Entrepreneurs are constantly on the lookout for lucrative ventures to try their hand in, and restaurant opportunities tend to be a popular route. It seems like a safe bet—people will always need to eat, so there will always be business. Unfortunately, this isn’t the case. Restaurants have a staggering failure rate, with over 60 percent of new restaurants failing within the first three years after opening. As the old saying goes, however, with great risk like this comes great reward. If you’re seriously considering an investment in a restaurant business, take these challenges and aspects of the process into consideration before putting your money or time on the line.
Do You Understand the Business?
Have you ever been involved with the successful setup or running of a pre-existing restaurant? Restaurant ventures require much more than a love of food and a desire for profits. If you haven’t dealt with the ins and outs of making a restaurant successful, then ensure the person you’re investing with has. Firsthand experience is vital to restaurant success, and will definitely be a deciding factor between failure and profits. It’s important to work with someone who has a handle on every process a restaurant endeavor entails; from sourcing food vendors to hiring the best chefs and wait staff, you’ll want to only place your money on the shoulders of someone who’s a jack-of-all-trades in this industry.
The Permits Involved
Restaurants come with their fair share of legalities to consider. There’s the question of business licenses and resale permits, employee health permits and building health permits. One of the top concerns that restaurant investors and owners face when beginning their establishment is whether or not alcohol should be on the menu. Alcohol permits are limited, and depending on state and locality, can be almost impossible to secure because of high rates of competition. Some owners choose to use brokerage services like License Locators, Inc. to finagle the license they need, while others simply decide to forgo serving alcohol altogether. While a costly investment, alcohol sales can also be a major profit driver, so it’s worth it to take the time to consider. Some restaurants are also required to secure additional city and fire permits to comply with building and safety codes.
It’s a Costly Endeavor
Restaurants are one of the most expensive ventures, and the list of items and permits you’ll need to shell out for before the restaurant is even open can seem endless. First, there’s the question of a restaurant rental space, which can cost upwards of tens of thousands of dollars per month. There’s securing the aforementioned permits, choosing an insurance company, shelling out for restaurant equipment and furniture, handling food sourcing needs, and marketing issues, and this is truly just the tip of the iceberg. Once startup costs are covered, keep in mind the money involved in maintenance. From customer damages to repairs on broken or fault equipment, utilities each month, and more, money will be consistently flowing, with profits not rearing their head until years down the road.
Take a Look at What Drives Your Target Consumer
Without understanding why guests want to frequent an establishment like the one you choose to invest in, you won’t understand how to best cater to their needs. Will the restaurant cater to customers that are looking for food at a low price? Or will you be appealing to the patrons that are seeking high-quality, five-star rated food? Once you understand why your target customer would choose your establishment over another, you can make decisions that affect your spending processes and help you plan for startup costs. Determining whether your restaurant is volume-driven or rate-driven, you’ll be able to better plan for financial issues that might arise.
If you’re looking to be successful as an entrepreneur, consider these challenges before throwing your money and time into a restaurant investment.