I get a lot of my clients that ask me: Why is it that the First Restaurant/Business is the hardest to open? In this blog I will talk about the perception and reality of the obstacles and hurdles new Restaurant/Business owners have to surpass. I will also talk about my own personal experience opening my first restaurant out of 5, Jimmy’z Kitchen located in South Beach/Miami Beach Florida. The reality is that in the eyes of Banks/Lenders and Landlords the Restaurant business is very risky.
First of all is the high failure rate. The Restaurant industry is notorious for a high failure rate. Many new Restaurants struggle to survive beyond their first few years due to intense competition, changing consumer preferences, economic factors, and 1 Million other reasons. The National Restaurant Association* estimates that 30% of new restaurants fail, these are very bad odds for the restaurant entrepreneur.
Banks and lenders often hesitate to approve loans for Restaurant startups for a variety of reasons:
Banks assess the risk of lending to a startup Restaurant business by examining various factors that influence its ability to repay the loan and avoid default. A thorough evaluation of the Restaurant's business plan is conducted to gauge its viability, market positioning, and revenue projections. The experience and expertise of the management team are considered, with a preference for individuals with a proven track record in the restaurant industry.
Many Restaurant owners may lack experience in business management, raising concerns about their ability to navigate challenges effectively. Managing the day-to-day operations of a restaurant involves numerous challenges, from staffing issues to supply chain disruptions. Operational difficulties can impact service quality, leading to customer dissatisfaction and a decline in business.
Financial stability, accurate projections, and a consistent cash flow are crucial elements in the assessment of the business's ability to repay the loan. The availability and quality of collateral, along with personal guarantees from business owners, contribute to the risk assessment. Banks also scrutinize the Restaurant's understanding of its target market, competitive landscape, and the potential for attracting customers based on its location and foot traffic.
Operational efficiency, including strong management practices and effective cost control measures, positively influences the perception of a well-managed and sustainable business. Contingency plans addressing potential challenges and demonstrating preparedness can enhance the bank's confidence in the business's ability to meet loan obligations. The credit history of its owners is considered as a positive credit history reflects financial responsibility. Adherence to regulatory requirements and licensing demonstrates a commitment to legal and operational compliance, reducing the overall risk from the bank's perspective.
In summary, banks evaluate a startup Restaurant business comprehensively, considering its management team, financial health, market positioning, and risk mitigation strategies, with a well-prepared loan application improving the perception of loan repayment ability.
Ultimately, the bank seeks repayment of the loaned amount and aims to generate profit. As a business, banks undertake the risk of lending capital with the expectation of financial return. Their primary goal is to safeguard their investment and ensure a profitable outcome, just like you would with your Restaurant Business.
Landlords often harbor reservations about leasing properties to restaurant startups for several reasons:
Landlords are particularly apprehensive about leasing to Restaurant startups due to the significant financial risks associated with this type of business. One primary concern is the high failure rate within the Restaurant industry. Many new Restaurants struggle to establish themselves, face intense competition, and often close within the first few years of operation. This instability raises doubts about the startup's ability to maintain consistent and timely rental payments.
The financial challenges of running a Restaurant also play a role. Restaurants typically operate on thin profit margins, and startups may face difficulties covering not only their operational costs but also the monthly rent. Landlords worry that a lack of financial cushion or unforeseen economic challenges could lead to missed rent payments or, in extreme cases, the inability to continue the lease.
Moreover, the initial set-up costs for a Restaurant can be substantial. Entrepreneurs often invest heavily in kitchen equipment, decor, and branding, leaving limited resources for lease obligations. If the Restaurant struggles to attract a steady flow of customers, sustaining both business operations and rent payments becomes a formidable challenge.
Landlords typically prefer tenants with a proven financial track record, stable cash flow, and a well-established business plan. The uncertain financial landscape of a restaurant startup, with its potential for cash flow fluctuations and the likelihood of early closures, makes landlords wary of taking on the associated financial risks.
In summary, the financial risks associated with the restaurant industry, including the high failure rate, thin profit margins, and substantial startup costs, contribute significantly to landlords' concerns about leasing to restaurant startups. The uncertainty surrounding a startup's ability to meet its financial obligations, particularly rent payments, makes landlords more inclined to seek tenants with a more established and financially secure profile
When I opened my first Restaurant it was much harder than opening the other 4 more restaurants that I opened after that. It took lots of money saving (because banks would not lend for a startup), convincing multiple Landlords on their approval, financial planning, concept development, menu testing, plus 1 MILLION and 1 more things.
When I decided that I wanted to open my Restaurant I brought over 22+ years of experience in the Restaurant Food & Beverage Industry and held a degree in Culinary Arts from one of the most prestigious Culinary Schools in the Nation, Johnson & Wales University. Throughout all those years of experience. I learned how to Manage the Front of the House and Back of the House of multiple different concepts ranging from 5 Star Rated Hotels to Fine Dinning to High Volume Restaurants and Prime Steakhouses. My dream as a Chef was to open my own restaurant so I could be my own boss.
Even with all this wealth of experience, opening My First Restaurant was by far the Most Difficult One. Banks would not approve my loan and Landlords would not even talk to me. In their eyes they perceived that it was too risky for them to lend me money or lease me a space for my Restaurant Business.
At the end, I had to personally fund my Restaurant, it took TONS of sacrifice and time for me to raise these funds. With the Landlord, I got lucky with a space in South Beach Miami that I had my eye on for a while. The space was a failing Pizzeria that I knew was going to go under because of the obvious lack of business it had. The same day it closed I called the Landlord and asked him if he would give me the opportunity to present my Restaurant concept to him for his consideration and review. After much convincing and multiple meetings, the Landlord approved my concept and gave me the opportunity to sign a lease. I can attest that prior to gaining approval from this landlord, I encountered refusal from over 10 different Landlords. This was the beginning of my Restaurant concept Jimmy’z Kitchen which I opened a total of five (5) locations including South Beach, Wynwood Arts District, Brickell, Pinecrest, Miami FL and Atlanta GA.
Recommendations for New Restaurant Entrepreneurs:
· Understand all aspects of the Restaurant business, both Front and Back of the House.
· Understand PROFITABILITY and grasp the financial intricacies of the Restaurant business, it is a business after all.
· Have the majority of capital on hand, rather than relying on banks.
· Develop a SOLID and Fully Executed Business Plan.
· Create a SPECTACULAR Marketing Deck.
· Collaborate with a Commercial Real Estate Agent well-versed in the Restaurant business.
Opening the first Restaurant business is undeniably the most challenging for aspiring entrepreneurs. Seeking professional guidance from a commercial real estate agent, attorney, and accountant is crucial. Thoroughly studying your concept, financials, operating procedures, legal responsibilities, and various other details will help you navigate the complexities of launching your inaugural Restaurant successfully.
Jimmy Carey Commercial Real Estate specializes in providing crucial support to Restaurant entrepreneurs navigating the intricacies of opening their businesses. With a keen understanding of the unique challenges within the Restaurant industry, Jimmy Carey Commercial Real Estate and Atlanta Restaurant Sales offers expert guidance on securing Restaurant-specific real estate, understanding financial requirements, and business strategies.
Leveraging extensive market knowledge, the team assists in selecting strategic locations and employs strong negotiation skills to secure favorable lease terms, considering the financial stability of clients and addressing landlords' concerns. Throughout the entire process, from conceptualization to securing a suitable property, Jimmy Carey Commercial Real Estate serves as a trusted partner, offering industry-specific insights and connections to facilitate a successful Restaurant launch.
For a FREE Consultation contact us at 678-406-8478 or firstname.lastname@example.org