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What’s the Risk of Opening a Restaurant? Restaurateurs Weigh In

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If you’re a whiz in the kitchen who’s been complimented thousands of times about your cooking, you’ve probably toyed around with the idea of opening a restaurant. You think, “I can cook, my food is delicious, so a restaurant would be a no-brainer.” But what’s the risk of opening a restaurant?

You conduct research only to find out that the restaurant business is notorious for failure. Some statistics put the food service business failure rates as high as 60% within the first year.

If you look deeper into the numbers, you’ll find there are a more promising statistics around the restaurant business. The U.S. Bureau of Labor Statistics (BLS) puts the number of failed restaurants at closer to 17% within the first year.

This rate is actually lower than the 19% failure rate for other service-based businesses. According to the same study, the median lifespan of a food service business is 4.5 years, slightly longer than other service-based businesses, which last about 4.25 years.

What’s the risk of opening a restaurant? 

Consider these statistics:

  • According to the National Restaurant Association, the number of restaurant jobs in the U.S. increased 25% from 2010 to 2017.

  • Restaurant middle-class job growth was almost four times stronger than the entire economy from 2010-2015.

  • The BLS also reported that, in 2014, the average American household spent $2,787 on restaurant meals and takeout, compared to $3,971 on groceries.

Bottom line: the food service is a strong, growing sector of the economy, and many restaurateurs have mastered the art of creating, running, and growing food-service operations.

Though no business is without risk, it’s helpful to know what challenges you’re up against and how to handle those challenges to stay afloat longer. While the risk of opening a restaurant may be high, understanding common challenges and create appropriate fail safes, you could increase your chance of having a successful restaurant.

The risk of no access to capital

Any business short on capital is doomed for failure. This is especially so with restaurants. This cash-intensive business requires enough liquidity to cover employee paychecks, supplies, and other operating costs. In fact, cash is one of the biggest risks of opening a restaurant.

Generally, the pool of traditional institutions that lend to restaurants is slim. Even though the statistics show that restaurants are no more inclined to failure than other service-based businesses, banks still tend to stay away.

There’s usually no other way to finance restaurant capital needs outside of venture capital, business profits, or credit cards. In some instances, restaurants can get alternative types of financing like equipment loans, working capital loans, food truck financing, and lines of credit, but this doesn’t mean these options are always available.

Keith Zust, co-owner of Nashville-based restaurant Sea Salt, says food service entrepreneurs should “have a realistic and accurate business plan.”

He goes on to emphasize the need for sufficient resources: “Restaurant owners should have enough capital for the unexpected to weather the first year. The most common issue is not enough capital to withstand the chaos of the unknown.”

Risk management move

This risk of opening a restaurant can be mitigated by creating a cash-crunch contingency plan. Have sufficient cash reserves in place in cases of emergency. Work with lending partners before you need them to increase your chances of getting help. Keep good accounting records and be ready to present them for loans or credit applications.

The risk of high costs

The amount of money it takes to start a food service business can be daunting: leasehold improvements, food, payroll, waste, insurance, and the list goes on. If costs are not controlled, then cash resources can be a serious risk of opening a restaurant.

  • Ancillary costs (think utilities, marketing, rent, etc.)

Portland has one of the “hottest” food markets in the U.S. but has recently been hit with minimum wage hikes and rising real-estate prices. Though it’s a food lover’s town and foodie tourist destination, Portland is getting difficult for the foodservice industry to operate as profitably as before.

Brandt says the creative nature of Portlanders comes through when dealing with this challenge: “Rising labor costs have caused many restaurants to adopt a counter service model.” This is where customers order their food at a counter, then a server brings it to their table. More often than not, the customer will also bus their own table.

According to Brandt, the counter service model lends itself to lower labor costs, which could help more businesses stay in business longer.

We can also learn another valuable lesson from Portland: The food truck and food carts have helped many people break into the food-service business with lower barriers to entry.

Risk management move

This risk of opening a restaurant can be mitigated by operating as “lean” as possible. Use discretion dealing with suppliers and choosing a location. Be creative and open to changing things like your menu, service model, or even operating hours to control costs. The restaurateurs of Portland are a great example of cost-saving creativity in a pinch.

