Howard Cannon, author of The Complete Idiot’s Guide to Starting a Restaurant, offers his advice about how to start a restaurant. He shares tips about restaurant financing, choosing a location, creating a restaurant business plan, marketing your restaurant, and more. [25 min.]
Can you talk a little bit about your background and tell me how you got started in the restaurant business?
I started in restaurants as a kid working in restaurants in small towns in Wisconsin, just trying to make a little extra spending money. Then as I went to school and got a little older and started to look at what I wanted to do for a living, ultimately I got into the restaurant business out of the fact that I seemed to enjoy the earlier time when I was a kid, and thought, “You know what, I think I can make some headway into this industry.” I like the instant gratification of serving people and figured I could be successful at it.
All of us have eaten at a restaurant, but give us a behind-the-scenes overview of how the business end of a restaurant works.
Well, everyone thinks of the restaurant business and they think of the particular food and beverage, and a lot of folks come to us and they have a favorite recipe they make, and the next thing you know they want to do a restaurant. But the reality is a restaurant is no different than any other business in the fact that the product you’re selling the customer is one small part of the business. Ultimately, there’s a lot of different pieces, and in fact we always say to folks that want to get in the restaurant business it’s the only industry we know of where marketing, tax, accounting, human resources, production, manufacturing, service and a whole host of other categories all come under one roof. The reality is the industry has a lot of working parts, it takes folks that have the desire to wear a lot of different hats, and then ultimately it comes down to putting the pieces together so that you’re building a concept that the customer can count on a particular set of products and services in exchange for a certain amount of revenue transaction.
How do you decide what kind of restaurant to start?
Well, everybody’s got their own thing. Of course there’s everything from fine dining to fast food, and a variety of different types of service models in between. There’s also a variety of menu options, a variety of cultural items, options, design options. Ultimately we always tell our clients you’ve got to pick something you’re passionate about. If you’re not passionate about pizza, then you probably shouldn’t get into the pizza business. If you’re not passionate about fine dining, then you probably shouldn’t get into the fine dining business. Because there are a lot of days when you’re going to question yourself as an entrepreneur and wonder if there are easier ways to make a living, and those are the days you’ve got to be able to count on the fact that you chose the business you’re in, and it’s something that you love down deep in your gut.
Talk a little bit about the restaurant franchises. What are the advantages and disadvantages of starting a restaurant franchise?
Well, ultimately when you buy a franchise what you’re expecting as the franchisee is a set of systems and tools and support infrastructure, that for the most part you couldn’t get on your own. You’re also expecting a brand and a marketing vehicle that you couldn’t get on your own. What has kind of happened to the industry, however, is there’s a lot of folks selling franchises, but then they’re not supporting their franchisees. So when folks come to us and were to ask us point blank, “Well, am I better off being a franchisee or am I better off developing my own concept?” Our answer is it would depend on what franchise family you’re wanting to go with. If it’s a franchise family that connects the dots very well and systematically provides you with a system of operating procedures and policies, and a system for marketing the business, and those sorts of things, then a franchise community can help immensely. On the other hand, if you have a franschisable concept that you can develop of your own, that is where the real money is at in this industry. Taking an idea, and not only planning the idea to build one restaurant, but planning the idea to build dozens or hundreds of restaurants and license it or franchise it to somebody else. That is where the money’s at, because research and development of a concept is what a lot of folks don’t want to do anymore. They would rather have somebody else do that, and then they would rather pay a franchise fee for that work.
If you have a successful proof of concept restaurant, how much is it going to cost you to franchise that concept?
Well, that’s a loaded question. The reality is, it has such a large range if you’re talking about a McDonald’s, a Taco Bell, a Burger King. The folks that buy those types of franchises are already quite wealthy, versus somebody who’s buying a newer franchise opportunity, somebody that only has a few restaurants, needless to say you can get into that for a franchise fee of 15, 20, 25, or $30,000 dollars depending on the franchise. I think the definition of proof of concept is the critical component. There are tons of franchisors out there now that are selling franchises that don’t have proof of concept yet. They’re selling the franchises before they’ve even built the prototype, which is perfectly fine if you look at what they’re providing you. They’re really not providing you proof of concept. They’re providing you a system, because just because a given restaurant concept works in Denver, Colorado doesn’t mean it will work in Des Moines, Iowa. Just because it works at one address in Denver, Colorado doesn’t mean it will work at another address twenty blocks away in Denver, Colorado. Even though the franchisee wants to believe they’re offering you proof of concept, they’re really not offering you proof of concept. And in fact, the UFOC document, which is what you sign when you buy a franchise, basically says everything you see in our offering is not a guarantee of performance, and in fact it is an at-risk investment, and therefore there is no guarantee that anything will work at the next location. You’re really purchasing a well-thought out system, a menu, a marketing pitch, a color scheme, a design of a building, an infrastructure, how many people you need on a given shift. You’re in essence paying them to be your research and development department, which is, again, perfectly fine, and based on the amount of research we see a lot of restaurant and bar owners want to actually do, it’s not bad for them to pay for outside research and development, because a lot of them don’t want to do the research and development to begin with.
