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THE BUSINESS PLAN
An Opportunity to Look - Before You Leap

The restaurant industry has one of the highest rates of bankruptcy of any industry in today’s economy. This is coupled with one of the lowest profit margin available to the entrepreneur. Restaurants that fail are usually under capitalized, lack relevant experience in the foodservice industry or don’t take the time to properly examine the business and the location which they are about to get into. Many entrepreneurs who wish to be in the foodservice industry turn to franchising as an option. Under the auspices of a franchisor, the entrepreneur’s lack of relevant experience can be minimized if the franchisor has suitable operation manuals, standard recipes and marketing techniques. However, foodservice franchisees and franchisors who have not conducted adequate location homework have been known to go bankrupt or work on a marginal basis as well.

The only way an entrepreneur, whether they are building and creating their own restaurant or buying a franchise unit, can clearly understand what lies ahead financially is to conduct a detailed business plan. If you have the fortitude to develop a business plan and to honestly interpret the results, you will have a far better understanding of your opportunity to succeed as an independent operator or franchisee. In addition, if you can successfully get through the grueling task of developing a business plan, you will likely succeed in the restaurant business.

A business plan should consist of nine phases. These phases include:

• concept overview
• economic overview
• site analysis
• competitive analysis
• marketing plan
• capital expenditures
• financial projections
• proposed menus
• management biographies

Conceptual Overview

The conceptual overview should provide the reader of the business plan with a clear understanding of the restaurant business which is about to be developed. You should describe in as much detail as possible the concept, menu themeing, interior and exterior design and hours of operation.

You should highlight the target markets which you are planning on trying to attract. The target market should be broken into primary and secondary markets with a detailed explanation of who is in each one of these markets. Your markets may consist of one or a variety of the following: business people, shoppers, local residents, destination diners, theatre goers, young adults, children, adults, etc. Your primary and secondary markets may be made up of one or more of the above and may also include other target markets which are not specified herein.

Within the conceptual overview section, there should also be a detailed explanation of the support systems which the management or franchisor will be providing to the restaurant. These services may include internal controls, staffing policies and procedures, purchasing procedures, standardized recipe and inventory controls, staff recruitment and quality assurance amongst others.

Economic Overview

The objective of the economic overview is to provide the reader with the knowledge that you understand the market which you are about to enter. First, you should include a general overview of the local economy and a detailed review of the restaurant business within that economy. In addition, you should look at local population growth and demographics as well as, depending on your target markets, the growth and decline of the local population, and other demographic factors including population, age, income and household make-up.

Site Analysis

Conducting a site analysis is extremely important as an independent restaurateur. As a franchisee, it is that much more important. Given the proliferation of franchises and the current economy, excellent sites are hard to find. Therefore, you should ensure that your franchisor provides you with an excellent site. Most franchisors and almost all restaurateurs ignore the importance of a site analysis until it is too late.

The site analysis should include an inspection of the property’s visibility, accessibility in terms of access and egress, available parking if required, ensuring the site has the necessary utilities brought to point of connection and that it is of an appropriate size for the concept being developed. It is all too often that a restaurateur or franchisor selects a site which is too large for the concept, thus, placing a high rental and taxation burden on the franchisee. It is also all too common for an independent restaurateur, who has not done the proper homework, to select a site which is too small, thus, reducing the ability to generate the required sales to support the concept. Finally, pedestrian and vehicle traffic counts are essential in order to ensure a suitable traffic flow to sustain your business.

Competitive Analysis

Everyone entering the restaurant industry should do a competitive analysis. Competitive analysis consists of conducting a general market overview of the restaurants within a one, three and five mile radius of the site. Your primary competition will likely come from within a mile radius of your site and your secondary competition will likely come from within a two mile radius.

In addition, the business plan should discuss in detail, similar size restaurants which are competing within the same segment of the restaurant industry although their concepts may be different. For example, all mid-market restaurants whether they are providing Italian, American or Mexican food are all vying for the same customer at the same time. Therefore, your competition will consist not only of similar themed restaurants but restaurants competing for the same market.

Restaurant franchisees should also be aware that there are several concepts within a market place and they should examine all of them before selecting a franchisor. For example, a market analysis of the bagel business will show that there are at least ten newly formed Canadian franchise companies in the Toronto area alone and that six major American franchisors are about to enter the market. This may indicate that the market will have short life due to the intense competition which is about to be created. Conducting a detailed business plan, will provide the restaurateur or franchisee with an insight to the business they are about to get into without all the hype attached to it.

Marketing Plan

A marketing plan should be well thought out before a entrepreneur opens a restaurant. First, there should be a marketing budget representing two to four percent of the projected gross sales. In addition, the restaurateur should provide consideration toward local store marketing, public relations and advertising prior to investing in a restaurant operation.

Food and beverage marketing techniques should be highlighted and detailed. This provides the entrepreneur with an opportunity to think about how they will display and promote their food items prior to investing in the business.

Capital Expenditures

Capital expenditures should be broken down in some generic terms so that you can have a clear understanding of where your investment is going. An overview breakdown should consist of costs broken out for the following sectors: construction, kitchen equipment, smallwares, seating and tables, mechanical & electrical, design and management consultants, permits and a fee for contingencies.

Working capital should also be discussed within the business plan. Working capital would include funds to buy opening inventories, carry the staff through initial training, be sufficient to pay first and last month’s rent as well as utilities and, should be large enough to support the restaurant for the first two or three months of operation.

Financial Projections

After all of the proceeding work is completed, you and your lenders should be concerned with the development of a realistic cash flow projection to determine if you can, in fact, pay off your debt and recover your equity within a three to four year period. Due to the high risk of the restaurant industry and the speed at which concepts and themes are changing within the industry, both you, as an investor, and your lender should be recovering your equity contribution and debt within this three to four year period.

When developing financial projections, it would be advisable to use the standards developed by the Canadian Restaurant and Foodservice Association in their book Canadian Restaurant Accounting and Internal Controls written by the author of this article.

In addition to using an acceptable national standard format for financial projections, the restaurateur should state all assumptions which have been made in order to create the financial projections. This will allow both the entrepreneur and the lender to test and verify whether or not the financial objectives are attainable.

Proposed Menus

While we have too often seen entrepreneurs develop their menu after the restaurant has been designed, we believe that it is essential to ensure that you have all of your menus and menu items in place prior to signing a lease. Therefore, the business plan should have a detailed breakdown and description of menu items by category. General foodservice category breakdowns include: appetizers, soups & salads, entrees, desserts, beverages and alcoholic beverages.

As a restaurateur you will be required to go through this exercise once you own your new restaurant, so it would be best to do it prior to owning a restaurant. In this manner, you can see whether your products and menu ideas can be supported within the marketplace and you can design your kitchen and restaurant flow in the appropriate manner to minimize labour and maximize profit.

Management’s Biography

Every lender, landlord and partner will be interested in knowing who is behind the operations. Therefore a biographical sketch of each of the principal participants in the restaurant operation should be included in the business plan.

Conclusion

The business plan provides an entrepreneur the opportunity to think through an entire restaurant concept, location and provides an opportunity to examine the market in detail. In many cases, an entrepreneur may well walk away from the proposed operation. In other cases, the soon to be restaurateur will have a clear understanding of how they are going to make significant financial returns given the potential customer base and competition. Ultimately, much time and money can be saved with consultants and designers in so far as they only need to read the business plan in order to have a full understanding of how they fit into the restaurant’s development.

While a business plan costs some money to develop and could take up to 100 hours to create, it is undoubtedly the best 100 hours and money that anyone can spend prior to building or buying a restaurant.

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