Saturday, August 25, 2012

The Restaurant Business is Brutal

There is a shuttered restaurant in the train station by my house.  Great location, had a bar, pretty good food, apparently popular for watching Phillies games.  Should be a slam dunk, but it wasn't.  It closed withing 3 months of my moving in and has been shut for something like 3 years now.  It is [still] for sale and the price just came down, but looking at the price and the setup, I'm not sure the restaurant could possibly do well enough. 

They are asking $700k, and that does not include the building (which leases for a "favorable" $3500/mo for at least the first couple years...the building had a published lease price of $6k/mo).  This means that the business needs to turn nearly $150k/year in profit (not including any salary the owner would need if working there as well).  Restaurant margins, particularly at startup are notoriously small, and a 5% profit margin would require $3 million per year in sales/revenue (or a bit over $8k/day).

Being kind about the lease and not taking that out of profit means only ~$100k profit per year, but adds the lease to the operating expenses cutting the margin by 1-2% and leaving the business in about the same position.  Really well managed/operated could bring margins up to maybe 12%, and then things are getting close.

But even those numbers assume that the $700k is good to go. In reality, there will be lots more upfront costs from cleaning and setup, to training new staff to advertising.  

Restaurants require lots of work, and good management.  I'd love to see this place succeed,and it could, but it will require someone capable and willing.

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