When planning a new restaurant the primary focus is naturally on success, and long term longevity. You begin with a business plan for success. Most 1st time restaurateurs seldom think or plan in terms of negative “what if’s”. Their focal point is on the present. However, all contingencies must be considered to be successful. For example, “what happens if I contract a serious illness”, or find that “this is just too much work”, or decide that “I really don’t enjoy the business as I thought that I would”. There are many unseen reasons why you may find that you want to go in a different direction with your business life. Therefore, an exit strategy is a contingency that must planed for.
There are exit strategies, for a successful restaurant, and for a not so successful restaurant. Certain safety measures can be taken in setting up both your business structure, and your lease agreement. Additionally, there are management policies & operational procedures that must be maintained after opening.
Ideally, if there is more than one owner, a buy /sell agreement should be in place among the partners. Typically, a buy /sell agreement will have a formula based on profit over a four year period. Several variations can be considered but the formula must be specific with no ambiguity in its terms.
The restaurant lease is extremely important to any form of business structure but it is especially important to single person/family ownership. Long term lease guarantees must be avoided at all cost. A typical restaurant lease will be a five years. A landlord will typically want the initial five year term guaranteed. Begin negotiations with a guarantee of the first 12 months and be prepared to compromise with 36 months. A back up plan can be to offer a 12 month guarantee at any time during the five year lease. This is fare to both tenant and landlord because it gives the landlord time to plan for the future of his space, and it lessens the liability for the restaurant owner. If your initial lease is five years make sure that you have at least two five year options.
Remember, based on your business plans financial projections, keep your annual rent factor at 10% or less of your projected annual sales. Annual 3% rent increases are normal.
Of course a good lease will go a long way in enhancing the value of your business when deciding to sell. Other considerations that will improve the viability of the business in the eyes of a potential buyer are as follows:
1. Keep an accurate set of books. Report all sales & expenses. Some unthinking restaurant owners will not report all sales. This practice not only reduces the value of your business based on sales but leaves the owner wide open to employee theft. When not reporting all sales loose accounting systems will be applied so that there is no paper trail if audited. However, loose accounting systems are an invitation to some employees to steal from you. “What’s good for the boss is good for me”.
2. Keep current on vendor invoices. A vendor who extends terms is not doing you a favor. Trying to catch up on past bills can be a slippery slope that can be difficult to recover from.
3. Show that the business is run by “systems”. Management runs the systems and the systems run the restaurant. A diligent adherence to comprehensive operations manual is essential for maintain smooth running operational systems.
4. Take care of your people by reward excellence. Employee turnover can be costly.
5. Maintain your facility with constant maintenance. The restaurant should never look “used“or “worn down”.
6. Build a database of your customers and keep records of promotional responses
7. Create a reputation for developing management. When management trainees progress to the point where you have no room for advancement, then help them find an improved position in the industry.
If you need help formulating an exit strategy or anything else while starting up your own restaurant business, Contact Us for assistance.