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Start Up Capital

Bill Bunker — Sun, 8 Feb 2009 09:29:49 -0500

I think that the need for start up capital goes without saying as before you can ponder the rest of the points in this entry you would certainly need some net worth.

Start up capital is required from the first day that you plan to enter the restaurant business. Starting with a feasibility study and development of a proforma to formation of a business entity, site search, concept design, menu and recipe development, construction, small wares and equipment purchase, cost of staffing, uniforms, site survey and selection, signage, set up of utilities and on and on.

Seldom does the actual cost come anywhere close to the original projection. To do it right my suggestion would be to have around $200,000 to $300,000 for an average restaurant concept, if, you have a location in mind that can be retrofit. If you are building from the ground up, plan on $500,000+. Then working capital for the first year should be your salary needed to live times 2 or 3. If your household needs to bring in $75,000 then your working capital should be $150,000 to $225,000.

Most independents raise that starting capital in several ways:

1) Inheritance or a wealthy relative who lends them the money

2) Personal wealth or accumulated earnings

3) An investor who has a "vision" and belief in the entrepreneur

4) Small Business loans. In this case the entrepreneur typically has a portion of the money necessary.

5) Traditional loans and equity loans on personal property.

The key rule of thumb (which I ignored when I owned restaurants) is to avoid using your own money and personal equity or credit. Always take loans or investments from others who share the excitement of your dream and NEVER tie anything in your personal life to the investment of that restaurant.

Of course, this all depends on the kind of business entity you establish. You should always try to incorporate with as much distance from personal assets as possible.

Franchises are a good way to go into business if you have no experience in the industry and want a cookie cutter concept but if you are innovative and creative you will have little or no flexibility and will be closely governed by the franchisor.

Franchises are also not cheap. You pay a franchise fee up front on every unit you build, you might be forced to build more than one unit and you often need a greater net worth and they tie that to your personal assets as well.

Many people think it will be glamorous to own and operate a restaurant BUT it is far from glamorous and most are at risk of failure the first three years.

They say that a "fool and their money is easily parted". That would be a great analogy for those with a dream of independence and ownership and absolutely no experience in the food industry or with limited working capital.

That being said, the best way in this economy to enter the independent restaurant market is to find an assumable business or one that is marginally profitable as you may be able to pick up a future thriving business for a "song".

This is also a good time for independents and those just starting out, who have some extra working capital, to be scouring the landscape for restaurants closing and the opportunity to pick up small wares and equipment at a fraction of the cost.

I hope that answers your questions, Ken.

One more point on restaurant equipment. The value decreases quickly. It is like driving a car off of the lot after a purchase. All of a sudden that $2500 char grill is worth about $1500. So when shopping for used equipment, bargain with the seller.

What about start-up capital?

Ken Braiterman — Sat, 7 Feb 2009 19:50:22 -0500

You really know the restaurant business inside out, Bill.

But you did not mention the enormous cash outlay an independent must make before he opens: every napkin, pot, table, chair, and kitchen machine. Chains have cash and credit for that. Franchises can help new franchisees get ready and pay back the corporation over time.

It seems to me that advantage would be almost insurmountable for independents. How does anyone lay out all that money with no guarantee anyone will show up? What do you think?

Missed something Michael

Bill Bunker — Tue, 3 Feb 2009 07:34:53 -0500

I was referring to casual and fast casual when it comes to liquor. Fine dining establishments who "offer" but don't "depend" upon liquor are a bit more responsible with alcohol and it helps the cost.

Then again, in this economy, who can afford to dine at a fine dining restaurant today. These places also fill a niche and draw a steady clientèle though. In that case you need that talented chef with ideas and attitude.

Thanks for posting Michael.

RE: Alcohol

Bill Bunker — Sun, 1 Feb 2009 23:18:38 -0500

I for one am not a fan of alcohol in chain or independent restaurants. For an independent, the liability is huge and the clientele you draw is not always the best.

Many independents serve what I call "light liquor" but the pubs, sports bars, etc. do pretty well and often that liquor business keeps their doors open.

It is true that the margin on liquor is much larger than food and it is an add on sale item. Statistics show that the average per person refill rate on alcohol is 2.5 drinks. You make more on a hard drink or beer than on a soft drink, tea or coffee.

With liquor comes liability and server training. One incident of a person being over served and then driving home and killing someone could cost one of these places their license and business. You have to be ever vigilant when you serve liquor.

In my opinion, if a restaurant is making it only because of their liquor sales, then there are problems with that model. In many instances, that is the case and the business model is flawed But again, it is hard to argue with success.............if they are solvent......

Alcohol

Michael Evans — Sun, 1 Feb 2009 19:49:47 -0500

I've always heard that to make any money in the food business you had to serve alcohol. What is your position on that, Bill?

Food For Thought

Bill Bunker — Sun, 1 Feb 2009 12:19:05 -0500

There have been some really good pieces in the Monitor over the past couple of months about restaurants. With the Cat ‘n Fiddle changing hands and the new late night restaurant review series in the Monitor I found it interesting that people posting to the site were “hungry” (no pun intended) for independent dining destinations.