The risk of low sales

Many restaurant owners believe their idea is unique. This is a huge risk of opening a restaurant. Because of this, they should have no problem attracting customers. Perhaps the menu is quirky and the decor is slick. The staff is super genial and attentive not to mention the great location with ample foot traffic. They’ve got systems in place to update social media accounts with awesome food pics. This restaurant is awesome!

The reality of the restaurant business is that you could do everything right and still have dismal sales. Many variables come into play for restaurant receipts. Your food sales could vary based on the time of day or year or even changed based on the food or type of food category. For example, your cafe might sell more drinks in the morning and more sandwiches in the afternoon but  on weekdays only.

Melissa Stewart, executive director of the Greater Houston Restaurant Association (GHRA), is also in a “hot” food service market. In fact, Zagat  named Houston the top eating out city of 2013 (meaning the city’s population eats out the most often).

The GHRA sees restaurateurs fall prey to slow sales all too often. “A restaurant will open three locations and get tons of media attention in the beginning which causes an initial income spike,” Stewart says.

However, many restaurants do too much too soon. “Once the buzz dies down and the traffic is slower,” she says, “many owners end up closing their doors.”

Risk management move

Avoid this risk of opening a restaurant by researching your market thoroughly. Don’t be afraid to start small and nimble. Catering, food carts/trucks, and farmer’s markets are all good ways to test a market before going full-monty. Don’t forget to put an emphasis on marketing: hire someone to manage Yelp and Google listings and promote your business on social media.

The risk of inexperience

If you are a newbie restaurateur all of the risk factors can be magnified with inexperience. In fact, Stanford researchers who studied small businesses in Texas between 1990 and 2011 concluded that entrepreneurs who failed once in business were more likely to succeed the second time around. If some didn’t reach success on the second go round, each successive attempt at business was garnered more success.

The sobering reality is that newer business owners will make mistakes. Sometimes they’ll affect the business in inconvenient or disastrous ways. It’s a risk that is inevitable, however we know every business owner has to start somewhere.

Risk management move

Get a mentor or a more experienced partner to help run the restaurant. Running ideas by someone else and being open to feedback can help you get your feet wet in the food service business before you’re ready to take it on yourself.

Starting a restaurant, or any business, can be risky. There is considerable risk of opening a restaurant—if you’re not prepared to mitigate the common challenges.

There’s no guarantee that things will work out. But these risks are not unique to food service. As you can see, there are many ways you can handle those risks and be successful in food service after all.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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10 Software Tools to Keep Your New Business Documentation Organized

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When it comes to documenting SOPs, training materials and other important internal business processes, what’s one tool or software (not your own) that you would recommend new business owners use, and why?

These answers are provided by Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most successful young entrepreneurs. YEC members represent nearly every industry, generate billions of dollars in revenue each year, and have created tens of thousands of jobs. Learn more at yec.co.

1. Google Docs

Stay simple and use Google Docs. With direct edits and commenting features, it’s easier than ever to constantly improve upon your living documents. That way, your SOPs can continue to evolve along with your business.

Firas Kittaneh, Amerisleep Mattress

2. Loom

You can use Loom, or a similar screen-recording software, to record short videos for your team and create sections within the platform to optimize your SOPs and onboard new hires. Video information is easier to retain for most and is also easier to look up again and parse out. Certain processes are timeless and can also be used if someone needs to take over a process in an emergency.

Matthew Capala, Alphametic

3. GitBook

Although Google Docs is an elegant and convenient resource, I think GitBook might be the next best thing. It’s far more functional than a simple Google Doc, since it allows you to structure your SOP more like a wiki page or a full website instead of a handful of files in a folder.

Bryce Welker, Testing.org

IT documentation

4. JobRouter

JobRouter is one tool that I love using for documentation purposes. It helps you manage your documents from creation, editing, approval, release and distribution. It also integrates beautifully with Microsoft Word for ease of use.

Thomas Griffin, OptinMonster

5. Process Street

When documenting SOPs, Process Street is a great option. It’s a user-friendly process management software that allows you to create, track and schedule workflows. It also lets you create checklists, collaborate with your team, capture data and more so you have full control over your processes.

