Know your market and be realistic about what will sell.
The popularity of Food Network and cooking shows, along with the opportunity to follow a passion as a career, makes opening a restaurant an appealing idea. Federal statistics show that 2 out of every 3 new restaurants close within their first three years. While creating a solid business plan and knowing your market can help the chances that your restaurant will succeed, the venture still proves to be risky.
Loss of Capital and Collateral
Opening a restaurant requires a significant investment. Linda Lipsky, president of Linda Lipsky Restaurant Consultants, recommends new restaurateurs start their business with enough money to cover all components of the restaurant for at least six months. This total includes rent, utilities, equipment, food cost, salaries and benefits. If a restaurant fails to earn back the initial investment, this capital is lost. Jim Laube, the founder of RestaurantOwner.com, explains that if you anticipate doing $1,000,000 a year in sales but only do $600,000, your restaurant will fail. Your capital will be gone, too. If you put up your house, property or another business as collateral for your restaurant and the business fails, you may lose the collateral as well.
Loss of Reputation
You may do everything correctly in planning and running your restaurant, and the business could still fail. Changes in the economy, the success or failure of other businesses in the area, or a change in the public's spending habits and tastes could all affect your business. If your restaurant fails for one of these reasons, your reputation may not be impacted significantly, although you may face a more difficult time securing funding if you wish to start up a new restaurant or business later. However, if your restaurant fails because of issues with management, personnel's treatment of the public, food safety or quality, your reputation as an owner of a restaurant and business may suffer.
Considerations
Before opening a restaurant, consider the financial and time investments needed to succeed in the industry. Calculate your sales-to-investment ratio by dividing the projected annual sales for your restaurant by the projected start-up investment. This will give you an accurate idea of how much you can expect to earn in sales per dollar invested, but only if you create realistic sales and investment projections based on research. Research the number of households per restaurant in the area where you plan to open, and consider how many other restaurants sell a similar product within the surrounding 5 miles. Remember the risks, plan ahead and be realistic if you decide to open a restaurant.
