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4 Secrets for Survival With a New Restaurant

April 24, 2015
Small Business
4 Ways to Ensure Your New Restaurant Doesn't Fail
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The myth that it’s nearly impossible for a restaurant to succeed started with a TV ad about 10 years ago, says Greg McNally.

McNally is a former restaurateur who runs Restaurant Profit Technologies, a consulting business in Los Angeles. The infamous ad he remembers had a celebrity chef claiming that 90% of restaurants fail within their first year. And even though no facts backed it up, the statistic stuck.

The restaurant industry has a reputation for frequent failure, but McNally says every industry has a substantial failure rate, and some (like the furniture industry) see businesses fail more often. McNally concedes that many restaurants do shut down in the first year, but the failure rate decreases the longer a restaurant is open. Well-capitalized restaurants typically have a high success rate, he says, since the root cause of most failures is business problems rather than food or service issues.

Christin Fernandez of the National Restaurant Association says that every year, around 60,000 restaurants open and about 50,000 close. While that illustrates churn in the industry, she says, not all of those closures are failures. Sometimes the owner is ready to move on or wants to change locations.

Despite overblown failure rates, the truth is there are common mistakes that contribute to many restaurants shuttering each year. Here are four ways to overcome the most common mistakes McNally sees, with advice from successful restaurateurs who have been there.

1. Don’t start undercapitalized
or underestimate costs

“Most restaurant operators underestimate the capital requirements to get the business started,” McNally says. “It’s a complicated, difficult business, and people get into it not recognizing the complexity and run out of money.” He says operators often don’t realize they need to pay for building permits, government licenses, real estate brokers, architects, engineers, contractors, shipping equipment and even music. Newbies are often astonished to learn the extent of the choices and costs required, McNally says. (He adds that he’s never seen a restaurant come in under budget).

Industry insight

“Neither [my business partner nor I] had owned a restaurant before. We thought we had enough going into it. We knew we’d be working with a very tight budget … but pretty much everything costs almost double what you expect. Permits were a lot more expensive than we thought. Even with friends helping with furniture, it was so much more expensive than planned. Architects ended up doing thousands of dollars of work in trade for mac and cheese. We were planning on keeping a big chunk aside when we opened for operating expenses, but we pretty much had two weeks of operating expenses when we opened, which was really scary.

“Luckily for us, Homeroom was pretty successful right off the bat. If we weren’t busy right from the beginning, we wouldn’t have made it. People should really try to have at least three months of operating expenses saved before you open. When you’re new, vendors won’t take credit from you; they want you to pay right away until you establish history. You need extra money on hand to be able to pay people. We recently opened a to-go location around the block, and we learned a lot from opening the first location. We definitely did things smarter the second time around.”
—Allison Arevalo, co-owner of Homeroom in Oakland, California, since 2011

2. Have a business plan

New restaurateurs often open with the idea they’ll succeed by having better food and service than anyone else, McNally says. But that’s not enough — everyone expects that. You need a strong concept and a business plan, two things he’s seen countless restaurants open without. “A business plan isn’t a recipe for success; it’s a road map,” he says. “And without a road map, you don’t know where you’re going.”

Industry insight

“I think a business plan is as much for yourself as anyone else. People think you need to write one for the banks, but I see a lot of restaurants who don’t even know who they are before they open their doors. They haven’t established that identity, they don’t know what their mission is, what they’re trying to accomplish, who they’re trying to serve or what they’re trying to serve. My first business plan was probably my most thorough. After that, in my second two restaurants, I still put together a business plan, had a financial forecast, and reasons why the location will work. It was for myself. You can write whatever you want to make the bank happy, but ultimately, a business plan is your own road map for how you’ll launch and why.”
Josh Wolkon, owner of Vesta Dipping Grill (since 1997), Steuben’s Food Service (since 2006) and Ace (since 2012) in Denver

3. Recognize the challenge of managing people

“A restaurant is the only business I know of that takes a raw product and manufactures that product, markets the product, delivers the product, cleans it up and collects money from the end user, all in an entire experience,” McNally says. For all these processes, you need people with different skills, experiences and temperaments. “It becomes a team sport, and we need people in different positions to fulfill the role for the success of the team.” The problem? Most restaurant owners are entrepreneurs with strong personalities, and they often struggle to share their vision and passion with others.

Industry insight

“What a lot of people don’t realize is that they get really good at a specific skill set and then they think they’re so good at it, it will overcome all other inadequacies. I see this all the time with chefs: They’re really good cooks and think all they have to do is be awesome, and then everyone will just follow along and do exactly what they say. You have to know where your gaps are and get the right people in place, and not try to do everything. If you’re an emotional leader, it’s important to understand your emotions, since anger and all those things trickle down to the culture of the restaurant. The more you can do work based on facts, what is and isn’t happening, and trying to minimize the emotional charge of the work culture is really important, so people can talk to each other about what needs to get done.

“I think the people who do really well have a big picture of what goes into a restaurant, and understand and have an appreciation for what other people do. Having an understanding of what is reasonable for people to do and accomplish is so important. It’s one of the few occupations where you’re going to be talking to so many people from so many backgrounds. Being able to talk to people on their level and get them behind you is one of the most fun parts of the jobs, but it’s a really important skill set to have.”
— Trevett Hooper, chef and owner of Legume in Pittsburgh since 2007

4. Know what you’re getting into

Experience is key for restaurant success. McNally is often approached by people who want to open a restaurant but have no experience. He likes to ask them, “Why would you like to enter this industry? What makes you believe you would be successful?” Just because someone has been successful in another type of business doesn’t guarantee that those skills or successes will transfer well. Running a restaurant isn’t a job, he says; it’s a lifestyle requiring extreme hours and commitment. McNally has found that a strong management team can help an inexperienced restaurateur succeed, but those going it alone are likely to struggle.

Industry insight

“Mother’s wasn’t an overnight success. I had the idea in 1992, and everything I did for the next eight years was getting ready to open this restaurant. I had the idea while working for Weight Watchers; I knew a lot about cooking and did catering on the side. I knew I was going to get laid off, so I decided to go to cooking school so I knew the way of doing things. I paid my dues. You have to pay your dues and know every job in your restaurant; you can’t open a restaurant or get into the business without knowing how to wait tables, do some work in the kitchen or bartend. I can do any job in the restaurant; if a server doesn’t show up, I can wait tables. If the cook is out, I’m on the line. I’ve heard of restaurateurs who don’t even know what’s on their menu. Be a cook, waitress or bartender first. I did those before opening. Know what you’re getting into.”
— Lisa Schroeder, chef and owner of Mother’s Bistro & Bar in Portland, Oregon, since 2000

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Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+.

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