Stephanie Wells, Formidable Forms

6. Trainual

Trainual is a software that helps business teams run internal processes faster, better and smoother. A pain businesses face is maintaining performance as teams are assembled, grow, mature and are refreshed. The onboarding process is one process that plays a significant role in growing and refreshing teams but, if botched, organizational performance suffers. Trainual focuses on that onboarding.

Samuel Thimothy, OneIMS

7. Trello

While I wouldn’t necessarily recommend it for distributing official materials, an excellent system for organizing, commenting on and discussing internal documents among multiple teams is Trello. Trello allows you to share, sort and comment on documents in an easy-to-manage system. With their team functions, you can also ensure only those who need the materials will have unrestricted access.

Salvador Ordorica, The Spanish Group LLC

IT project management

8. systemHUB

One tool that I love using for any documentation purpose is systemHUB. It lets you integrate your existing project management software and continue working on it. You can replicate the existing documents or start from scratch as per your requirement. You can also share it with your team and do a lot more.

Josh Kohlbach, Wholesale Suite

9. ETQ

The most important thing about document control software is retrieving what you need when you need it. I like ETQ because it streamlines the entire process from document creation through retrieval and training. ETQ lets you set up permissions for employees to access the information they need and automation to notify employees of upcoming/pending training.

Matthew Podolsky, Florida Law Advisers, P.A.

10. Your Own Internal Wiki

Create your own internal wiki. There are many plug-and-play WordPress templates that are easy to use and pre-built to act as an internal wiki. Allocate a login to each employee, categorize content and use hashtags to make your SOPs and other processes easily searchable.

Chase Williams, Market My Market

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How Startup Studios are Bringing New Ideas to the Startup Space

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By Startup Studio Insider

Even as businesses have struggled through COVID-19, investors have been eagerly bringing capital to startups with the hope that new and fresh businesses will catch on and become the latest and greatest success. This influx of capital is primarily due to the exponential growth of new investment models that have exploded into the mainstream in the last five years. It is these new funding models that are helping connect entrepreneurs with investors who fit their wants and needs.

This new phenomenon of the ‘perfectly matching’ entrepreneur is a beautiful symbiosis capable of helping startups avoid risk, increase efficiency, and continue business development in a forward trend.

In this explosion of entrepreneur-startup matching, startup studios have developed almost a cult following. As many entrepreneurs have strong ideas, but lack the experience, finances, or team to bring them to fruition, studios provide a sort of safety net, capable of helping entrepreneurs deal with business and operational aspects, leaving them the time necessary to focus on ideas. With this initial investment, the special teams behind startup studios are mobilizing to mitigate risk for new businesses and help entrepreneurs focus on what matters most.

Startup studios are a critical competent of the startup and entrepreneurial space due to their capabilities to usher new ideas and practices into the industry. As this model continues to change the startup space as we know it, take a look at the list below to learn more about how a startup studio can single-handedly turn any entrepreneurial project into a juggernaut.

A Concrete and Singular Vision

Startup studios are built to do one thing and one thing well: build companies from the ground up. As this is the core initiative of these studios, they are better equipped than any other organization to take an entrepreneur from initial idea stages all the way to launch and beyond.

Because of this singular focus, startup studios are in the business of churning out these business over and over again. What this means is that they have not only repeated the process many times, but also standardized it down to a science. They’ve experienced every step of the process, and can often forewarn against roadblocks or concerns inexperienced entrepreneurs would plow headlong into.

Complete Operational Guidance

With the repetition behind the core of startup studios, they have a layer of shared resources which allow for a more rapid development and faster growth process than many other incubators or accelerators. From strategy playbooks to cross-collaborative teams, processes, and backing, these resources have allowed companies to take their development to the next levels.

Additionally, startup studios are invested in the process of developing a product beyond its launch. As such, many studios have developed programs to share resources and guidance beyond the launches from the startup studio and into the spaces beyond them.

Startup team doing planning

Oversight on Strategy

As startup studios are deeply entrenched in the day-to-day operations of their projects from the very start, especially when compared to incubators and venture capital firms, they are more capable of providing strategic oversight than other investment styles.

By utilizing a repeated process, as well as the experience of the entire team, these studios are capable of developing plans from the start, and imparting wisdom and experience onto younger entrepreneurs. This strategic guidance has been cited by many who’ve gone through the startup studio ecosystem as one of the most essential tools they’ve taken away from their experiences.

