Restaurants fail for a lot of reasons. Poor management. Boring food. Bad timing. The number one reason? Under-capitalization. It’s about the money.
To reach your dream of running a restaurant, you need to stay within your budget while opening a restaurant.
The smallest savings add up to a better bottom line. Here’s a few tips to save you money upfront (and in the years to come), build a more thoughtful financial plan, and make better money decisions.
1 - Spend less, buy used.
Brand new restaurant equipment depreciates in value just like brand new cars: the second you open the box, you’ve lost value. Rather than buy new, capitalize on the opportunities to buy used. A classic Craigslist search can help you find equipment in your area. If you want to buy from a vetted source, there are used restaurant equipment sites like BOE that sell a wide-variety of tools and appliances you’ll need to start a restaurant.
Want to shop by concept (nightclub, pizzeria, cafe, etc.)? Check out Restaurant Business Broker and approach their team with your different equipment needs. Buying used is buying smart.
2 - Plan ahead and negotiate smart.
Another way to spend less is during lease negotiations. Remember, your restaurant will add value to their property. Everything is negotiable.
Before signing a lease…learn what the landlord is willing to cover. The bigger the space, the greater the costs. Electrical service installation, sufficient air conditioning and heating, and air ventilation are expensive. Sometimes, with a little negotiation, landlords agree to pay them or provide a discounted rent for the beginning of a lease to help you mitigate these heavier upfront costs.
During renovations…secure free rent. Most landlords will not charge you for the projected three months of construction and installation. But, if your restaurant doesn’t open in the predicted timeline, ask your landlord for a statement that they will extend the waived rent for a couple of weeks to an additional month if necessary.
For failure and success…ensure you aren’t personally liable for the entire lease period; you should be allowed to transfer or sell the lease in case your restaurant fails (or changes location). Most landlords put in what’s called a “good guy” clause stating you are only responsible for the first two years. However, if your restaurant is a success, you also need a guarantee that there will be an opportunity to extend the lease. You don’t want to be bullied out of the space or into paying a higher price.When it comes to neighbors…don’t pay for their utilities! If you’re sharing the electric or heat with businesses, make sure there’s a way to separate costs so you only pay for the water, gas, and electricity you’re using.
3 - Do research and hire contractors.
Throughout the process of opening a new restaurant, there will be a lot of people involved. Standard practice is to hire one contractor to manage the different tentacles of the project; you pay them the grand total, and they distribute the money across practices: plumbing, electrical, mechanical, carpentry, etc. It’s convenient, but with convenience comes cost. For this reason, you're paying for the luxury of being able to delegate your responsibility.
To save money, hire each of the trades individually then hire a contractor to manage the team. It does require homework, but this way, you know each person’s value-add. Rather than trusting a contractor, you call the references and guarantee they’re the best person for the job. This will ensures the job will be done right the first time and keep your project on timeline.
However, you still have to hire a contractor—a contractor is a value-add not worth compromising for lower costs. They ensure everyone is working within the agreed timeline, help manage payments, and track progress on the project. Without a contractor to manage the day-to-day decisions with your construction, the timeline will drag on, and the costs will pile up.
4 - Eliminate risk, use trusted professionals.
Opening a restaurant is a complex process. It requires a lot of decisions. That’s why, in addition to hiring a contractor, hiring a professional consultant with industry experience is important. They help you make decisions.
Most overspending happens when an entrepreneur makes a short-term fix over a long-term solution. For example, to save money, an entrepreneur might choose to buy a fridge from Costco rather than from a wholesale, industry-specialized supplier. But, due to heavy usage and lower quality, commercial fridges tend to break down, leading unexpected repair or replacement costs.
Additionally, consultants can also help you better predict your margins, allowing you to plan for an achievable break-even point and budget accordingly. For example, one client from The Fifteen Group estimated—with their menu and food costs—a margin of 33% (cost). But, when consultants conducted their own marginal assessment, the results were different, at a 42% (cost).
The restaurant underestimated their food cost and overestimated their profit margin, leading to an overly optimistic prediction. In short? They added the risk of under-capitalization to their restaurant opening. But, with the help of the experienced consultants from The Fifteen Group, they changed their financial plan, increasing 12% to a 30% margin and creating a bigger cushion for their future success.
Consultants are important because not all restaurants are the same. Opening a high-end restaurant is different than a quaint corner diner. Consultants learn your business from the ground up and work with you to create unique solutions for your business’ unique challenges and opportunities. With the right consultant partnership, you'll make better decisions from day 1 through day 100.