So you love to watch all of those restaurant and cooking shows on cable television–so much so that you’re thinking about opening up your own cozy little bistro in your hometown. But before you do, step back and ask yourself the question: “How much does it cost to open a restaurant?”
In 2005, Ohio State University researcher H.G Parsa discovered that the oft-cited figure of a 90% restaurant failure rate was a complete myth. The actual failure rate for restaurants in the first year is closer to 26%. Nonetheless, one of the main reasons for such failures is a lack of adequate financing.
What is Considered Adequate Financing?
There’s no hard and fast measure of what’s considered adequate financing because various industries are so different. But, as a general rule, it’s good to have your cash flow planned out for at least a couple of years. Adequate financing encompasses your startup costs plus enough extra money to keep you going when business is slow. And, despite how good your mother’s killer tomatillo sauce is, you will have slow days.
Included in your financing should be your own salary. It doesn’t do you any good to open the best restaurant in town and put in endless hours if you’re not getting paid. After all, you have a mortgage and a utility bill too.
What are Typical Restaurant Startup Costs?
Before even beginning to commit to any solid plans, a restaurateur needs to assess startup costs under two scenarios: the franchise and the independent restaurant. If the latter is chosen, startup costs are limited to staff, equipment, supplies, marketing, insurance, and the physical property where the eatery will be located.
If a restaurateur decides to go the franchise route there are additional franchise fees that apply. The good news is that sometimes startup costs are considerably less if a franchisor has a good start formula in place. An especially strong franchisor might also make getting business loans easier.
Just to give you an idea, the franchise fee for an Applebee’s location is $40,000. Popeye’s Louisiana Chicken charges a franchise fee of $30,500 along with a development fee of $12,500. Both charge a 4% royalty for the first two years of operation.
Franchise and development fees aside, new restaurant owners can expect to spend anywhere between $100,000 and $500,000 if starting from scratch. Buying an already existing restaurant obviously saves an awful lot of money.
Are There Any Government Fees Involved?
The question of government fees is one that need not really be asked. Of course there are government fees. No matter what business you’re in, there are always local, county, and state hands held open wide and waiting for their fair share. You’ll need to pay for operating permits, inspections resulting from property upgrades, health department inspections, and anything else the bureaucrats can muster up. It’s a part of doing business.
Be sure to include all of those fees in your initial budget so you’re not caught off guard. A phone call or in-person visit to your local town hall or county clerk’s office should suffice for getting that information. As a side note, don’t cut corners where the government is concerned or it may come back to bite you later on.
How can I Finance a New Restaurant?
The good news is that you don’t need to be scared away by restaurant startup costs and franchise fees. There are plenty of financing vehicles available for new restaurateurs, beginning with the franchisors themselves.
Some franchise operations will assist new operators with supplemental funding to get them going. Others have worked out deals with lenders whereby their franchisees get special consideration based on the good name of the franchisor. Other times, however, the new restaurateur is left to fend for himself.
Those who have to work out their own financing can take a look at local or national banks. There are quite a few banks, like Bank of America, that have dedicated divisions focused on restaurant franchise opportunities. Bank of America’s relationship with Merrill Lynch allows them to target lending specifically to restaurateurs looking for a financial partner with a good deal of experience in the industry.
Are There Government Grants or Other Financing Options Available?
If you’ve ever seen the lanky, wild-eyed pitchman screaming about how much free government money is available to business owners, take some aspirin and forget about it. The federal government does not make grants available to small businesses of any kind except in the rarest of circumstances.
That being said, there are small business loans backed by the SBA (Small Business Administration) and administered by local banks. At the state level it’s possible to find grants available from time to time. But these grants won’t be large, and they will probably be limited to specific groups of people and geographic locations.
Needless to say, opening a restaurant is not a cheap endeavor. Plan on having enough money through your financing package to support your restaurant for at least a year. If you can get enough to cover 18 to 24 months, all the better. By the time your second year comes to an end, you ought to be turning enough profit to keep going.