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Restaurant Reality: What to Know if Owning a Restaurant is on Your “To-Do” List

At age ten, Kent Andersen set his sights on being a doctor. He never once doubted his future in medicine—that is, until he submitted his medical school application. To the shock of friends and family, Andersen decided being a doctor wasn’t what he wanted to spend his life doing after all.

With a degree in foreign policy from BYU, Andersen turned to law school. He took the LSAT and began his application, only to feel that law wasn’t the right fit either. Uncertain of his next step, he sought guidance from a career counselor. What followed was an unforgettable conversation—one he can laugh about now.

“My counselor looked me in the eye and called me stupid,” he recalls. “I was completely taken aback. There I was asking for help, and she was insulting me.” Andersen asked her what she meant. Pointing to the magazine in his hands, she replied, “Kent, every time you come to my office, you have a cooking magazine under your arm. You obviously like to cook. Why don’t you see if you can make a career out of it?” “Oh, no. That would never fly,” he said half laughing. She urged, “I think you should investigate it and at least see if it’s something that would be viable for you.”

As he walked out of her office, something clicked. Cooking was the right fit. Soon Andersen was attending the top culinary school in the nation. Fast forward fifteen years, and you’ll now find him at the helm—owner and operator—of one of Utah’s top fine dining restaurants.

Andersen had the rare courage to follow his passions. Even more remarkable, he followed those passions into a notoriously risky industry rumored to have a 90 percent failure rate during the first year. Yet those daunting numbers don’t seem to scare entrepreneurs like Andersen away from the lure of starting, owning, or operating their own restaurant. An estimated ten thousand U.S. restaurants were opened or changed ownership during the last year.1

But if you ask Andersen or any other restaurant owner who has survived the first few years, they’ll more than likely tell you it’s easier said than done. Those who excel in the business have discovered there is a recipe for restaurant success, and the most critical ingredient is understanding the realities of the business.

Seeing the Numbers for What They Really Are

It seems to be widespread knowledge that restaurants are risky businesses. But do the numbers really measure up to the rumors? Industry experts don’t put much stock in the alleged 90 percent failure rate for restaurant start-ups.

In fact, one professor at Ohio State University, H. G. Parsa, set out to debunk this myth. He found that the 90 percent figure is not only off base but also practically impossible, given industry growth rates. His research, consistent with similar studies, found that about one in four restaurants close or change ownership within their first year of business. His study concluded an overall failure rate of 61 percent over a three-year period.2 According to the Small Business Administration, that’s about the same level of risk you’d take on starting any new business.

It’s also important to note that most studies count any restaurant turnover or closure as a failure when, in fact, the business may have been profitable and merely changed ownership or closed for reasons other than financial hardship.

Take for example, the experience of Joan Young, Marriott School undergraduate program director. For fifteen years she and her husband owned and operated a profitable Italian restaurant located in a historic church. When the property owner decided not to renew the lease, the Youngs were forced to either move or shut down. “We looked at other places, but the one-of-a-kind atmosphere with original stained-glass windows and beautiful fountains just couldn’t be replicated, so we chose to close,” she explains.

Profitable restaurants, just like Young’s, close every day for countless reasons other than lack of cash flow. So next time you hear someone quote the 90 percent failure rate: first, ask where the numbers came from; and second, remember that not all closures are failures.

Choosing Which Ownership Is Right for You

If you’ve dreamed of someday owning a restaurant, have you thought about whether you’d like to start from scratch, buy a franchise, or purchase an existing establishment? Is buying a franchise less risky than an independent start-up? It seems to depend on whom you ask. Parsa’s data suggests that franchise safety is overrated. His study had a distinction of only a few percentage points between the failure rates of independent and franchise start-ups.3

Industry veteran Matthew Stroud disagrees, saying there is a substantial difference in risk level between independent and franchised operations. “You have to have much deeper pockets to withstand the ups and downs of starting an independent restaurant,” explains Stroud, vice president of investor relations for Darden Restaurants, the largest casual dining restaurant company in America. “Franchises are less risky because they generally come with proven methods in place, training, and handbooks. They have brand recognition, which means customers know what to expect. But most important, the cash flow is usually more certain,” adds Stroud, who earned his MBA from the Marriott School in 1991.

While the risks of independent vs. start-up are debatable, there isn’t much argument that acquiring an existing restaurant with a good history is the least risky route. Mark Abell, a loan officer for Vectra Bank in Denver, says when it comes to getting a business loan, the banks definitely prefer acquisitions. “It’s much easier to get a loan if you’re acquiring a restaurant with a proven history,” he explains. “The bank knows within reason how much cash flow the business has to service its debt.”

