Any restaurant owners on here?

[rocketpj]

So Mrs. Rocketpjs and I are at a bit of a crossroads.  My career is stable, boring and going nowhere I want to go (I've considered and rejected a promotion based on the fact that the management is treated terribly and not paid particularly well for their level of responsibility).  Her career is stable-ish and has been on a strong uptrend for quite awhile (if her current job ends I suspect she'll land on her feet very quickly).

I know this forum is mostly people who took the STEM education - high pay job - FIRE path, but there are other paths to FIRE as well.  My FIL built and sold a restaurant in 12 years, retiring at 41 - he hasn't worked at a serious job in all the years I've known him.

We both have experience in restaurants (I was a cook for a few years, she grew up in a family restaurant and worked in several back in the stone age as well).  I actually loved working as a cook, I just didn't love the relatively low pay.

All of this is to set the stage for our current thought process.  We are in a reasonably good financial position - nowhere close to FIRE, but we have no debt, our mortgage is well in hand, and we have some pretty solid savings and a solid savings rate.  I'm bored with my job though, and have spent a lot of time creating side hustles - sometimes good ones, other times not so much, but a net positive.

Recently a restaurant near our home has come up for sale.  It has an excellent location (waterfront, overlooking the harbour), a good history and it's in the 'pretty' part of a rapidly growing community.  The menu is outdated and the current owners have clearly been 'phoning it in' for awhile, at least as far as building their business (the health inspection and other stuff has been a near perfect record for at least 15years).

So the end result is that it is a good restaurant with a big potential upside in profits.  Because of the relatively disengaged operation so far the selling price is very reasonable. 

I have no illusions about the realities of owning a restaurant - I've worked in a few, and I have been management in various other industries over the years.  Restaurants, all business ownership really, are hard work.  There is risk involved, not least of which it would mean taking on some business related debt and giving up my current job.

This is not a 'wouldn't it be nice' daydream, we are seriously considering buying this place.  I am working my way through every bit of due diligence I can think of, and I am quite willing to walk away if there are any dealbreakers that come up.

So my question, if anyone on here owns or has owned a restaurant - what are the big red flags you can identify?  Are there any concerns that might not be obvious to a potential buyer?

[Fishindude]

My brother owned 13 restaurants at one time.   Not too many tougher businesses out there.   The hours are long, you're dealing with turn over and low paid help, thieves, health inspectors, expensive equipment, expensive inventory, difficult clients, taxes, crazy sanitation and housekeeping, etc.   You will be a dishwasher, cook, waiter, store manager, accountant, purchasing agent, salesman, marketing exec, janitor, maintenance man, etc. .... maybe all in the same day, and you will need to keep a smile on your face for the duration.

But is sounds like you know all of this.  Could be a very rewarding opportunity.
Best of luck !

[mistershankly]

The hours are long, you're dealing with turn over and low paid help, thieves, health inspectors, expensive equipment, expensive inventory, difficult clients, taxes, crazy sanitation and housekeeping, etc.   You will be a dishwasher, cook, waiter, store manager, accountant, purchasing agent, salesman, marketing exec, janitor, maintenance man, etc. .... maybe all in the same day, and you will need to keep a smile on your face for the duration.

Add Yelp and internet trolls to undermine your business online to the list of challenges.

http://www.thesmokinggun.com/buster/Sparks-Steak-House-sues-over-Yelp-review-687432

[Gimesalot]

I am married to a chef that once dreamed of opening his own restaurant.  We of the opinion that there is no worse decision that one can make.  There is very little money to be made UNLESS you have an Applebee's type model, extremely low overhead, or are a bar.  Not only will it be a lot of work, but most likely you will lose money in the process. 

The place that you are talking about seems to be the opposite of what is doing well around the country.

If you really want into the food service industry, I recommend a smaller, easier set-up.  Something like a small counter service sandwich shop.  These require very little investment, and people LOVE the cheap food.

[nr]

Don't do it.

A little background on me:  I grew up in the restaurants and have opened and owned 4 restaurants in the last 7 years - including a waterfront restaurant.  All very successful (touch wood) and I'm down to 2 restaurants currently - I'm cashing out.  These two should be sold in the next two years.  Restaurants are not a business you want to get into right now.  Here are a few points as to why I am liquidating.  Also bear with me - I'm not a writer.

