Having a Business Plan is a must when Opening a Restaurant!

And more advice from Rick Camac, Restauranteur and Consultant. Rick is a proven brand builder and concept creator. Over a career in two industries, technology, and hospitality, he has successfully launched startups and run large regions for billion-dollar organizations. Rick has been involved in opening 12 restaurants in the US and abroad. Rick was a New York City Chapter Board Member of the New York State Restaurant Association. He trained tech and restaurant managers, leading to guest lecturing at the Institute of Culinary Education in NYC before becoming the Dean of Restaurant & Hospitality Management.

The challenge we have in our business is the biggest reason we fail: we don't truly understand the business. It's as simple as that sounds. That's the problem. Everyone will say, okay, undercapitalized. Well, why are you undercapitalized? You're undercapitalized because you didn't understand what you needed in the first place. So you were behind the eight ball when you got started. Typically, you start with no money because you spend more than you thought you would. And then you've been chasing it since day one. You need to know or do four things before opening so you're not behind the eight ball.

First, you need a solid business plan. Second, you need solid projections that include the use of funds.

You should have an executive summary to start. This is a summary that would get the investor interested right off the bat. Because if you do a bad job, they may not go any further. A potential investor may often spend 3 to 7 minutes on your business plan, even though it took several months to write it. So you got to rope them in right there. Likely, they skip down to the 3 to 5-year projections. If they like that, they'll read the rest. And if they don't like one of those two things, they're not going any further. You want the investment opportunity to be one page. What are you getting in return for what you're giving? Marketing analysis has several aspects, including competitive landscape, demographics, psychographics, geographics, and bio. And that would include groups or consultants you might be working with. If you're a newbie, you should have a restaurant accounting firm or a great PR firm working with you. I put in those bios as well. You want to combine a sample menu and a mood board so that people can start picturing what the food will be like and what it will feel like in this space. How am I going to spend the money that I'm bringing in? You want that to be to the dollar? You want a sales projection and how you got there. And then you want a five-year proforma showing the ROI from years 1 to 2, three, four, and five. And that's your business plan.

Third, you need to have a solid and clear operating agreement because there's so much power in that operating agreement. And most people take what they get from whatever state it may be. It's a couple of page document; everyone signs it, and they move on without adding all the wonderful things that someone can do to control how your operating agreement works and who votes on what and how. How do you distribute money? How do you buy and sell units? Who makes those decisions? Can you take out a new lease? How do you dissolve the company? How do you add new members? A lot of people don't understand the power of that document. Therefore, they pay no attention to it until problems come up. They find out they didn't properly address them and are in trouble.

As an operator, you have to get smart about what will happen when the toughest things come to fruition. If I were the operator, I would want to have three voting members. You always want an odd amount of voting members. People need to understand that someone can own 51% of the units in your LLC, which is typical 98% of the time these days. People think that, in an LLC, because someone owns 60% of the company, they can make all the decisions. That's very wrong. That would probably hold true if you don't modify your operating agreement. But if you create manager members, the equivalent of a voting member, that's all that matters. So, theoretically, you can take someone who owns 1% of your business. They could be a voting member. The next voting member is you. And the third voting member could be someone that has 10%. So, you may have 30% or 40% of your operating agreement, but you control everything because that's how you set it up, which is just one example of why it's so important to amend and restate it.

Fourth, the lease is also incredibly important. The challenge with the lease is knowing you can afford it before you take it. And most people don't know how to sort that out. Although it represents a smaller percentage of your other expenses, such as your payroll or your cost of sales, which could, between the two, add up to 65, 60 to 70% of your business, hopefully not 70. Your lease should be only 10%. But the problem is if you don't project right. If you go for a lease that you ultimately can't afford because you didn't project your sales properly, your lease percentage will go from 10% to 20%. Let's say you're off by 50% on your projections. You said you could do $4 million, and you did $2 million. Well, that percentage is static. It doesn't change. Your 10% lease was based upon $4 million in business. Now it's 10% based upon 2 million and 20%. When that 10% goes to 20%, while you can adjust your payroll, you can adjust your cost of sales. You can't adjust your lease. And that's why when Covid hit, so many people went out of business because it's a fixed cost. So 10% all of a sudden turns into a much larger number. You can only afford up to 10% in a lease.