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Friday, May 7, 2010

Should I Open a Resturant in California?

Question: I know what you've said over the years about restaurants and nightclubs. But I've found two different opportunities which appear to be sound. In both cases I would own the properties outright (no mortgage). I would hire seasoned general managers with profit share agreements only. Both locations have been profitable since day one (I conducted separate audits). Please send me your thoughts.
W.E. Burbank CA

Answer Marc Charles:

Hi -- I appreciate your email and question.

First of all it seems like you've done your homework. That's more than most people do!

I love your strategy of owning properties outright and hiring seasoned GMs with profit share agreements only. That is the best strategy in my opinion.

But I would still try and talk you out of owning a restaurant. Restaurants are like love buying them but can't wait to sell them!

On top of that, I would never open a restaurant in California. I realize a lot of people are making money hand over fist with restaurants in prime locations. But I couldn't stand the regulation, red tape, taxes, fees, fines, police state, franchise board, etc. etc.

So no........I would not open a restaurant in California. Skip across the boarder into Nevada, or a couple of boarders to Utah or Texas!

If I can't persuade you to change your mind.....or invest in resturant groups or ETFs, then consider this approach............................

Restaurants and nightclubs are the hardest businesses to launch and run profitably.


Because the overhead costs can kill you.

If you want to open a restaurant, you have to contend with staff salaries, inventory, inspections, unions, utilities, property taxes, licenses, heating and cooling systems, insect protection, trash removal, and certifications ... to name a few.

These are serious expenses. 

More important, these are expenses that most restaurateurs ignore - or grossly underestimate - until it's too late.

But you can make money hand over fist in the restaurant business.

Obviously, not every restaurant fails. But most of them do.

If you're thinking about opening a restaurant, here are three simple things you can do - and it will cost you less than $75:
1. Watch reruns of The Restaurant (if you can) - a series showing what Rocco DiSpirito went through opening a restaurant in New York City. The show has been cancelled, but reruns are still around.
2. Subscribe to Nation's Restaurant News. This is considered "the bible" for restaurant owners and professionals.
3. Play The Restaurant Empire game on your PC. You'll love it, your kids will love it, and your spouse will love it.
My fascination with the restaurant business began in high school. I was the youngest general manager for a hot Mexican casual dining franchise. (Unfortunately, this franchise had to file for bankruptcy as a result of a hepatitis outbreak that killed several customers and made hundreds of others very sick.)

What's more, I have four friends who opened restaurants over the past 12 years. All of them failed - except one. (And he's miserable.)

Interestingly, the failure of most restaurants rarely has anything to do with the food. In most cases, the failure is due to out-of-control overhead costs, the inability to find quality people who stay put, ineffective direct marketing, and the ego of the owner/chef.

Most of the owner/chefs I've talked to opened their restaurants so they would be admired by the press and their customers - not to make money. Maybe it shouldn't be called a "business" if making a profit is not the goal.

If you watch The Restaurant with Rocco DiSpirito, you'll get a sense of what I'm talking about.
Rocco is a lot of fun to watch. And he may be one of the greatest chefs that ever lived. But his pride and ego blinded him to the principles that make restaurants profitable. 

His constant squabbles with the partners who were providing the capital reveal his lack of business savvy.

Rocco knew very little about risking capital (prior to this experience, he never owned a business) - and even less about leading a team of qualified (high-spirited) professionals.

Anyway, if you're still motivated to open a restaurant after being exposed to the downside - and if you have sufficient capital - consider a top-notch franchise instead of trying to do it "your way."

6 Benefits of a Quality Restaurant Franchise for Start-up Entrepreneurs

Based on my research and hands-on experience, here are the top 6 benefits of purchasing a quality restaurant franchise. The franchise provides you with:
  • cost-control expertise
  • marketing expertise
  • systemized personnel training
  • intense demographics research
  • back-office technology and expertise (for dealing with payroll, vendors, and insurance)
  • research and development (concerning food and dining trends)
Here's an idea of what some restaurant franchises will cost you:
  • McDonald's - $500,000 to $1,000,000
  • Carvel Ice Cream - $75,000
  • Chester's Fried Chicken - $70,000 to $395,000
  • Dunkin Donuts - $500,000
  • Buffalo Wild Wings - $500,000
  • Captain D's Seafood - $450,000
  • Figaro's Pizza - $95,000
  • Blimpie Subs - $25,000
  • Huddle House Restaurant - $250,000 to $500,000
  • Burger King - $100,000 to $350,000
Another thing to keep in mind is that restaurant trends are always changing.

You've probably seen this in your neighborhood. The No. 1 fast-food chain today may be tomorrow's laughing stock. One bad marketing decision or health issue can sink an entire operation.

Fifteen years ago, a Burger King franchise was considered the "hottest ticket in town." These days, Burger King can't unload stores fast enough.

Trying to predict which fast-food brand will be the "hot ticket" 10 years from now is almost impossible. However, one way to identify profitable restaurant trends is by watching where the "big money" is being invested.

A "big money" restaurant operation like Brinker International (Chili's, Macaroni Grill, Maggiano's, On the Border, Rockfish, Corner Bakery) is a good example.
Brinker International is one of the largest and most successful restaurant franchises in the world. 
They own more than 1,600 units and have more than 140,000 employees. For the past five years, Forbes magazine has listed Brinker among the "400 Best Companies to Work For."

I think franchises are a great alternative when you're starting out in the restaurant business - even if you have a "name" as a chef and are tempted by the idea of franchising your brand ... like Tony Roma and Emeril Lagasse did.

The purpose of Profit Center Dispatch is to identify legitimate business opportunities and show you  HOW to make them profitable.

And when it comes to restaurants, your best bet will be a solid franchise that has identified a rising trend.

By the way, there are hundreds of non-food-related franchises too. And most don't require nearly as much capital.

So while you're investigating restaurant franchises, you might want to check out some of these:
  • Meineke Car Care Centers - $65,000
  • Valpak Direct Marketing System - $5,000 (15,000 households)
  • 1st Propane - $10,000
  • Sona Laser Hair Removal - $200,000
  • SuperCuts - $30,000
  • Friendly Computers - $50,000
  • AccuTax - $10,000
  • CashPlus - $75,000
  • Regis Salons - $50,000
  • Ice Cold Air (discount auto repair) - $75,000
  • Lil Pals Mobile Pet Photography - $20,000
  • Ace Cash Express (Kiosk) - $15,000

If you're determined to open a restaurant, consider viable franchise opportunities.

Watch the major money restaurateurs. Where and what type of restaurants are they building today?

Do your research and then talk to current owners or former owners of the operations you're interested in. You may not hear what you want to hear, but it'll give you a great perspective on the reality of this business.

The main benefit of owning a legitimate franchise is that you will have an established brand. The next-best benefit is that you will be taking advantage of time-tested marketing. This could save you tens or even hundreds of thousands of dollars by avoiding the serious pitfalls and marketing blunders of most "go it alone" restaurateurs.

Morel Resources for Restaurant Franchises:

Additional Resources for Non-Food Franchises:

I hope that helps!!

Send me your thoughts.


Marc Charles

"The King of Business Opportunities"

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