Opening a Restaurant or Other Food Business Starter Kit

How to Prepare a Restaurant Business Plan & Feasibility Study

Sharon Fullen

Opening a Restaurant or Other Food Business Starter Kit: How to Prepare a Restaurant Business Plan & Feasibility Study

Atlantic Publishing Group, Inc. Copyright © 2005

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SAN Number: 268-1250

All rights reserved. No patent liability is assumed with respect to the use of information contained herein. Although every precaution has been taken in the preparation of this book, the publisher and author assume no responsibility for errors or omissions. No warranty is implied. The information is provided on an “as is” basis.

International Standard Book Number: 0-910627-36-3

Library of Congress Cataloging-in-Publication Data

Fullen, Sharon L.

Opening a restaurant or other food business starter kit : how to prepare a restaurant business plan & feasibility study : with companion cd-rom / by Sharon Fullen.

p. cm.

Includes index.

ISBN 0-910627-36-3 (alk. paper)

1. Restaurant management.

2. New business enterprises--Management.

3. Small business--Management. I. Title.

TX911.3.M27F835 2004

647.95'068--dc22

2004022739

Table of Contents

Introduction

Starting your own restaurant is an exciting adventure. Close your eyes and visualize how the dining room looks, lust for the latest cooking equipment, smell your signature dish and see the faces of happy customers. Now think about writing a business plan for your new restaurant. Jars your eyes open and makes you sweat, doesn’t it? Take a deep breath, help is on the way. Opening a Restaurant or Other Food Business Starter Kit: How to Prepare a Restaurant Business Plan & Feasibility Study was written to give first-time entrepreneurs and seasoned restaurateurs the support and guidance they need to make their dreams a reality.

You’ve taken a big first step by purchasing this book. Perhaps your banker or lender has told you that he MUST have a copy of your business plan or a friend suggested that you write a business plan. At this point, you may not actually know why you should bother. Just like writing a school paper, you probably are approaching this reluctantly. There are businesses that become successful without a business plan—but significantly more fail to plan and then fail to succeed.

There is no magic wand you can wave to speed you through the tough aspects of launching and operating a food service establishment, but with good planning, you can minimize the pain and maximize the benefits. The goal of this book is to help you P.L.A.N.:

Prepare for Success

Learn How to Be Profitable

Act, Not React

Navigate Pitfalls

Your Elevator Pitch

Your elevator pitch, which should take about the length of an elevator ride to deliver, is a brief description that neatly sums up your business concept. It isn’t just a lifeless declaration—“I want to start a Chinese restaurant”; it is a statement that captures the excitement and potential of your idea—“I’m starting a trendy restaurant featuring exquisite dinners from every region of China. I’ve hired a chef from a trendy New York establishment and renowned restaurant designer Barbara Lazaroff is working with us.”

Imagine you were alone in an elevator with billionaire Donald Trump. Here is your chance to pitch your idea to him. Can you capture his attention, sell him on your idea and intrigue his entrepreneurial spirit before you reach the 22nd floor?

Your elevator pitch is also a useful tool that helps you focus on your goals. You’ll find several ways to build upon your elevator pitch throughout the book. Now set aside some quiet time with a pad and paper (or make your notes right on these pages), and start the process of creating your own plan for success.

Table of Contents

Chapter 1: What Is a Business Plan?

As you begin exploring the possibilities of opening a new restaurant or enhancing your current business, many ideas, emotions and dreams are bouncing around in your head. Should you do this or would that be better? So many things to think about, where do you start? The answers are within the entrepreneur’s best guide and decision-making tool—your business plan!

I don’t know too many people who are excited about the prospect of writing their business plan. It requires you to do extensive research, ask many questions, calculate current and future financial pictures and do some real soul searching. Nevertheless, the benefits are worth the effort. Once you get everything down on paper, I’m confident you’ll be glad you invested the time to think through the “good, bad and the ugly” so that you can be prepared to handle a multitude of business situations. If your personal future and business success isn’t worth the time and effort it takes to write your business plan—then perhaps you should rethink whether you are ready to be a restaurant owner.

A business plan is a document where you:

1. Describe your new or existing business.

2. Define your customers’ needs and your ability to meet them.

3. Explore competitor strengths and weaknesses to outperform them.

4. Address possible stumbling blocks to success.

5. Establish yourself and your team as capable businesspeople and food artists.

6. Detail marketing strategies to capture your share of the market.

7. Set benchmarks and goals for launching, developing and profit making.

8. Provide financial projections and returns on investment.

9. Ask for money to support your success.

10. Tell investors and lenders what’s in it for them.

In the following chapters, you’ll learn how to develop a plan that addresses all ten of these purposes.