Over-saturation - There are two parts to this:

1. Celebrity chef's and restaurateurs on channels like E! and The Food Network have led everyone to believe that it is simple to open a successful restaurant and that it is a cool/trendy thing to do.  More restaurants are popping up from people  who have no business opening a restaurant.  Most think this wouldn't be a problem, rationalizing that those restaurants that don't perform will have little impact on the more successful restaurant.  This is not true.  Anytime a restaurant opens you are introducing more seats to a market.  The catch is you haven't introduced any new butts to fill those seats.  Even if a new restaurant struggles - any one single customer who comes in was most likely taken from another restaurant - too many seats and not enough butts.

2. Retail is struggling.  It is no secret that retail is not what it used to be.  People are buying online and brick and mortar stores are going out of business.  Landlords are scrambling to fill these newly emptied spaces with new tenants.  Unfortunately most educated people see the changes in retail and very few are investing in new storefront locations.  One of the very few retail businesses left that actually requires a customer to walk in the door is the restaurant business.  Landlords in many areas are offering big allowances (tenant improvement funds) to fill their empty spaces - and restaurants are the only ones who can fully take advantage of the retail store space.  You'll see more and more former retail spaces being occupied by restaurants in the near future.  And as mentioned above - landlords are inadvertently creating more seats without creating any more new butts!

Minimum wage - $15

Advocated for the $15 minimum wage are pushing hard and there is no doubt in my mind that it will be here soon.  Keep in mind that $15 does not affect just the lowest guys on the totem poll - but ALL employees.  If your entry level dish washers are making $15/hr and your line cooks who were making $13/hr are now also making $15 an hour you'll have a mutiny on your hands.  You'll have to pay your line cooks a higher wage also, let's say $18 an hour, or else they had might as well just go back to washing dishes.  Wages need to reflect skill sets and no intelligent line cook would accept the same pay as the guy scrubbing the pots and pans.  Again - $15 minimum wage impacts all employees - not just the bottom guys.

Facebook & Social Media

The labor pool has changed drastically in the last 5 years and I blame a lot of it on social media.  People don't want to work entry level or service related jobs.  Everyone is constantly trolling social media, being exposed to the "glamorous" lives that seemingly EVERYONE ELSE is living.  "I'm not going to settle for a dirty kitchen job working nights and weekends when I see all of my friends going out partying and living it up!"  Many people seem to be living by the "fake it until you make it" motto.  And working in a kitchen does not lend well in many social circles to success.

Waterfront Restaurant

One of my restaurants was a direct waterfront restaurant - I had boat access, plenty of parking and a beautiful 7 figure build-out.  The former restaurant was just as you described - dated and old.  Boring menu, no improvements or renovations, crap service etc.  The owner passed away which is the only reason the opportunity arose.  There is a reason why he never changed anything and probably the same reason is true for the location you are looking at.  Waterfront restaurants are nothing but tourist traps!  The people will come in season and won't out of season - no matter what you do.  There was no reason for the former owner to invest in improvements because he had learned 27 years earlier that whether he made an improvement or not he would be totally full in the summer and the people would abandon him once again.  I learned this after dumping over $1,000,000 into the place, hiring a professional chef, curating a top notch wine program etc. only to return to the very same sales(still great sales) that the previous owner was doing just one year after opening.  Don't assume people are doing it wrong just because you don't agree with them.

Customers

They're tough - I'm adding this now because as I was typing the waterfront paragraph I had a difficult customer who had a complaint about everything that I just had to deal with.  She wnated her ENTIRE meal for 3 people comped because her petite filet mignon, which she request be cooked well done, was too small and wasn't a true 6oz filet mignon like the menu described it  ::roll my eyes:: Customer service is much more demanding now than ever before - especially with the younger generation.  They almost enjoy holding you hostage with threats of negative yelp reviews and social media posts if they don't get what you want.  South Park nailed it with this episode:  http://southpark.cc.com/full-episodes/s19e04-youre-not-yelping


This doesn't mean I don't love the business - I'm actually investing heavily right now in a quick serve concept - fewer employees and much more casual service/atmosphere with a great bar component.  I love this business but I do not think you realize how much it has changed since you and the Mrs. were involved.  Think long and think hard about this decision.