Putting risk levels aside, the path to restaurant ownership is usually a matter of personal taste. The National Restaurant Association (NRA) reports that more than seven out of ten eating-and-drinking establishments are independent operations. Some, like Andersen, enjoy the spice and excitement of starting new and having complete control over the menu, atmosphere, marketing, etc. Others prefer the peace and security of entering into the proven system of a franchise or buying a restaurant already established and profitable.

Finding Your Funding

The rumors about getting restaurant start-up loans are about as discouraging as those about failure rates, only loan rumors have more substance. Abell says restaurant start-ups in general—whether they are independent or franchised—are among the most difficult loans to obtain. “The banks heighten their lending standards because it’s a tough industry,” explains Abell, who works specifically with small business loans.

Why are banks so leery of restaurant start-ups? Abell says it’s a number of factors such as: high expenses for leasehold improvements, which have no value in liquidation; lack of significant collateral; intense competition; low barriers to entry; severe fluctuations in cash flow; or faddish trends that don’t last. “Most restaurants hit roadblocks within eighteen months to three years,” he explains. “Usually, if they’re not profitable by then, they’ve run out of start-up capital.”

Because restaurant loans are more difficult to obtain, Abell says, most restaurant entrepreneurs seek other funding sources first, like friends, family, angel investors, or even their home equity. When Susan Hafner and her father started their own taco shop in 1987, they borrowed five thousand dollars from a relative to get it up and running. “With so little capital, it wasn’t easy,” explains Hafner, who earned her bs from the Marriott School in 1990. “We shopped around for used equipment and hired mostly family members. But we made it work and were able to support ourselves.”

For those willing to go to bat for a loan, listen up. The critical factor most banks look at is not necessarily how much money you have in your savings but how much industry experience you have on your résumé. “Experience of the owner trumps all other factors,” Abell says. “If you don’t have experience, get it. Find a mentor, do your research, test your concept.”

Andersen, who earned his MBA from the Marriott School in 2001, attributes most of his restaurant success to having worked in the industry for fifteen years before embarking on his own venture. “This isn’t a spectator sport,” he says. “It’s a business that has to be learned, practiced, and replicated over and over.” Young agrees: “Before even thinking about the restaurant business, I recommend shadowing someone to get a feel for the everyday life and crises of restaurants. Talk to as many people as possible and spend time behind the scenes.”

The bottom line: If your only restaurant experience is sitting down to a nice meal and paying a tip, you might consider finding an experienced partner, asking mom or dad for a loan, or getting a weekend job as a server.

Optimizing the Labor Pool

Ask a group of restaurant owners what their biggest challenge is and you’ll most likely hear a unanimous, “Labor.” According to the NRA, nearly half of all adults have worked in the restaurant industry at some time during their lives, and 32 percent of adults got their first job experience in a restaurant. With numbers like those, it’s easy to see why the restaurant labor force is in constant flux.

Hafner experienced firsthand managing employees on the fast-food end, both in a franchise and in an independent restaurant. “We paid minimum wage, so we were constantly asking, ‘Who can we get for that price?’” she recalls. “Other industries could afford to pay more, so it was hard to compete with them for labor.” She says most of their employees were teenagers, which came with certain challenges. “When homecoming, prom, or a big football game rolled around, no one would work,” she says. “I ended up working those nights.”

She also explains that inexperience plus opportunity can equal dishonesty. “We had many employees yield to the temptation to take cash from the register or give free food to their friends,” she says. “Even years after we closed, we were still getting apology letters with checks from former employees who admitted to stealing.”

Joseph Call, a senior manager in strategic planning at KFC, agrees that managing young workers can be tough. “Getting a seventeen-year-old to show up on time isn’t easy,” he remarks. He says you’ve got to keep them interested by rewarding them with more than just money. “To keep good employees you need to offer perks like life skills training, ESL courses, and special recognitions,” adds Call, who earned his MBA from the Marriott School in 2002.

Young, who earned her MBA from the Marriott School in 1995, says that one of the keys to her restaurant success was treating her employees like part of the family. “We had regular social events for our employees with games and prizes,” she explains. “We also shared our financial successes with them by giving them bonuses when we did well, which helped them feel connected and appreciated.”

Hafner, Call, and Young also point out the importance of hiring a good manager with solid industry experience and then doing everything you can to keep him or her. “When your manager leaves, you usually lose much of your staff along with them,” Hafner says.

