Starting a Small Restaurant without Deep Pockets
By: I Sun
Tags: Food, Entrepreneurship, Restaurant, Small Business

Starting a Small Restaurant without Deep Pockets

How I started a successful eatery with no restaurant experience

Why Listen to an Amateur

I’m an engineer at a major defense company. 3 years ago I decided to start a restaurant with my brother-in-law who was also an engineer working at a telecommunications company. I read all the internet how-to guides, listened to webinars and podcasts, attended seminars by the Small Business Administration and Chamber of Commerce.

What did I learn? Not much really, a lot of it just states high level crap (create a business plan, location is everything) or assumes you’re sitting on a ton of cash. If you’ve been to one of those Rich Dad, Poor Dad workshops you know what I’m talking about, you don’t learn anything substantial until you pay for an advanced course. This guide is different, this is the real world from soup to nuts of building up a restaurant when you don’t have the experience or big bank account to back you up. I’m sharing with you things that restaurant consultants would overcharge you for and restaurants who’ve been through the struggle don’t openly share. This is the school of hard knocks.

Need Guts and there is No Glory

There’s absolutely nothing glamorous about opening a restaurant business. Let’s just get that out of the way upfront. It’s dirty, frustrating, takes a lot of hard work, you have to put in the sweat to make it work. Sacrifices have to be made to your family, to your friends, to all the fun things or hobbies you used to do. You’re not going to be out here hanging out your friends eating free food. Your motivation to succeed must be strong, you have to believe in yourself and the end result is you’ll be financially independent but more importantly you will unlock new doors. When you look out into a dining room full of conversation, laughter and clanking of silverware on plates it will all be worth it. If you’re just looking for a buck then invest elsewhere or hire someone to run it that does care.

Starting off I called a friend who’d owned a restaurant in the past. Asked him advice about starting a restaurant and his first question was:

Before we get into it, can I convince you not to do it?

Not exactly motivational but it’s what I needed to hear. Was I really prepared to endure the journey that looks easy to the outsider, with no experience could I truly make it in a vicious industry that chews up and spits out newcomers for breakfast?

The Odds

Get ready for it, there will be people who will tell you that you will fail. Soak it in. You’ve probably heard this stat:

9 out of 10 restaurants fail in the first year

We honestly couldn’t find any backing for this commonly touted intimidating number. We could find more studies pointing to a 25% failure rate so it’s more like:

Correction: 1 out of 4 restaurants will fail in the first year

Now understand this. If you’re a mom and pop shop like us we’re more likely to fail because we don’t have the deep pockets to do all the ideal things like state of the art stuff, mass marketing, stomaching a slow start. But turn that into an advantage, be focused, put your heart into it.

Success is my idol, being broke is my rival -Big Sean

Before you go on from here, you need at least two things:

Someone who can cook. This person is the magic sauce.

Someone who will help take care of everything else. Paperwork, logistics, accounting. This person is an essential complement to the magic sauce.

Set up a simple partnership agreement. We downloaded one off the inter webs because we didn’t have money for a fancy lawyer. Each person needs skin in the game, do a 50/50 if at all possible to keep things simple. Define a role and responsibility split and have an agreed way to resolve disputes. This area needs a whole write up of its own but start with that. We got a free consultation from a lawyer who said they could draft us an agreement at $200/hour. No thanks.

Total Expenses: $0

Do You Have the Product

Well congratulations you made it this no far. Don’t celebrate just yet, it’s time to begin taste testing.

You need an honest opinion so start off by inviting your friends, especially the ones that will be brutally honest. Have your friends invite their friends. Build up a representative menu from apps to entrees to desserts.

You have to get to a point where people can’t stop sampling your food, it has to be addictive. People should be talking it for days, reminiscing about how good it was. Understand though that not everybody will like everything. Figure out your signature dishes, what will separate you from the herd?

After getting a few taste testing parties under your belt it’s time to take it another level. Sign up for a local festival or farmers market as a food vendor, try out your wares on the general public. Better yet, get in touch with local, independent restaurants and do a pop-up. The realest opinions come when people actually have to pay for the food.

You can access for donations during the taste testings to defray the cost but let’s say you spend about $20 per person with 10 people per session and a total of 5 sessions over time.

Total Expenses: $1000

Count Your Bank

If your dreams haven’t been crushed yet now is the time for you and your partner(s) to count your bank. You want to keep your circle as small as possible, too many people results in too many opinions.

Calculate your free cash flows and your net worth. Understand each partners credit history and access to cash because you’re going to need to be able to withdraw, borrow and scrape for money to survive the buildout and opening phase.

Spreadsheets are your friend. We used Google Sheets to start collaborating on listing all our expected startup and operational expenses.

Kitchen: Think through your menu to think of the kitchen equipment needed. Watch The Founder, a movie about McDonalds, simulate a day-in-the-life by taping out an outline of your kitchen to truly understand how the kitchen will be laid out and how much space you will need.

