Opening a Restaurant? Ask Yourself These Important Questions First!

July 7, 2017

Opening a new restaurant can be an exciting business venture. However, with it can come a great deal of stress and a high risk of failure. To avoid the clichéd trap of restaurants failing within several years, prospective restaurant owners should develop a thorough business plan and ask themselves these important questions:

  1. What is your restaurant’s concept?

Consider what type of food or beverage items your restaurant will serve to customers. What is the demographic of your target market? What type of atmosphere will you create for customers?

  1. How are you going to legally structure your restaurant?

As the owner, you must decide the right entity structure for your restaurant based upon a variety of factors. Will your restaurant be legally organized as a Limited Liability Company (LLC), S-Corporation, or C-Corporation? Before making the decision, you will need to consider the number of co-owners you will have, whether the restaurant be funded through debt or private equity, how you plan to compensate yourself, how you will pay your partners or outside investors, and what would make the most sense for you from a tax perspective. Consulting with an experienced accounting advisor can help you make the right choice.

  1. Are you going to be the sole owner or will there be other partners?

If you are going to have co-owners, there are certain considerations that should be made when drafting the initial operating or shareholder agreement. What role will each owner have in the restaurant? How will the profits be divided? How will everyone be compensated for their services? What will happen in the event one owner chooses to sell their share of the restaurant?

  1. Where will the restaurant be located?

It’s the running joke of business: location, location, location! As corny as it may sound, there’s a reason it’s such a common refrain. Location is vital. Your restaurant should be in a space where it can generate a high volume of traffic from your target market.

  1. How much will it cost to open the restaurant?

You need to estimate how much it will cost to furnish the new restaurant, obtain a liquor license, and buy the initial set of china, linens, silverware, etc. There should also be enough working capital set aside to cover business expenses for the first few months should the restaurant’s traffic be initially slow.

  1. What will the bank need from you should you fund the restaurant through lender financing?

Banks and other financiers need to know that the restaurant will have enough cash flow from daily operations to repay any loans you are seeking. Most investors will want to see a strategic business plan for the restaurant to ease any concerns that they may have. It’s not uncommon for the bank to request the restaurant owner, especially for a start-up restaurant, to personally guarantee the debt so they can have an alternative should the restaurant be unable to repay the loan.

  1. How will you market your restaurant?

Even before its official grand opening, it is important for your restaurant to start marketing to the community. Create a variety of marketing tools, including a website, social media, promotional events, coupons, and restaurant specials, to start generating buzz.

  1. How will you manage your restaurant’s food costs?

A restaurant’s food, or “prime costs,” is the highest and most variable expenditure that it will incur each year. Food costs need to be properly managed to ensure that food made to order is not over-portioned, sitting too long on the shelf, thrown away, or stolen.

  1. How should tips received by servers be handled at full service restaurants?

The treatment of employee tips has been a problematic area in the restaurant industry for years. It is imperative that tips are handled correctly or your restaurant could face expensive consequences. Tips received by servers must be reported as W-2 compensation. The restaurant is obligated to withhold Social Security and Medicare tax from future compensation and match the FICA withholding.

  1. Who will oversee the restaurant’s daily operations?

As a restaurant owner, you will have many responsibilities that will constantly keep you busy. You should consider hiring a manager to supervise the restaurant’s daily operations, such as ensuring the restaurant is selling its menu items and there is an appropriate number of staff assigned each shift.

  1. How will your restaurant comply with the Affordable Care Act?

Business owners with 50 or more full-time equivalent employees must provide health insurance to employees that work an average of 30 or more hours per week. All insurance offered must provide “minimum value coverage,” meaning the employer’s insurance plan must pay out at least 60% of the employee’s incurred medical charges. Businesses that do not offer health insurance to full time employees could face penalties up to $2,000 per employee. Not offering “minimum value coverage” insurance could cost the business fines of $3,000 per employee. As a restaurant owner, you must plan ahead for how you are going to comply with the mandates of the Affordable Care Act.

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