When Andersen opened his fine dining restaurant six years ago, he set a goal to keep his staff long-term. So far, he still has the same kitchen crew and has managed to maintain many of his front staff at least four years or more. His secret? “I offer all my staff flexibility, excellent compensation, and benefits,” he explains. “But most important, I listen to them, and I believe that means a lot.”

No two restaurants, no two employees, no two managers, and no two owners are the same, so it is critical to find a system that works for your team. It takes being creative and attentive, but mostly it means serving your staff the same way you’d like your customers to be served.

Devoting Your All

What do entrepreneurs underestimate most when they consider buying or starting a restaurant? Capital? Marketing? Repairs? Improvement costs? Economic factors? These are all likely answers, but the answer most often expressed by those in the industry is time.

“I think many people get involved with owning and operating restaurants because they think it will be fun, but what they don’t realize, unless they’ve been in the business, is how much time it really takes to grow a restaurant,” Stroud says. Andersen says he’s seen it over and over, new restaurant owners disillusioned with the long hours. What does he mean by long hours? Take a look at a typical day for Andersen:

He arrives at 9 a.m. and begins answering and returning calls. He checks on grocery deliveries, oversees kitchen preparation and production, visits with vendors, and works on purchasing. At 11 a.m. he opens the restaurant for lunch. During lunch hours he personally greets and visits with his guests in addition to planning events and coordinating catering schedules. By 3 p.m. the restaurant is cleared and cleaned, and dinner preparations begin. From 5 p.m. to 9:30 p.m., Andersen is busy with dinner operations and again visits with guests. Around 11 p.m. or midnight, after dinner cleanup, Andersen finally heads home. That’s at least a seventy-hour work week.

It’s also important to note that a restaurant’s busiest times are during everyone else’s leisure time—weekends, holidays, and celebrations. Then there are the unpredictable days when anything can happen.

“When you are the owner, the buck stops with you,” Young says. One night the Youngs were on their way to the theatre when they got a phone call about a leak in the refrigerator. “It was in the middle of winter, and I remember standing outside in the cold with my thumb plugging the pipe until the plumber arrived,” she recalls. “We never did make it to the play.” But when asked if she’d do it all again, she says, “Absolutely.” “We really miss those years and often think about opening another restaurant,” she says. “We loved working with our children and made so many lasting friendships with our customers.”

Young’s sentiments exemplify a vital factor for restaurant success—loving what you do. The long hours, unpredictability, and seasonality don’t seem like such sacrifice if you love your work. As the adage says, “Time flies when you’re having fun.”

Following Your Passions

Last fall Marriott School MBA students heard from Wyman Roberts, president of Maggiano’s Little Italy restaurant, a forty-one-unit chain. For more than an hour he captivated his audience. Why? Because he talks passionately about what he does. “What can you talk about in depth and with enthusiasm?” he asked the students. “Figure it out and follow your passions.”

Roberts speaks from experience. He began in the restaurant industry washing dishes at age twelve. When he graduated with his MBA from BYU in 1984, he had several job offers, but only one in the restaurant industry. Despite it having a significantly lower salary, Roberts took the offer. “I knew I would bring passion to the job,” he says. “I can honestly say I work in an industry I love—an industry all about people.”

It’s the same love for people that keeps Andersen working seventy-hour weeks and holidays. “I get to see people at their happiest moments,” he says. “They come to my restaurant to celebrate life experiences. I help create memories of those special events.” Andersen knows many of his customers so well that when they walk in the door, he has the kitchen start making their favorite appetizer before they are even seated. “It’s so satisfying to do something you like, to create something people enjoy,” he adds.

Andersen can still be found with a cooking magazine under his arm and says he’ll always be grateful to his career counselor who helped open his eyes. Andersen, like most successful restaurant owners, embraces the realities of the restaurant business—both the challenges and the rewards. He’ll be the first to tell you it isn’t easy to operate a restaurant that hits the mark and is a financial success, but if you ask him what he loves about his job, you may have to pull up a chair and order an appetizer—perhaps one of his bacon-wrapped sea scallops.

Endnotes 1 National Restaurant Association 2007 and 2008 Industry Forecasts. 2 “The Restaurant-Failure Myth,” by Kerry Miller. Retrieved December 2007 from BusinessWeek.com. 3 Ibid.

Who’s Who Among Alumni in the Restaurant Industry

Susan Hafner—BS Finance, 1990—Independent consultant for restaurant owners, Farmington, Missouri

Restaurant experience: Owned a Taco Time franchise and Teela’s Tacos restaurants.
Highlights: “My favorite memories are the family bonding moments like when we dressed up our car like a taco as a float in a parade or hosted all-you-can-eat burrito contests. Then there were the times we pulled together and worked a month for free if necessary or got to add on to our restaurant if the business grew.”
Advice: “Plan for price increases. Don’t be afraid to charge the right price. Never cut corners.”