What kind of costs are usually involved in opening a non-chain restaurant?
Again, a loaded question, because you have square footage to determine, cost of real estate, you have the build out, whether it be a free standing location, or an in-line, or inside of a mall. You have the staffing, which could be as few as one employee and as many as 150 on a given shift, and so it’s such a broad range of options, and that’s where, again, you always hear about the failure rate in the restaurant industry and that the failure rate is so high. Well, we don’t experience that high of a failure rate because we are the kings of research and development, and we’re the kings of thinking things through and strategically figuring out the best way to design and operate the business. And each one of those types of restaurants, even though they’re all categorized as restaurants, each one of them has such a separate set of rules that when it comes to financials and design and expense structures, that you’re really not matching apples and apples, and therefore people randomly think, “it’s the restaurant business, how tough can it be, it’s just a bunch of guys wearing paper hats.” And poof, we’re open for business. And they get into it and they realize all of the different working parts, and all of the different industry segments, before you know it, there’s 35 different potential answers to the same question.
What if you’re looking at buying an existing restaurant? How are restaurants typically valued?
Much like any business, they are valued at a multiple of EBITDA, earnings before interest, taxes, depreciation, and amortization. And in the restaurant business, usually the guy selling it wants 5 or 6 times the EBITDA, the guy buying it wants to buy 1.5 to 2.5 times EBITDA, and the transaction usually happens somewhere in between. We have done pretty well with looking at restaurants where guys for one reason or another want to sell them. We buy them for a multiple of the EBITDA, we go in and fix their food costs, go in and fix their labor issues, go in and fix whatever sales-driving issues they’re having, we then go sell it off for a larger multiple of the EBITDA, and of course the EBITDA’s increased. That’s the other place in this industry where I’d say there’s a lot of money to be made is not only in the design and development of a concept and then growing it into a franchise community where you’re the franchisor, but buying and flipping restaurants. There’s a significant amount of money to be made, much like buying and flipping a house. You take a house that’s beat up and needs some tender loving care, and then you do it and you give it what it needs, and you go sell it for significantly more than you bought it for. Same kind of things happen in the restaurant industry.
Along those lines, tell us a little bit about the process of formulating a restaurant business plan.
Well, it’s not a whole lot different than any other business plan out there, except that the widget that you’re selling happens to have a more flexible, what we would call a hard cost. The reality is let’s say you’re selling office supplies, staplers, etc., and that was the business you were in. Well, you know what the stapler is, how much it costs you to make that stapler, and therefor you also know how much it costs you to distribute that stapler, and then you distribute the stapler, and you have the profit that comes from it. In the case of the food and beverage industry, waste is a critical factor to food costs, which also becomes a critical factor to profitability, as does pilferage, as does over-portioning or under-portioning. The stapler has x number of given parts, and you know exactly how many parts there are. In the food and beverage industry, those parts change based on how many pepperonis you put on a pizza versus how many you should. In this industry, part of the same issues that you have, where a person says I want to get in the restaurant business, it’s because they were in a restaurant last night and they think they can do better than the guy that owns it. Well, you have the same issues with, they come in thinking, “Well, if he can do it, I can do it,” and the reality is the food and beverage has a very flexible cost structure, and so you’re projecting what that should be off of what’s in essence called a menu mix. You’re trying to determine what the customer will buy. Again, if you’re in the stapler business, they either buy your staplers or they don’t. In the case of the food business, you might have 35, 40, 45 different menu items or different widgets, if you will, on your menu, but you don’t necessarily know which one they like, so there’s that flexibility factor that goes in there. And that can change literally six, eight, ten percentage points, and when you’re talking margins of the restaurant industry being as tight as they are, that six, eight or ten percentage points is critical. That is the difference between making money and losing money.