While the startup studio model is not for everyone, it is a true partnership that provides more than just financial backing. A studio is a great model for entrepreneurs who thrive off of teamwork and collaboration, and who may be looking to deepen their experience and learnings. While they can require flexibility and trust in their studio’s guidance, they are often a critical tool in pushing startups to the next level.

As the old adage goes, if you want to go fast, go alone; if you want to go far, go together. If you want to truly take your idea to the next level, consider developing it under the help and guidance of a startup studio. For more on startup studios, be sure to check out Startup Studio Insider, the newest journal providing daily insights into the startup studio space.

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5 Mistakes Business Owners Make When They Open a New Dental Clinic

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Starting a dental clinic is a daunting task, especially for young, budding entrepreneurs. The medical equipment can be pricey, putting the owner at great financial risk. Because of that, planning is a crucial step of the process that can save you a lot of money and stress down the line. Luckily, even if you don’t have experience running a business, you can learn most of these things.

photo credit: Tima Miroshnichenko / Pexels

With that in mind, here are the five mistakes business owners make when they open a new dental clinic:

1. Hiring Too Quickly

Due to high expenditures, business owners tend to rush the initial processes when opening a clinic. Hiring the right staff is crucial for your success, but unfortunately, some entrepreneurs make a decision for all the wrong reasons.

As a way of cutting expenses, lots of owners will hire young professionals straight out of school. Sometimes, they will put them on probation even if they have experience. When the time comes to hire them as full-time employees, they might not have enough loyalty to stay with your organization.

Having enough experience is crucial for dentists, but you also need to consider if this person is the right fit. Business owners neglect long-term plans and team suitability for short-term financial goals. Hiring a reputable professional is usually a better idea as it will bring stability to your team.

2. Not Creating a Beautiful Website

Word-of-mouth marketing was always crucial for companies, and it is especially important for small businesses such as dentistry. Unfortunately, getting those first clients is always a choir.

Many owners neglect the power of promotion, thinking that it’s enough to have a good service. However, unless you’re able to attract those initial patients, you will never be able to scale the business.

Having a great website is important as it sets up the basis for search engine optimization. Down the line, it will help you reach more people through Google. But it also works as a digital business card. Like your clinic, the website needs to be clean and to instill confidence in potential patients.

3. Ignoring Search Engine Optimization

Performing search engine optimization or SEO is a time-consuming job. However, small local companies can achieve great results in just a few months.

According to several professionals that conduct dental SEO by Dental Marketing Guy, local search engine optimization is an ideal way of promoting dental services to your local community. When a person looks for medical experts in their home city, your clinic should appear at the top of Google search pages. By investing some money in this promotional activity, you can get thousands of new clients in a short time.

Among others, search engine optimization is great for branding. Unlike other digital marketing activities, such as pay-per-click, the SEO results will remain even when you stop paying for the service.

Dental assistant working on a laptop

4. Not Having a Stellar Customer Service Plan in Place

We can argue that customer service is more important for dental clinics than most other businesses. This is because lots of patients are anxious before treatments and exams. Like with any other medical procedure, a person wants to be certain they’re in good hands.

Most patients are willing to pay extra for premium dental services. However, if you have poor customer service, it can dissuade them from giving you a chance. Even if they visit your clinic once, they might not return.

Retaining a patient is especially important in dentistry. Like with some other services, a patient is willing to travel long distances to perform an exam at the same clinic. Once a person chooses a dentist, they will likely return to the same person for most of their lives. And the lifetime value of one patient can be high.

5. Not preparing for the unexpected

Similar to other businesses, dental practices are subject to inherent business risks. For example, an equipment malfunction can set you back for months. In some situations, it might take weeks before you can get back to business. Losing a staff member can also be a major problem.

Although you cannot avert some potential issues, you need to have a contingency plan. First off, a business owner needs to have a healthy cash flow to cover any unexpected expenditures. Having debt is normal for dental offices, but you need to reduce liabilities as soon as possible.

One way to protect yourself is by getting insurance. Certain policies can cover dental practice overhead and provide you with income when you go on a hiatus.

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