Advice on Starting a Restaurant

The failure rate for restaurants is extremely high. A third go out of business in less than a year, and by year five that dismal figure swells to above 70 percent. To find out which key ingredients make for crowded tables and convivial conversation, Right On The Money asked a restaurant consultant and experienced restaurateurs for the key ingredients to a successful eatery:

Nail down your financing. Like any other business, a restaurant is capitalized with equity, debt or some combination of the two.

Are you going to keep financial control, but take on the obligation of a monthly debt payment? Or do you want investors who share in your profits, if you have any, and your losses if you don't?

"The trouble with investors, unless you plan to buy them out in some way, they're there forever and that could be painful," says Izzy Kharasch, president of Chicago-based Hospitality Works Inc.

A debt commitment only lasts the life of a loan. But it's tough to borrow from a bank to open any business, let alone a restaurant. That's why many entrepreneurs prefer loans backed by the U.S. Small Business Administration.

You'll need more money than you think. Izzy points to under-capitalization as a top reason why restaurants fail.
"If they think they need a certain number of dollars, they're probably off by a half of that again," he says.
Have a cash reserve. Veteran restaurant owners need to add 10 to 15 percent to their operating capital above their total investment, while novices need 20 percent, according to Izzy.

"It's hard to get open and run for a month or two months and not have enough money for payroll and then find out, 'I have to go back to the bank and ask them for some more money,'" Izzy says.

But Ludger and Julie Szmania, owners of the Seattle restaurant Szmania's, are more conservative, recommending 30 to 40 percent for new restaurateurs. "You might not do exactly the amount of business you were thinking of," Ludger says. "You might find that lunch is not going to be as good as you thought or not as profitable as you thought."

A restaurant concept takes time. Hammer out the details from appetizer to check. Izzy asks his clients to put their restaurant concept in writing, detail by detail. "When they do that, they find a lot of holes in the way that they were thinking before and start to really complete that piece of the puzzle of the service and the food," he says.

Factor in staff training. Set aside money for staff training: 40 hours for service staff and 80 hours for kitchen staff, Izzy says. "That means you have this big payroll with no income for maybe a month -- and that's the difference between a successful restaurant and one that fails," he says.

Get insurance. A fire, a flood, an equipment break down, employee injuries and alcohol-related incidents: Accidents happen in the restaurant business. That's why Izzy recommends insurance, and you can contact your local chapter of the National Restaurant Association for tips on what kind to get and where to get it.

Promotion never ends. After the first few months of initial interest from customers, owners will have to constantly put the word out, Izzy says. That's where quality matters. "It's still got to be, you know, great food and great service," says Izzy, a former chef. If you can do those two things, you'll get customers to come back, he says.

Expect ups and downs in the beginning. It took a couple of years for Julie and Ludger to be comfortable with predicting the seasonality of their business. Julie's advice? Slow down, step back and don't try to be everything to everyone.

If you plan on having time for anything but work, guess again. No more baby showers, weddings and holiday parties: When they opened their restaurant, Julie and Ludger threw a party to say good-bye to their friends and old way of life.

But there is a pay off to running a successful restaurant. "We lost some friends, but we also made a lot of new friends," Ludger says. "It's amazing, when I go someplace and people do recognize the name or they recognize me as a person, it makes me feel very good."