While other children were out playing sports or raising a ruckus, 6-year-old Carl Redding could be found whipping up pastry batter in his mother’s kitchen. Even then, he dreamed about working in the restaurant industry and owning his own eatery.
Some 25 years later, Redding realized his childhood ambition. Thanks to financial backing from prominent members of the Harlem community and family and friends, he raised $150,000 and bought a former fish-and-chips shop on 116th Street in Harlem, New York. On Mother’s Day, 1999, Amy Ruth’s Home Style Southern Cuisine was born. And Redding’s longtime dream became a reality.
Redding is one of many African American entrepreneurs who have successfully launched a restaurant. The restaurant industry, which has estimated sales of roughly $408 billion for 2002, employs some 11.6 million people. The industry has an overall economic impact of $1 trillion (including sales in related industries such as agriculture, transportation, wholesale trade, and food manufacturing), according to the Washington, D.C.-based National Restaurant Association, the leading business organization for the restaurant industry.
But while the rewards of owning a dining establishment can be sweet, they’re not without risk. Startup costs can be high and vary greatly depending on the type of restaurant, cuisine, and geographic location. Leasing existing space can run $2,000 to $5,000 per month while fixtures, equipment, signage, and remodeling average $15,000 to $35,000 per year. Total yearly costs for licensing and permits, including health department and food handlers’ licenses and fire department and building permits, are typically $500 to $750. Advertising and promotional costs range from $600 to create and distribute flyers, to $1,500 for quarterly newspaper ads. Other annual expenses include business insurance for around $3,000, and office supplies, which cost from $500 to $2,000.
Then there are the staffing issues. According to Howard Cannon, author of The Complete Idiot’s Guide to Starting Your Own Restaurant (Prentice Hall, $19.95), industry turnover can easily be more than 200% for hourly employees and more than 100% for management. Other problems that owners encounter include legal issues, an overabundance of competition, and keeping quality and service up to par.
THE GRILL OF HIS DREAMS
For Redding, the grand opening of Amy Ruth’s marked the culmination of years of education, dedication, and sacrifice. “All my life I’ve been cooking and learning the
Redding, a former chief of staff for Reverend Al Sharpton, didn’t need an aggressive marketing campaign to attract customers. A few radio spots and some fliers were secondary to word-of-mouth and publicity from appearances on The Today Show and Late Night with Conan O’Brian. However, lack of preparation for startup costs threatened to ruin his young enterprise. The initial $150,000 he used to open the restaurant was depleted by the time he unlocked Amy Ruth’s doors.
With virtually no working capital, he was forced to rely entirely on customer flow to keep his business running. The first day was successful and he raised enough capital to get through the week, cover payroll, and purchase additional supplies. “I relied on the fact that the restaurant would be a popular spot. [I] knew people would come,” says Redding, who lived paycheck-to-paycheck for two months until he was able to cover week-to-week expenses.
Redding says he learned from his mistakes. “I knew how to get by with the bare essentials,” he says. “I tried to do everything myself and wound up falling behind.” He now has 25 employees and estimates 2002 sales at $1.5 million.
Redding’s early money challenges are common in the industry, according to Isidore Kharasch, president of Hospitality Works Inc., a Deerfield, Illinois-based international foodservice consulting firm. Kharasch ranks undercapitalization as the top reason that restaurant failure rates average 30% in the first year, 50% in the second, and 75% in the third. “If you’re 80% of the way to your money goal, don’t even think about opening until you have 100%,” Kharasch says.
With one successful enterprise under his belt, Redding plans to open Amy Ruth’s Old Fashioned Waffles and Cream in early spring 2003. And he recently signed a 15-year lease for a second Amy Ruth’s, which will be located in Bedford
Stuyvesant, Brooklyn. The restaurant will open in 2003 on Mother’s Day. In addition, he’s in talks with Foxwoods Resort about opening a restaurant in its Connecticut casino and is working on launching five new restaurants in New York. This time around, Redding plans to have a lawyer and accountant on retainer.HIS COSTS RUNNETH OVER
Derrick Angus knew that opening a restaurant in Los Angeles wouldn’t be a piece of cake. But he didn’t know how complicated and costly his choice of location would be. An engineer turned catering-business owner, it was his training in the former field that proved most useful.
Before he could open Derrick’s Jamaican Cuisine, Angus learned that he would have to pay the city of Los Angeles a $17,000 sewer line fee. He also had to bring the building up to city code, which forced him to install energy-efficient fluorescent light fixtures that totalled nearly $8,000.
“The location was great, but I had no idea that a sewer line and other infrastructure would cost so much money,” Angus reflects. Additional startup costs included $35,000 for a walk-in refrigerator/freezer, $30,000 to cover the required three-month deposit, and roughly $10,000 for building permits and health department and licensing fees. The startup expenses quickly ate away at the funds he had saved. “I had to go back to myself and my family for more money,” says Angus, who raised $300,000 to start the restaurant.