Still panicked about writing a business plan? Remember that your plan is a collection of information and ideas based upon your knowledge, expertise, background and faith at that time. Your plan isn’t a rigid set of rules to live by, but a powerful living guide. As you move through each stage of your business development, you’ll learn new facts and gain additional experience that may alter your path and goals.

Why Do I Need a Plan?

You need a Business Plan to explore your business ideas, determine their viability and secure money to make your ideas happen. Most people concentrate on the last reason—to get money. Their plan is then written solely to attract outside investors or satisfy lender requirements. If you are writing your plan primarily for them, you are at risk of slanting the truth and overlooking other areas that will benefit you.

How You Can Benefit

Researching and writing your business plan offers multiple benefits for new and experienced restaurant owners. The process of developing the plan helps you solidify your desires and set your professional goals. Writing your plan will:

1. Clarify your vision. Instead of just saying, “I’d like to own a restaurant,” you’ll be creating a Technicolor version of your cozy little Italian deli or your sleek and sophisticated restaurant featuring live jazz.

2. Prove your potential. You’ll prove to yourself and others that your community needs another steakhouse or tearoom. On the other hand, you may even discover that your idea isn’t a viable one. Too much competition, wrong location, inadequate customer base or insufficient customer demand are all reasons to stop and reassess your ideas.

3. Look at obstacles. Every business venture will have obstacles. By looking at potential problems and outlining solutions, you’ll prepare yourself. Not all problem/solution scenarios will make it into your plan, but you’ll uncover many of them as you research your business prospects.

4. Determine your business viability. Are your goals achievable with the people, time and money resources you have available to you? Is the idea too trendy? Will it have sufficient lifespan to repay lenders? Will investors be attracted to the idea?

5. Project your success. Will your restaurant provide you with the personal and financial rewards you are seeking? Can you physically or emotionally deal with the workload? Do you have sufficient experience to make it happen?

6. Secure ample capital. By projecting your cash flow and working capital needs, you’ll have a better understanding of how much money you will have coming through the door every day to pay your vendors, lenders and employees. Before you invest your entire nest egg or borrow more money, you must decide if you’ll have enough money (from every possible source) to keep you afloat until profits roll in. Insufficient capitalization is a primary reason new businesses fail.

Great Risks, Great Rewards

As an entrepreneur, you are the one with the greatest investment and the most at risk. Your financial future, emotional and physical health and reputation are on the line. Sure, investors and lenders have a risk—that’s why they ask for ownership rights or charge interest. A well-researched business plan looks at and analyzes various risk factors. No one likes to think about failing, but truthfully, the success rate for new restaurants is not exceptionally high. The better prepared you are, the more likely you will be one of the successful ones.

Everyone focuses on the process of writing the plan. How do I convince the lender to grant the loan? What if my writing skills aren’t the best? We’ll address these issues in later chapters. Right now, I want you to concentrate on research. Corporations invest millions on research before launching a new sales division or product line. Your diligence in researching your customer demographics, competitors, equipment purchases, menu choices and more is just as important. It is your key to determining whether your dream can be successful.

No Profits, No Reason

Sometimes business owners discover after months of research and number crunching that their idea has insufficient profit potential. As you look at all the variables, create sales and expense reports and set budgets, you must be proving that you will be profitable within a reasonable time. These profit points also must be worth your time and effort. It isn’t just earning money that counts, but is it enough to finance your growth, pay your employees fairly, provide a quality product and have enough to live on?

However, if your plan tells you that your idea isn’t a profit-maker, it will have been time well spent. Saving yourself from potential financial ruin, long-term debt and stress is an invaluable lesson.

Who Should Review Your Business Plan

Your business plan should be reviewed by your accountant and legal counsel (who should have been consulted on specific sections of the plan). Their comments (even outside of their expertise) can be invaluable for catching confusing passages or fine-tuning ideas.

Your banker would be the next person who might assist you. In some smaller communities, businesspeople will have a personal relationship with a local bank. Even if you are not seeking a loan, a business specialist banker has experience in reviewing business plans and can give you feedback.