How do you go about selecting a site for your restaurant?
Well, of course there’s all kinds of demographics surveys, all kinds of traffic patterns, vehicle counts, foot traffic, etc., depending on the given location. To me, nothing beats good old gut feel, because I can collect all the data I want, and then ultimately somebody’s still got to read the data, and say, “Well, here’s what the data is telling us,” and my gut feel is still telling me this. And nothing seems to beat it. The other thing is a lot of folks and a lot businesses think the best way to build a business is to stay away from your competition. In the restaurant industry, one of the best ways to build a business is stay close to your competition. Too many guys spend too much time looking for a place where there is no fast food, when in reality as consultants that do a lot of site selection, we look for a place where all the fast food restaurants are, and then we build a place right next to them, because we know the customer is saying, “I’m coming to this area of town to eat,” now it’s just a matter about competing with the other guys that are right next to me. I like being in that position, where I’m out competing, versus being out in the middle of an open field where nobody knows you’re out there and I have to out-market them. Out-marketing them is difficult, out-competing them is very easy.
What’s the best way to get money for your restaurant start-up?
Well, of course, SBA loans is a great angle. Even though you’ll hear people say banks never give loans to restaurants, that simply is not the truth. They absolutely give loans to restaurants. And in fact they like restaurants because of the fact that well thought out restaurant business plans with experienced or access to experienced restaurateurs is a cash business, and banks like cash businesses that provide a lot of deposits into their bank. Private equity, there’s plenty of private equity options out there. Vendors a lot of times will invest in restaurant ideas and concepts. Believe it or not, probably one of the best places to get money is from your friends and family and the group of people right around you. Everybody always says, “Well, you know, my friends and family don’t have money.” That’s, for the most part, not the truth. There is access to money within a very short distance of you, whether it be your friends and family or it be their friends and family. And you have to show that you have skin in the game, so even if you have access to only $50,000, what any investor, any bank, any lender is going to say is, “We want to see you put money in the game. If you’re not putting at least the money you have, you don’t have to have a lot, but if you’re not putting at least a portion of the money you have in the game, and at risk, why would we?”
Finding employees. I’ve heard there can be high turnover in the restaurant business? How do you find good employees and keep them?
Well, there’s a bit of a misnomer there. There is high turnover, but there’s high turnover in virtually every industry, in every city in America, and the reason that there is high turnover in every industry, is there’s competition for great employees, and that competition drives people moving to other jobs. But what people don’t seem to realize is there are 12.8 million restaurant employees in this country. There are more employees in the restaurant industry in this country than any other industry workforce other than the federal government. So when you hear high turnover, it’s because there’s high competition. And again, I would rather be in a position where I have a lot of competition around me and I am competing for the best employees, because I will out-compete the big chains every time with personal connection, and with providing the staff a fun, enjoyable place to work where their opinion matters. Much like there are restaurant companies and individual independent restaurants and restaurant chains with literally 250 and 300% turnover, there’s also restaurant companies and individual restaurants as well as restaurant chains with 20% employee annual turnover. You’ve got to look at who’s doing what in the industry and how they’re going about getting it. Ultimately it comes down to he or she who hires the best people and treats them the best, wins. It’s as simple as that.
Restaurant owners have to deal with a large number of food vendors. Any tips for getting the best product at the best price?
Yes, first of all I’m one that I do not like to go with a whole bunch of vendors. I would rather go with fewer vendors but build long term relationships with them. Also, a lot of times you’ll see a restaurant guy think that he’s got to pinch every nickel and every penny, he in essence pinches his vendor so tightly that the vendor then can’t provide a decent product or a service because he’s not getting a decent price. Or the next time another vendor comes and lowers the price by a nickel the guy jumps ship and goes with that other vendor, and then he wonders why good service and good product doesn’t come back his way. What we try to teach people is build a relationship with your vendors. Build a long-term focus that says “I understand you’ve got to make money, and we’ve got to make money. We’ve got to provide good products and services, so therefore you’ve got to provide us good products and services. I don’t necessarily want the cheapest, but I want the best, and I want fair prices for the best, and the next time your competitor comes and offers me something for a nickel less, I’m not going to jump ship. I’m going to let you know he’s offering it for a nickel less, and if you can do it, be honest and fair with me. If you can’t do it, then you can’t do it, and we move forward.” And those who stay with the vendors and focus on the commitment of a long term relationship are always the ones that end up doing the best.
