost between $900k and $2M to open. The SBA will only loan money on hard costs (ovens, tables, chairs, etc.) and only 50% to 60% of all of your costs are hard costs. The rest is for things like inventory, training, concept development, graphic design, architecture, etc. You can reasonably expect this restaurant to generate between $2.5M and $3M in sales, with $250k to $350k in profit. And that’s for an operation that doesn’t require the owner to be the operator…just a good boss of their managers. Do it on the cheap or without help and you’re gambling with your livelihood and precious time.

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