He made it through the construction crisis by doing most of the work himself. “I designed and installed most of the equipment and handled my own electrical and plumbing work,” he says. “I wound up saving a lot of money.” Angus’ efforts paid off in February 2002 when the doors to his 100-seat establishment opened. Billed as “fine Jamaican dining with a healthy twist,” the restaurant offers skinless, boneless jerk chicken, jerk tofu, grilled vegetables, and seashore salmon. “Our service is excellent,” he says. “We offer a complete dining experience, as if you’re in the islands.” He expects the establishment to generate $800,000 in sales for 2002 and close to $1 million for 2003.
“There’s a much lower failure rate in buying an existing restaurant location than building a new one,” says Cannon, who is president of Birmingham, Alabama-based consulting firm Restaurant Operations Institute Inc. He notes that choosing a non-restaurant location is a mistake many restaurateurs make.
Angus continues to cater from his new, four-employee location and has an eye on expanding into fast-food later in the year. But when expansion time arrives, he says he’ll look for a pre-existing restaurant: “The laws, regulations, and codes that come with converting existing space into a restaurant can kill you.”
A RECIPE FOR SUCCESS
Most people know the reasons restaurants fail: bad food, bad service, and poor advertising. Cannon believes that high failure rates are due to poor financial habits, bad decisions early in the startup process, and unrealistic expectations on th
e entrepreneur’s part.
According to Cannon, the U.S. has almost 844,000 restaurants and adds 13,000 to 17,000 each year. Roughly 81% will eventually fail, he says, adding that most go astray on the cash management side. “New owners often go out and spend the cash without realizing that, in 30 or 60 days, they have to pay their staff, their vendors, and their landlords,” says Cannon.
To avoid falling into such traps, Cannon and Kharasch offer the following suggestions:
- Retain a good accountant. “A good accountant can help the restaurateur keep score and help them stay in the game,” Cannon advises.
- Hit the streets. Speak with at least five local independent (not franchise) restaurant owners about the pros and cons of the business, the area, and the market. “These entrepreneurs are usually very involved in their communities,” says Cannon, “and will go through hoops to mentor an aspiring restaurant owner.”
- Determine how much time and energy it takes to run a restaurant. “Get out there and work in the industry,” says Kharasch. “Then go to a culinary school and take a few management courses.”
- Create a solid business plan. Be sure it takes into consideration the initial investment and amount of income it will take to reach profitability and success. “Get the appropriate capital together to make it work,” says Kharasch, who estimates the average startup costs for a new restaurant at over $1 million.
Despite the pitfalls and challenges, owning a restaurant maintains its appeal, regardless of the economy. “The restaurant industry grows because people are eating out more and more, which means there’s plenty of money to be made,” says Cannon. As restaurateurs become more proficient and experienced, cash generation becomes more and more consistent. “There is simply no better entrepreneurial opportunity on the planet than the restaurant business,” he says.
When Redding enters the doorway of Amy Ruth’s every morning, he feels confident that, even in an industry where 81% of the entrants fail, the restaurant — which is named after his grandmother and culinary inspiration — will continue to draw a steady stream of clientele with its honey-dipped fried chicken and corn pudding. With three years of success under his belt, he’s thinking about a new ice cream and pastry venture. He knows that this time around he has experience on his side. “For years I helped others make their restaurants successful,” says Redding. “Now I’m doing it for myself, my community, and my God.”
12 STEPS TO A SUCCESSFUL RESTAURANT
Howard Cannon, author of The Complete Idiot’s Guide to Starting Your Own Restaurant (Prentice Hall, $19.95), suggests that aspiring
restaurateurs go through this 12-step checklist one year before opening a restaurant.
- Research types of restaurants, the competition, and the number of restaurants in the area. Pay attention to voids in the marketplace.
- Visit other restaurants and take notes on the pros and cons of the menu, pricing, décor, and service style.
- Determine which restaurants are thriving and which are failing, then spend time analyzing why.
- Network with other restaurant owners and operators, lawyers, accountants, bankers, and marketing firms.
- Create a solid business plan that includes the business concept, information about your management team, market analysis, and financial needs and sources.
- Do a preliminary location selection and site-analysis process.
- Assemble rough financial statements and projections, and investigate sources of funding.
- Determine minimum, maximum, and optimum square-footage requirements for your facility.
- Build your recipe file and start putting together your menu. Consider issues like menu size, portion control, and product consistency.
- Get a handle on equipment costs by networking with equipment dealers who sell new-and-used items.
- Investigate the various legal issues and hurdles involved with starting a restaurant — including securing health permits, liquor licenses, fire permits (a restaurant can’t operate without one), and building permits.
- Determine a structure for your restaurant (sole proprietorship, corporation, limited liability corporation, etc.) and select a name. (See “Incorporating Facts,” Enterprise, this issue.)