Talk about restaurant marketing. What are some effective techniques?
Again, you’re looking at an industry that has some chains that have literally 20 and 25 and 30,000 locations, and you’re looking at an industry that also has the independent “mom and pop” that has one location. You’re looking at an industry that has restaurants that do 2 and 300,000 a year, and the industry that has a restaurant that averages 14.5 million dollars a year. So you’re looking at such wide varieties, so when you say marketing, everybody’s got a different set of rules that they have to live by. Sure it’s nice to think, “well, I like to pay for print, and I’d like to pay for radio and TV,” but everybody can’t afford to do that. I can say if you’re going to try to get in the marketing game against the national chains out there, they’re going to beat you every time. That’s why I always say I like building next to the national chains, so now the whole community knows I’m there, I’m benefiting off the national chain’s traffic, and I like out-competing them. The reality is, if I was going to get into an independent restaurant and just for the sake of argument, decide I’m going to get in the pizza business, I’m going to go find a national chain, I’m going to go build at a location right next to a national pizza chain, and I’m going to out-compete them.
You talk a lot about out-competing national chains. What are some ways to out-compete a restaurant chain?
Almost always in service. Service really doesn’t have a cost, it has a focus. It has an independent owner of a business whose heart really cares that he serves the customer and he serves the employee. He really cares that the bathrooms are clean, he really cares that the food is done properly, that the customer leaves satisfied. A national chain has no owner that’s sitting there. A lot of times they’re publicly held via the stock exchange. Well, so there’s no entrepreneur that’s sitting there with the situation where he or she has to perform to make the business run, so I like being in the position where I, as an independent owner and an entrepreneur can out-service the national chain. The industry hasn’t changed for fifty years. For fifty years it’s been focused on hospitality, quality, service, cleanliness, and accuracy. Well, I can out-compete the chains on hospitality, quality, service, cleanliness, and accuracy.
Can you recommend some good websites or magazines related to the restaurant industry?
Yes, of course if you go to Google all kinds of stuff will come up. You put in restaurant magazines or restaurant consulting or restaurant business plans and all kinds of stuff will come up. Some of the better ones, needless to say the restaurant associations, the National Restaurant Association has a ton of good information for people. There’s Nation’s Restaurant News which talks about the national restaurant industry which is a magazine that’s highly popular. There’s QSR Magazine which is targeting at fast food restaurants, Quick Service Restaurants, highly popular. You know, there’s such a large industry. You’re looking at, in the United States alone, there are 950,000 restaurants. 17,000 new restaurants open every year on average. And it’s such a large industry, that there is more material out there than, for the most part, people are willing to read, and ultimately if we had to pick a huge cause for folks who get in the industry and then they struggle is they’re not willing to read, they’re not willing to collect the data and learn from industry trends, and they’re not willing to hire people who know this industry like the back of their hand.
What are the biggest mistakes people make when starting a restaurant?
Probably one of the bigger ones is they get into it for the wrong reasons. They get into it because they think their chili recipe is better than the guy’s that they just ate at. Or they get into it because they think they can run a restaurant better than the place that they just ate at last week. And really, much like any business, you’ve got to be in business to make money, and you’ve got to understand that a lot of the right things have to happen for a long, long time for a person to make money. And so we see a lot of the startup mistakes come from the entrepreneur thinking this will be easy. Or they think they see an opening in the market, and they can take advantage of that opportunity without planning through how much it’s going to cost them to do it, how much time it’s going to take to execute on it, and whether or not the customer even wants what they’re offering.
Do you have any parting advice for someone wanting to know how to start a restaurant?
I think probably the best advice I could give pretty much anybody wanting to get into the restaurant industry is to do your research, ask your questions, make sure it’s something that you want to get into. Take plenty of time to put a plan together, really analyze the pieces that you’re putting together. If you’re trying to rush to market, that’s a failure waiting to happen. Take the necessary “pursuit phase,” pursuing a business concept. We don’t really necessarily care if it’s in any industry, but we of course focus on our industry, but take the necessary pursuit phase, which takes time and money, before you jump in with both feet. And the pursuit phase is going to take a few months of hard effort and work, and it’s going to take some capital, and if you’re not willing to spend the time and money to chase the pursuit phase the right way, it is a failure waiting to happen, and we would suggest not to do it.
Howard Cannon is the author of The Complete Idiot’s Guide to Starting a Restaurant, and president of ROI. He can be reached at (800) 300-5764.