Other Outside Advisors and Consultants

You may find other people in your community who can provide you with advice, recommendations and a critique of your plan. Your local university or community college may have a business development advisor on staff. SCORE, a volunteer program manned by retired businesspeople, provides no- or low-cost counseling aimed at helping businesspeople succeed. You can find more information on SCORE at www.score.org. You’ll find additional advisory resources throughout the book and in Chapter 14—Resources.

Who Will Use Your Business Plan

Investors (family, friends, outside professionals) will need a full version of your business plan to review its profitability potential. Lenders (bank, credit union, government, family/ friends) will also need a full version to determine your ability to repay loans. Both will be looking at your idea along with your financial projections.

Your insurance agent may want to see sections of your plan to help them determine your business insurance needs such as liability, auto, fire, casualty, theft and life.

Your real estate broker may want to see sections of your plan to help you locate the right property (land or land and building) for your new restaurant. Your architect, builder/contractor may also want to review parts of your plan as they begin designing a new building, planning renovations or specifying remodeling projects. Other designers (landscape, interior, kitchen, lighting, sound) may also benefit from seeing your vision.

Confidentiality/Non-Disclosure Agreements

The information you gather and report in your business plan is confidential. While it may not be top secret, it may be in your best interest to have interested parties sign a non-disclosure agreement before receiving your plan to read. A non-disclosure agreement outlines that the information is proprietary and confidential and not to be shared, copied, distributed or discussed with unauthorized parties. This agreement can be verbal or written. Should a violation of the agreement occur, a written agreement is your best bet. Investors may be hesitant to sign a non-disclosure agreement; however, terms can be negotiated. Your attorney can assist you with an appropriate agreement for your situation and advise you on when to use it.

Please note: Bankers, lenders and venture capitalists are professionals bound to confidentiality. Requiring a non-disclosure agreement (and/or contract clause) may be considered insulting; so be careful when requiring a signed agreement.

What Interested Parties Should Find in Your Plan

Everyone who reads your business plan will be looking for something different based upon his or her needs. The messages within your plan can play an important roll in selling your concept; these are the soul of your business and can affect how people respond to your requests for support. Even bankers, who want to see strong financials, are looking for a gut reaction that tells them you are worth the investment.

Your Family

Your first support group should be your family members. Your spouse and children are your most important allies. Your husband/wife and older children may also be your business partners. Even if this isn’t a family business, it will put additional demands on everyone, require you to be working long hours, distract you from family activities, and create stress. Enlist your extended family in your vision and let them read your plan. You’ll have a network of people interested in your success (however, beware that this may color their opinions and mean you aren’t hearing the truth). In addition, family members are a common source of start-up capital.

Your family should see why your dream is important to you and how they can take an active role in its success.

Your Partners

Whether you have a silent or active partnership arrangement, everyone should share the vision expressed in the plan. You won’t be detailing assigned duties but general responsibilities based upon experience and skills will be outlined. If you have partners, you’ll be writing the plan together. You may co-author each section or only work on specific sections that require your expertise. If partners are assigned sections to research and write, be certain that the writing style and “voice” remain consistent throughout to avoid confusing the reader.

Partner(s) should see a healthy partnership, a mutual respect and their value to the business in your restaurant’s business plan.

Your Lender

Anyone who gives you money in exchange for periodic payments and interest is a lender. Lenders can be a family member or friend, a bank, private organization or a government agency.

• Family members and friends. Borrowing from family members and friends can be an excellent way to finance your business launch or growth. While you may not have a lengthy loan application, you should treat these loans just as seriously as you would a bank loan. Have your attorney draw up an appropriate contract for all parties to sign.

Creating a financial relationship with family and friends can have more than financial risks. Everyone must separate the business arrangement from personal interactions. You should also consider what might happen if you are unable to repay the loan according to its terms or should your business fail. Even if everyone shakes hands and agrees to the lender/borrower terms, people just cannot seem to separate their personal feelings when it comes to doing business with family and friends.

Private lenders should be able to see that they are making a loan that can be repaid. They’ll probably think of it more like an investment in your future.

• Bankers. Your banker may be an advocate for your business. Additional business banking services may also be available to you just for the asking. In the age of ATMs and Web-based banks, many of us have lost touch with the value of a bank professional. However, even major national bank conglomerates often offer business (and even small business) services through a specific department. Regional and state banks often use their individualized business banking services as a way to set themselves apart from the national banks. Shop around for a small-business banker and meet him or her face to face.

