Money Matters

What to expect when owning a restaurant

Owning a restaurant can be fun and rewarding but you need to plan carefully and work hard to be successful. Here's what you need to know.

With UK restaurants moving towards full reopening, now could be a perfect time to take the plunge and open your own eatery.

Dining reservations may have plummeted in the past year because of coronavirus restrictions but this is changing rapidly as the dining sector recovers and pent-up demand for eating out accelerates.

Before the pandemic, restaurants were enjoying steady growth in a £40bn industry, according to Statista.

Figures from OpenTable, show venues rising 7.7% between 2013 and 2018, and adults were eating out in Great Britain an incredible 2.4 billion times a year.

If the industry can return to these pre-pandemic levels relatively quickly, current low rents and prices of distressed businesses could make this the ideal time to start your dream diner.

Here’s what we cover in this article:

Should I start my own restaurant?

How to prepare for starting a restaurant

Prioritise staff and service

Prepare a financial plan

Financing for restaurants

Other factors in starting a restaurant

This is your time to start your restaurant

Owning a restaurant gives you control over your life and is a creative and rewarding way to make a living.

However, most owners also find it hard work, especially in the first few years.

You may be a great cook at home or an experienced chef, but these are not enough to see your restaurant venture succeed.

You need to understand all the other aspects of successful hospitality businesses, including:

  • Payroll
  • HR
  • Legal
  • Marketing
  • Team management
  • Maintenance
  • IT
  • Systems.

All these require different skills and you need to master them or hire someone to help you.

If you’re in the kitchen too much, you’ll neglect these key aspects and risk neglecting the key drivers of profit.

Attending a restaurant management course before you start should help.

Gather as much information as possible before you start.

Choosing a building and location is an art, with many factors to consider such as aesthetics, socio-economics, passing footfall, proximity to shops and offices, and parking space.

One way to start is to count footfall on the street in potential locations.

See how many people are going into rival restaurants and try to figure out how much they might be spending per head.

Do street surveys. Go up to people walking past and ask questions about, for example, how often they go out to dinner, what they eat and what their budget is.

You could even run online surveys and focus groups, and use third-party research.

In restaurants, service standards are crucial. Without great service, you’ll probably fail, even if your food delights.

Staffing will also probably be your biggest challenge too. Hiring, training, documenting and retaining the team will take most of your time.

Experienced restaurant owner Chris Hayes has regularly appeared in the top 5% of London eateries on Tripadvisor.

“Well-trained staff are essential,” he says. “In other countries, service is much more professional – people make it a living.

“In the UK, many people are just waiting tables to earn money while at university or backpacking from Australia.”

He goes on to highlight the importance of online reviews in today’s market.

Hayes says: “These days, Tripadvisor ratings are important. Being consistently in the top 10% or even 5% in London is all down to staff. Simple things like if there is something wrong with a customer’s food, always ask ‘would you like it again or your money back?'”

In the UK, staff costs have ratcheted up with a series of above-inflation rises in the living wage. Even before coronavirus, that was tough for many restaurants to absorb. But paying staff even more than the living wage is worth the investment.

“In addition, use your discretion to give them incentives, prizes, training courses – anything to make people feel they have more worth,” adds Hayes.

Estimating and monitoring gross margins – Sales minus Cost of Goods Sold – are critical in the restaurant trade.

Once you’ve figured out your expected gross margins, you also need to deduct costs of staff, rents, equipment, licenses and permits, other supplies, utility bills, and decor or renovation.

Research all these likely costs carefully.

Hayes says: “Work out your margins straightaway and keep on top of them weekly.

“Restaurants are high-turnover businesses. It’s no good turning over £1m on the assumption your margin will be 70%, if it’s actually only 50% because your staff are pilfering goods from the kitchen.

“In a high turnover business, even the smallest change in margin makes a huge difference. For example, if you are turning over £1m a year, the difference between 59% and 60% is £10,000 less profit.”

The actual margin to aim for depends on your type of restaurant, location and other factors.

Make sure you have some popular, high-margin dishes on the menu.

“Fish and chips have always been a good earner for us,” says Hayes. “So long as your best sellers are achieving good margins, you can afford to sell fillet steaks, for example, at a lower margin and play around with other dishes.

“Just make sure the blended margin hits your target.

“Meet your chef every Monday morning and ask ‘why is the margin 68% and not 70%’, for example?

“When you get the answer, look at the invoices then factor that into your gross margin calculations to make sure it all adds up.

“It’s difficult to do stock takes for food but nonetheless important. So stock-take every week yourself unless you have a very good, trustworthy manager.”

Upselling is another critical concept.

“Restaurants are all about spend per head so you need to train staff to upsell,” says Hayes. “If your staff are not trained and motivated, they won’t care that people are sitting for a long time with empty beer glasses.”

And how can restaurants avoid waste?

According to Hayes: “If you’re busy, your food turnover is good, everything is fresh – that’s the golden circle.

“But when you’re starting a business, you don’t know whether it will be or not. You might even throw some food away.

“So you need to factor that in with your working capital – say £20,000 in the bank for the loss you might make in the first year, while you figure those things out.”

Make sure you don’t run out of money before you break into profit.

Plan your capital needs and repayment terms carefully. When talking to banks or investors, you will need a good business plan. Show them three forecasts of profit and cash flow – worst case, medium and best case.

Then finance for the worst case.

Banks often refuse to lend to restaurants because they consider them too risky, especially in the current environment. So consider alternative types of credit such as personal loans, peer-to-peer lending or crowdfunding.

Customer expectations can be high in the hospitality sector.

Attention to detail is important, from making sure you don’t run out of ketchup to choosing interesting and charismatic decor.

“People do notice the decor and it entices them in,” says Hayes. “They also notice how clean and well-kept it is, so you need lost of lists to tick off, and carefully organised cleaning and staff rotas.

“That way, when you get to midday and the doors open everything is ready.”

Technology will make your job a lot easier in many ways. For example, point-of-sale (POS) systems can help you monitor key variables – such as sales data, labour costs, order history, customer data and inventory – in real time from your phone.

You can also integrate logbook and scheduling software with your POS.

Rota apps are crucial for organising your staff shifts, and cloud accounting software makes it much easier to measure anything from gross margins to VAT, payroll and even HR.

Even at the best-organised restaurants, things can go wrong. Customers complain, staff get sick, bathrooms flood. You’ll need to roll up your sleeves and tackle all these challenges or pay a good manager good money to do it for you.

Even if you do the latter, a good work-life balance is likely to be elusive in the first year or longer.

But if you are patient, hard-working and willing to learn, starting a restaurant could become the best thing you’ve ever done.

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