[With This Herring]

I'm curious: Is there a reason you haven't asked FIL's advice?

I have nothing to add; I just found the topic interesting.

[Cyaphas]

People are lazy. I work in a huge office that has a pretty good sized unexploited market of people who want their lunch made for them. Also, delivery restaurants seem like a big possibility for profit. Less face time and a large market of lazy people who don't want o go out or cook.

I've worked in the industry but never as a manager. These are just ideas that nag at me on occasion.

The coffee stand business has had it's appeals too. There are stands on every corner in the NW, where I am in TX, I can't think of one, NOT ONE! Low overhead and mostly just location, location, location!

[paddedhat]

The coffee stand business has had it's appeals too. There are stands on every corner in the NW, where I am in TX, I can't think of one, NOT ONE! Low overhead and mostly just location, location, location!

This is a stunning reality were I live in the northeast.  There are huge, and ignored opportunities for stand alone coffee places, and they are nearly non-existent. In a nearby major market ( pop. 700k+)  the local paper did a recent story of how you can't seem to swing a cat anymore without hitting a Dunkin Donuts. They quickly went from a handful of stores to almost 120 in that market. They have recycled every  type of commercial space available, including old gas stations, and freestanding bank branches.  I would rather not have coffee than do the Dunkin drive through for their bitter, overpriced swill. OTOH, If somebody were smart enough to open a decent drive through hut near me, I could get loyal, quickly.

[rocketpj]

I'm curious: Is there a reason you haven't asked FIL's advice?

I have nothing to add; I just found the topic interesting.

I have, of course.  Just asking as broadly as I can.

Staff costs are pretty low - it isn't a huge restaurant.  We do love in a tourist town, and the financials reflect that - big spikes in sales in the summer, significant drops n 2001-2 and 2008-9.  However, they have also had a fairly steady year round trade as one of the 'local' restaurants that is fairly affordable (we have a few fancy places and only a couple of modest priced places). 

Over saturation could be an issue, for sure - especially if there is another drop in the tourist traffic.  That said, the traffic is pretty good and the low points are still fairly strong (if the financials I've seen are to be believed anyway).

We are in Canada - minimum wage is a different animal up here.  That said, wage costs are definitely an issue.  And rents are higher here than in most places because of our proximity to the Vancouver market (not in it, but not far away either).

Social media is an issue, for sure.  I'm pretty plugged into the local groups on social media, and I can and have seen things go crazy over little misunderstandings.  That said, the current primary clientele of the restaurant is in the over 60 crowd - this is not a fashionable restaurant. 

Waterfront location - as far as I can tell the current owners don't actually work in the restaurant, at least not in the last couple of years.  The sales have been flat or declined over a couple of years, which makes the sale price attractive if the sales can be increased (which I think they can - e.g. they aren't open in the evenings and sell very little booze).

As for customers, well - people are difficult.  I appreciate the negative considerations, and would never dive into something like this without about 2000 bits of due diligence. 

Thanks for all the input.  It all goes into the hopper.

[Cannot Wait!]

Well...you wouldn't be bored.

Perhaps you need to look at the bigger picture, i.e. life goals and future plans for the both of you.  If you have a rosy financial picture and you want to try something new - look at it as an expensive hobby or a big adventure.  Reframing it this way takes the emphasis off the bottom line and looks at the lifestyle.

[LLCoolDave]

I've worked in food service for 10 years but never as an owner. During culinary school I took a food service management class. From what I remember over 50% of restaurants go bankrupt in the first 3 years due to under-capitalization. Many a chef's personal net worth has been ruined by using their life savings to open a restaurant.

What I would do is develop a very thorough business plan, take it to banks for financing and also look for investors (not friends or family). You set up a profit sharing program for investors (you would be one) and then you and your wife take an annual salary. So you would get salary plus a share of profits. This way you are mitigating a lot of risks of sole proprietorship. Most restaurants are lucky if they average a 10% net profit.

Almost all celebrity chefs do not own the entirety of their companies. I would say most don't even own a majority share. Also, there has been a ton of good advice offered so far.