This relationship can prove to be invaluable and costs you nothing more than your time. Secured loans use real property (business or personally owned) or other tangible assets as collateral. However, there are other types of collateral such as community economic development, personal goodwill or just your potential for success.

Bankers should see that your business will have ample capital and resources (people and things) for continual operation over several months (and maybe even more than a year) and sufficient profits to pay back your loan on time.

• Private organizations. Depending upon your community’s economic needs, you may qualify for financial support in the way of low-interest loans or grants (essentially a financial gift) through privately funded organizations and associations. These funds are typically used to stimulate economic development in high-risk communities or economic parity for woman and minorities. Check your local business development agency to see if they have a list of private loans and grant programs.

Philanthropic organizations should see that you, your community and your restaurant meet their criteria for economic support. They will consider your ability to repay your loan. If you are applying for a grant, they will look at your potential for success, contribution to the community (creating jobs, paying taxes, rejuvenating neighborhoods) and need.

• Government agencies. Have you ever seen the guy in the loud suit with question marks shouting on TV about the millions to be had from government agencies for whatever purposes you can dream up? The fact is there actually are national, state and county agencies that can provide you with loans and grants.

The federal government, through the Small Business Administration, is a major supporter of small businesses. The SBA doesn’t directly loan you money, as their role is to underwrite small business loans through local banks. You’ll need to meet all SBA loan requirements along with the bank’s.

Publicly funded grants operate similarly to privately funded ones and are targeted at people and communities that need economic stimulus.

Government agencies should see that your business would be capable of repaying loans. Grant applications will be reviewed for their ability to satisfy the grant program’s mission.

Your Investors

Any person or business who gives you money in exchange for a share of ownership is an investor. Investors can be a family member or friend, an angel investor or a venture capitalist.

Investors typically come into play when you are unable to obtain a conventional loan. Where as a lender might be charging 9.5 percent interest and has no stake in your business, investors will want to own a percentage of your restaurant. Ownership equals a greater risk, so this money will cost you more. You’ll not only have a financial relationship, you may also be entering into a partnership. While your investor(s) may not actually help you run your restaurant, they will have expectations and needs that you’ll have to meet.

Investors should see that your business has an excellent profit potential. They’ll be looking at your numbers first. A plan that doesn’t demonstrate an ample return on their investment may not be worth their time. They’ll also want to see that you and your team have the ability to start and operate a successful restaurant.

Your Partners

Your partners may be active participants in your daily operations or silent partners that work behind the scenes in financial and legal issues. Investors owning a share of your business are also like silent partners. Typically, you and your partners would develop your business plan together; however, you may write your plan to help you secure one. Perhaps you are a talented chef looking for a partner with more front-of-the-house experience or you are a great restaurant manager and searching for a partner with outstanding culinary talents.

Your partners should to see that their contributions are valued. Their role in the business should provide them with more than money—it should fulfill their entrepreneurial dreams also.

Your Employees

Key personnel such as head chefs, master bakers and managers not only serve your customers, they also serve you. Their energy, enthusiasm, expertise and input are the foundation of your business. If you have an existing business, involve your staff in the development or update of your business plan. You may not feel comfortable sharing specific aspects of your financial plan; however, involving your staff in researching, developing and writing portions of the plan can be a wise decision. Not only can you tap into their skills and expertise, you also empower them to think creatively and to own the idea. This ownership mentality is invaluable in making your goals and creating a successful restaurant.

Your employees should see how they can make a difference, what your mutual goals are, and how you will actively support them. Your plan can also establish success benchmarks, business guidelines and employee performance standards.

Your Suppliers

As a new business, establishing yourself with vendors can be arduous. Even existing businesses often have failed to develop strong business partnerships with their suppliers only to discover that there is little or no goodwill to trade upon. You may find it advantageous to share sections of your business plan with select vendors. While companies don’t base your established credit line on projections and owner bios, you may find partners who will extend you courtesies and considerations that you hadn’t even considered. Solid companies want to build long-term relationships with trusted customers. Sharing your vision and potential may be a way to start that relationship.

Your suppliers should see the fiscal wisdom of your endeavor and see the payoff (in long-term business with increasing purchase volume). Select vendors may learn how you intend to use equipment/services and how their working with you can prove profitable for everyone.

Table of Contents

Chapter 2: Who Should Write Your Business Plan?