Key Success Factors of Buying and Operating a Restaurant Business
Buying an existing restaurant business has many advantages over trying to start a business from scratch – assuming it was priced right. Even so, new restaurateurs will have to learn how to optimize every aspect of the business to thrive in this highly competitive and dynamic industry.
Consumers’ spending habits have grown more cautious, their dietary preferences have become more specific, and their expectations of food quality have grown more discerning. Now more than ever, restaurant owners must implement savvy business practices and pay attention to the latest trends if they want to be successful.
First Things First: Minimize Risk When Buying a Going-Concern
Buying an existing, operational restaurant gives you the advantage of an existing customer base, knowledgeable personnel, operating procedures, and brand identity. Minimize the risk whenever possible. Here are a few tips to keep in mind from the start.
Restaurant broker Steve Zimmerman offers these steps to restaurant operators taking over an existing restaurant:
Don’t make any major changes right away. Wait until after you’ve been operating the restaurant for a few months, and you’ve had time to learn all the details. Remember, you already have a loyal customer base, and you wouldn’t want to make any changes that would negatively impact business before you get your bearings.
Retain all existing personnel. After you have the restaurant up and running and you’ve had a chance to get to know everyone, you can start weeding out any undesirable employees. Proceed cautiously, as some of these employees are familiar to customers; they have built relationships and largely responsible for attracting business.
Budget for any compulsory remodeling. If you purchased a franchise, be aware that periodic remodeling may be required every 5-7 years or so. This is necessary for brand image and uniformity.
Stick with the same vendors. Your best bet is to continue using the previous owner’s established vendors and not risk making any changes. Your best bet is to wait until the business has been in operation at least thirty days.
Keep existing insurance in place. Assuming the previous owner had minimal insurance claims and a good history, it is usually beneficial to keep the existing liability and workman’s compensation insurance in place.
(If you're still looking for the right restaurant, see 7 Key Areas to Evaluate Before Buying a Restaurant).
Focus on Profitability
The restaurant industry is expected to grow slowly, with food and labor costs increasing. That means maintaining sales volume is critical when overall profit margins can be slim. For the last full year (2021) in BizBuySell’s market data, average restaurant revenue was $600,000 and cashflow to the owner was $110,000.
To generate enough profit to make the venture worthwhile, restaurant owners must balance menu prices against high quality ingredients and high service standards to maintain sufficient sales volume.
Profits vary depending on gross profit contribution. Restaurant businesses tend to worry about how high or low food costs are. Instead, profits are based on a menu item’s gross profit dollars. Profits are further affected by volume of customers and the type of turnover needed, depending on the type of restaurant.
Demand from customers in your local market can affect profit margins. While there’s no exact formula to calculate menu costs, understanding what your immediate market is able and willing to pay is an important factor in profitability. This can include evaluating nearby competitors, consumer demographics and spending habits in your local area. It means that location can greatly influence how profitable a restaurant can be.
Food waste and shortages can be a concern. Profit margins will be greatly influenced by product use. Food spoilage, extra waste and carelessness in handling ingredients burn margin. Operators need to watch out continually for the influx of products in order to manage high profitability.
Market share concentration is high. The largest segment is high and therefore slower growing. However, quick-service and fast-casual sales are expected to grow steadily.
Barriers to entry are high. Rising labor costs, as well as a complex regulatory and legislative environment at the local, state and federal levels put pressure on new and existing businesses, ability to be profitable.
Food and menu trends are expected to meet pent up demand. Customers remain more cautious and selective with their spending, including where they choose to eat. They expect better food choices, as well as convenient access, such as mobile ordering and payment options. However, the costs of enabling such trends continue to be a barrier.
Other Keys to Success
A successful restaurant business requires a good understanding of the market, and how to manage food production efficiently while maintaining a solid profit margin. It also requires skilled employees, great service and keeping up to current regulatory procedures.
Maintain quality control. A restaurant will never be successful with poor quality food. Businesses also need to create a worthwhile experience for diners by maintaining high standards of service, cleanliness and ambience.
Quality menu items and service means repeat business. Sales volume remains a top concern, so restaurant owners need to keep up with industry trends to leverage word of mouth advertising and online reviews. Operators need to ensure they are capitalizing on consumer interest in healthy food items and increased use of technology. Impress your customers.
Attract local support. Successful restaurant operators maintain community relationships. That means getting involved in local groups, sponsoring local charities or schools, and offering their restaurant as a fundraising platform when appropriate. For example, don’t underestimate the value of working with the local PTA to create “elementary school nights” to raise money. Parents will show up in force, and for many, this will be their first introduction to your restaurant.
Create a targeted value proposition and branding. Understanding and responding to market trends is important to attracting new and returning customers. Also, being able to stand out from your competitors will ensure longevity.
Location is key. Locations with high foot traffic and close proximity to demand generators is critical. Nearby movie theaters, shopping malls, transportation hubs, and corporate parks are force multipliers.
Successfully running a restaurant business is challenging, considering the relatively slow growth and high market concentration. Demand for healthier and more exotic menu items means that owners need to stay on top of trends and remain flexible towards a dynamic appetite.
Savvy business owners will be successful if they provide customers with what they want, maintain a good profit margins, and relentlessly cater to repeat customers. With careful planning and an eye on efficient operations, restauranteurs can steadily grow profit and eventually apply their expertise to growing locations.
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