Many restaurant owners, even experienced ones, are hit by unexpected surprises when they open a restaurant. A nasty surprise or three can bring a restaurant to its knees. Here is what you need to know before you dive in.
The Cold, Hard Facts
Owning a restaurant looks great on paper. Food is plentiful and people love to eat out. If you can make a good meal, why not build a restaurant? Well, here are the facts:
- If a restaurant can make it to five years, they have a 90 percent chance of making it to the 10-year mark. However, many restaurant owners burn out before that point.
- 90 percent of independent restaurants fail in their first year.
- 70 percent of the remaining restaurants fail within three to five years.
Not Having Enough Money
Money makes the world go ‘round, especially in the restaurant business. There are the obvious food and drink costs, the utilities, the purchase of equipment and labor costs. There are also other costs associated with running a restaurant: insurance, licenses and certifications. The biggest reason that most restaurants fail is undercapitalization. The new restaurant owner simply had no idea what it took to set up a restaurant, and ran out of working capital before the money started coming in.
If a restaurant is ready to open its doors, the recommended amount of cash is enough to cover six months to a year of rent and utilities, two payroll payments, and enough to buy all the food and drinks over again. The best way to handle this is to start talking with people in the business and see what monetary hurdles and challenges they had to overcome. Their experience might serve as the cautionary tale or give you a roadmap to blasting off to success.
Running a restaurant is an extremely expensive endeavor. While profit margins can be high and may get higher, the failure rate is also high. This makes it difficult for many restaurants to secure funding from a traditional bank unless they are a well-established brand. Most independent restaurateurs use their own money or receive business loans from family members. It can be very helpful to hire a business accountant to take you through five years of operations. This can help you set financial targets to aim for, or tell you when you should abandon ship before the restaurant pulls you under.
Losing Money Through Bad Business Practices
Something that can rob money from your business is, unfortunately, employee theft. Sometimes it’s outright stealing from the till, but most of the time it’s stealing food without permission. The cost of this food must be taken into account if you choose to allow employees to eat a meal. The policies on this practice vary a lot from restaurant to restaurant. Some restaurant owners see free or reduced-cost meals as a price of doing business. Others ban the practice and require employees to bring their own meals. When you hire someone, make sure the policy on eating food on the clock is known so there are no misunderstandings.
Employee injuries can also cost your business a significant amount of money. As the owner, you are liable for someone else’s injury if they are your employee and it happened in your workplace. It’s very easy to get injured in a kitchen. Get worker’s compensation insurance! You may even be required to get it once you have a certain number of employees. Be sure to factor the cost of this insurance into your operating costs. It may seem like an extra burden, until someone gets hurt.
Another thing that can slip you up is inexperience with restaurant cooking. Most successful restaurant owners are former chefs or people who went to school to learn how to become one. A restaurant must know how to minimize food waste and find creative ways to use food before it spoils, while still maintaining costs and pleasing customers. If you’re constantly running out of food, using the wrong suppliers, ordering too much food or not using food before it starts to spoil, then you’ll need to gets some education fast before food costs eat your restaurant.
Finally, there is the dreaded health inspection. Health inspectors have the power to shut down your restaurant and notify the public if it is unsanitary. Few things will make customers flee a restaurant faster than a bad health review or when a rat is seen running around. Furthermore, you never know when an inspector will show up. Your employees must follow all health procedures as required by your local laws and you should hire a competent pest control company. Every day that you’re shut down costs you money, but the real impact of a health inspector shutting your restaurant down is the damage it does to your reputation.
Another unexpected stress is the amount of time it takes to run a restaurant. 16 hour days are common for a new restaurant owner. There are so many things that must be managed until the restaurant is on its feet. Forget about having any social life outside of your restaurant, especially if it starts to become successful.
Many restaurateurs dream of getting out from under their business, but the fact is that many restaurants can fall apart once the owner spends less time around the place. Problems can creep into the service. Unscrupulous employees can plan. A health inspector could come. A restaurant critic could get bad service. You can’t control everything of course, but it takes a lot of trust to turn your restaurant over to others.
When running a restaurant, it’s very difficult to keep all of the plates in the air. That’s why it’s so important to be prepared for what might happen. The more preparation you can put into your business before you open your doors, the higher your chances of success will be. The people who are successful in this business have a passion for food and their customers.
What unexpected stresses did you encounter when running your restaurant? Join the conversation in the Kabbage community below!