Matthew Stroud—MBA, 1991—Vice president of investor relations at Darden Restaurants Inc., Orlando, Florida

Restaurant experience: Waiter in high school and college (Brick Oven in Provo). MBA intern for General Mills’ restaurants in Japan. Corporate financier for Red Lobster in Japan and the United States.
Industry trends: “Restaurant spending is less discretionary than it used to be. People have hectic lifestyles, more parents are working, and fewer people know how to cook at home. Dining out used to be a treat, but now it’s a way of life.”
Advice: “Build a brand, create customer loyalty, and show consistency and predictability in food, cost, value, atmosphere, and service. But most important, remember it’s a people business.”

Joseph Call—MBA, 2002—Senior manager in KFC Strategic Planning, Louisville, Kentucky

Restaurant experience: Worked in restaurants through high school and college, including managing a successful pizza shop, before joining KFC’s finance department in 2002.
Fast food trends: “Restaurants are becoming more of a destination for your lifestyle and not just a place to get food. That’s why you’ll continue to see more services being offered besides food, such as video rental and wireless internet.”
Highlights: “Being able to connect with people, to have a tangible good you’re providing to someone, and making a difference in their day.”
Advice: “The industry as a whole is moving and changing, which means if you have a great idea and the ability to execute that idea better than anybody else, you can make it.”

Kent Andersen, C.E.C—MBA, 2001—Owner and executive chef of Chef’s Table, Orem, Utah

Industry experience: Certified executive chef for sixteen years. Degree from New England Culinary Institute.
Restaurant philosophy: “To give each person who dines in our restaurant a customized dining experience—anticipating and exceeding every preference, expectation, and need.”
Highlights: “Perceiving the needs of our customers and acting on them. For example, after one of my customers broke down crying because she was so stressed about preparing Thanksgiving dinner, we began offering Thanksgiving cooking courses. Now, hundreds have taken the course, and we have a lot of fun teaching it.”
Advice: “If you own a restaurant, remember you leave a part of who you are at work—on every plate.”

Wyman Roberts—MBA, 1984—President of Maggiano’s Little Italy, Dallas, Texas

Industry experience: Washing dishes in restaurants at age twelve. Sixteen years at Darden Restaurants and four years at NBC’s Universal Parks & Resorts.
Industry trends: “International segment for casual dining is going to take off, more healthy options on menus, and more focus on atmosphere and emotional connection to brands.”
Advice: “Ask your customers, ‘Did we make you feel special today?’ That is how you differentiate yourself from your competitors. Make it about the people.”

Did You Know?


• Restaurant industry sales equal nearly 4 percent of the U.S. gross domestic product.
• 23 percent of all meals in the U.S. are eaten outside the home.
• Americans spend 47.9 percent of their food budget in restaurants.
• The restaurant industry employs 12.8 million people, making it the nation’s largest employer besides the government.
• The restaurant industry is expected to add 2 million jobs during the next decade.
• The average household expenditure for food eaten outside the home in 2005 was $2,634, or $1,054 per person.
• Women and minorities represent three out of five owners of restaurants, compared to less than half of all U.S. firms.

National Restaurant Association 2007 Industry Forecast.

Top Culinary Trends

  • Bite-size desserts
  • Locally grown produce
  • Organic produce
  • Flatbread
  • Bottled water
  • Specialty sandwiches
  • Asian appetizers
  • Espresso/specialty coffees
  • Whole-grain bread
  • Mediterranean cuisine
  • Pan-seared items
  • Fresh herbs
  • Latin American cuisine
  • Exotic mushrooms
  • Salts
  • Grilled items
  • Pomegranates
  • Grass-fed items
  • Free-range items
  • Pan-Asian cuisine

National Restaurant Association survey of 1,146 members of the American Culinary Federation, October 2006.

_

Article by J. Melody Murdock
Illustration by Jon Cannell

About the Author
J. Melody Murdock is former editor of Marriott Alumni Magazine and is now a freelance writer and editor based in Salt Lake City. She earned her BA in 2000 and master’s degree in mass communication in 2003 from BYU.

Notes

  1. National Restaurant Association 2007 and 2008 Industry Forecasts.
  2. “The Restaurant-Failure Myth,” by Kerry Miller. Retrieved December 2007 from BusinessWeek.com.
  3. Ibid.

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