June 24, 2003 - Alan is a microsoft whore

Got the following from Parsons the other day... yes, I am one of those delusional ones who wants to open a restaurant!!

Restaurants require complex recipes

Home Office / Jeff Wuorio

Take one entrepreneur. Sift in equal parts of determination and, perhaps, delusion. Marinate in glorious dreams of haute cuisine.

That's a recipe many of us would love to taste. Whether through a love of good food or condemnation of anything less, many of us have hallucinated about running our own restaurant, cheerfully greeting streams of hungry customers, menu and wine list at the ready.

However, whether those dreams eventually blossom into beef bourguignon or plummet toward olive loaf surprise depends on a firm grip on reality. If you've ever thought about opening a restaurant of any sort, make sure you take the following into sober consideration:

High mortality rate. Know this: A lot more restaurants die in the first five years than survive. Izzy Kharasch, president of Hospitality Works, a restaurant and hospitality consulting concern, estimates some 30% of all restaurants close their doors within the first year. By the fifth year, the death toll jumps to 70%.

Why? Lack of money. The cause of restaurant failure is simple but pervasive: inadequate capital. Kharasch points out that few would-be restaurateurs have a reasonably accurate idea of the enormous expense of obtaining property, acquiring equipment and staffing, not to mention underwriting the first few lean months when more passersby ask to use the restroom than ask for drinks and entrees. "Most startups don't have nearly enough money that they would need to stay afloat," he says. "If a lot of these restaurants had enough capital, many more would probably survive."

Know the numbers that dictate capitalization needs. Not surprisingly, lack of comprehensive planning is a central reason for lack of adequate funding. But, aside from all the usual elements that comprise a thorough business plan, it's essential to pinpoint just how many customers it's actually going to take to keep your Cuisinart humming. Break down daily operating costs, then factor out how many diners paying an average bill would offset that expense adequately. "I knew a guy who wanted to start a small restaurant and we determined that he'd need 200 people every day," says Kharasch. "He knew right away he could never attract that many."

Know your market firsthand. Another pitfall is the mistaken assumption that you know what your prospective customers will like. Kharasch urges would-be owners to cruise the neighborhood, talking to people about the sort of food they enjoy and why. Obtain local demographic information about spending habits. Gather up menus from other restaurants to see what's consistently selling. "If there are hamburger joints everywhere, don't just go ahead and open an upscale Japanese restaurant," Kharasch adds. "As often as not, a particular restaurant isn't there because people don't want one."

Know the time commitment. A full-time restaurant without a full-time owner is like tap dancing near a soufflé: sooner or later, things will collapse. Not only do owners of established eateries consistently put in long hours, the demands of a startup — from correcting misprints on a new menu to filling in for a dishwasher gone AWOL — can spell a particularly exhausting work schedule. "You should usually expect to put in at least 12 hours a day. And if you're open six days a week, you're going to work those days, if not more," says Kharasch.

Understand your dependence on your employees. Workers at some companies can fold innocuously into the mix like eggs into cake batter. It's hard to overstate the value of good employees. That close interaction makes attracting and retaining solid employees critical. Be prepared to make compensation and benefits competitive and solicit feedback to keep your staff satisfied. "People often don't appreciate how employee intense the restaurant business is," Kharasch says. "I knew one restaurant which hyped the hiring of a particular chef. After a year, he was unhappy and quit. Now, those owners have a $2 million investment in jeopardy."

Don't expect a golden egg. Granted, there are scores of restaurants that turn a tasty profit. But don't start yours with unrealistic expectations. According to Kharasch, restaurants on average return anywhere from 8% to 10% profit per year, a rather modest margin that reinforces the need for exhaustive planning. "When you're talking about a perishable product and an intense labor market, the profits can be surprisingly minimal," he says.

All of these warnings aren't meant to deter you from pursuing your dream. It's simply meant to tell you that you need to plan carefully, understand your market and know the demographics of your region.