Dining: Get an idea of your theme (sit-down, counter service). How big your dining area is will depend on how much you can afford. Staffing levels will depend on that too so factor that into your spreadsheet formulas. We went with a smaller 1,200 square foot space.

Form an LLC now and register for your Employee Identification Number, you’re going to need this for everything. Start up a business bank account, preferably with one that offers money for opening an account.

Takeaways from this phase:

You know how much money you’re working with.

Use this to figure out a reasonable rent range. You need to be able to get past buildout and have buffer to last at least 6–8 months (assuming you can negotiate some free rent).

Total Expenses: LLC filing -$125 + Business Checking Promotion +$300 = +$175!

Find Your Corner

Location, location, location. Right, it’s the obvious thing to say but all the good locations will come with a premium. You don’t want to get killed by rent because you have to assume that it will take time for your business to catch on and you don’t want to be eating high overhead costs.

Believe me, this isn’t the Field of Dreams.

If you build it they won’t come

Think of it like your mortgage payment, you don’t want it costing more than 25% of your planned monthly revenue.

You’ll want to get a commercial real estate agent, they’re good for scheduling appointments and all that but you still have to do your own homework. Remember they make a commission of the lease so it’s not like they care that much about whether it’s a good fit.

Scout the area, here are a couple keys:

Foot traffic

Visible from the street (or else the traffic count won’t help you)

Easily accessible. Do I have to make a weird u-turn or wait at a long light.

Parking. See how it gets during lunch and dinner on weekdays and weeknights.

Where will your customers come from during lunch?

For the lease, we got a lawyer to review for $300. Didn’t give us much besides a little peace of mind. Couple keys from the lease:

Rent escalation — try to get a delayed arrangement if possible. Instead of 2% per year, 10% after 5 years

Tenant improvement — you’re putting work in, landlord should chip in something

Free rent — get some free months rent for the buildout

Exclusivity — don’t want someone else in the plaza competing with you

Grease trap and A/C — these are essential things that can get expensive, make sure landlord covers it

Before you sign the lease, spend a lot of time scoping the area. After all commercial leases are typically at least 3–5 years so you’ll be here awhile. Get an idea of how many people come through, it’ll help validate your operating cost estimates a little. Remember to have fun with this step. Take time to discuss it with you partner(s) and dream about the future.

Total Expenses: $300

Build It Up

If you really want to do it up nice you need an architect, kitchen designer, interior designer. But we don’t have that luxury.

We weren’t building the next world wonder or a Michelin Star establishment, we just needed a simple space. Call it Japanese minimalist if you want to be fancy.

We drew up our design using Google Sketchup which gave us a scaled representation of what we needed and gave us the ability to do some experimenting with color themes and layouts. Using this we were able to find an architect to draw up our plans at a low cost with little revisions.

Get to know other restauranteurs, they may not all help out but usually most don’t have a problem sharing which general contractor they used. Shop around and get multiple quotes, don’t necessarily go with cheapest but with one that is the most transparent in their pricing. Buildout costs can easily balloon with an unscrupulous contractor.

Kitchen Equipment

At this point you should be pretty comfortable with your starting menu and extrapolated the equipment you need. There’s a lot of savings to be had on used equipment. For sure get used prep tables, pots and pans but be careful on cooling equipment like fridges, freezers and ice machines. We looked on Craigslist, OfferUp and auctions.

Furniture and Decoration

We saved a ton on furniture building a wall bench and tables ourselves. For example we got a quote of $5000 to build a bench for seating along the wall. Cost us $200 from Home Depot to build ourselves.

If you can find the furniture from another closed restaurant definitely a great option too but the DIY gave it more personality and sense of accomplishment.

For wall decor, we found great murals from Wall26.com that were easy to install as well as wood paneling from Wayfair for a modern wood look. If you have artsy friends lean on them for opinions and spend time on Pinterest, so much inspiration and beautiful ideas there.

This will be the most expensive which is why you have to keep a close in everything. Second generation restaurants will save you a lot but those will be in high demand so balance the buildout saving versus the premiums those leases will command.

Total Expenses: Construction and kitchen varies ($40k+), furniture ($1k+), decoration ($1k+)

Market Yourself

From the moment you sign the lease, start up the social media accounts. Instagram, Facebook. Twitter too if you’re so inclined, we use this as a quick way to communicate with our bank and follow local happenings.

You want to start building up your following and building excitement. Post in local Facebook forums and provide updates along your journey, you never know how impactful each connection will be in the future. Can write a novel in this area but you want to start getting a feel of the influencers you identify with as later in during grand opening you may want to partner with something. Some know jack about food and are only in it for money and popularity. Find ones that actually like your food, don’t reward the others (just a personal take).

Follow other restaurants, see how they market themselves. Social media marketing companies will come knocking. We’ve never tried it because they ask for too much but your call.

When close to opening reach out to local newspapers and news stations. Offer free food, don’t be shy about it. It’s more important to build your customer base and awareness so understand that you’re investing in your growth and success. Get some promotional swag (cups, glasses, shirts) and good luck with your grand opening.