When opening a restaurant, one of the first and perhaps the most important decisions you will have to make is regarding your business’s location. Your choice of property impacts which customers you attract, which concepts you can execute, and whether your business is a viable operation in the long term.
While it would seem obvious that the best choice for a restaurant’s space is one that is cost-effective and marketing-friendly, many new restaurant owners make the mistake of over-investing in large, beautiful buildings or new properties. The first lesson of opening a restaurant is to recognize that your choice of space should make sense not just during peak hours, when the restaurant is full, but during off-seasons or slow periods when your revenues are less steady. In other words, spending too much on a space or on renovations can mean tough times when your business slows down.
The challenge is assessing your restaurant’s overall size to effectiveness ratio when determining what properties you may be best suited for. When working with clients, we use a number of factors to determine which space is right for them, including their ideal market, their current finances, and their projected revenues. Using this information, we can assess which properties will help maximize your profits and minimize your debts.
Choosing The Right Space For Your Restaurant
When looking for a location for your restaurant, you should be eyeing properties and neighborhoods that attract customers throughout your shifts. For example, if there are many popular shops nearby or an often-visited service building like the DMV, you are more likely to be able to count on consistent and fresh crowds at your own business. More specifically, you can tailor your choice of location to fit your business model. If you’re a restaurant focusing on lunch and dinner, opening near a popular morning coffee shop will let your restaurant get good visibility from the morning cafe crowd.
Even if you think your choice of location is going to attract crowds, it’s important that you do not sign on to a larger space than you can fill. If you open a 300-seat restaurant in order to accommodate crowds from a nearby stadium, and games only happen once per week, your restaurant will be empty for most of the week. A safer decision is to find a space that can accommodate your peak nights while ensuring that your slower shifts aren’t marred by an empty restaurant. The empty feeling of a restaurant/bar can kill your sales just as much as any other factor. People are driven to go to a small venue that is always packed for the exclusivity of it, versus a large location that is rarely full. The perception is that you aren’t a place that people want to be. For example, if you have a restaurant space that can only seat 100 and is always full, versus a 400-capacity location serving 150 people, the perception is that the smaller venue is doing more business because they are always packed.
When choosing a space for your restaurant you have the option to build a new space or renovate an existing lot. Unless you’re opening a franchise or second location for an existing brand with strict design requirements, it will usually be cheaper to do the latter. When designing your space, keep in mind the differences between your peak and off-peak performance, and take care to invest only what you’re sure to cover down the road. And remember, it’s always better to fill your restaurant, attract a following, and open a second location than to keep your space half-full at all times.
How Much Seating Capacity Do You Need Vs. Want?
As we mentioned above, restaurant owners must plan their operations around their worst-case projections just as much as their ideal scenarios. Often, this means weighing property costs with projected revenues and determining the most reliable location for you.
For example, a great way to drive business can be to situate your restaurant in close proximity to a venue that itself attracts potential customers, for example, you might open a sports bar near an NFL stadium or a cocktail lounge near a concert venue. However, even if nearby businesses draw crowds to yours, there are only a finite number of days/times that will drive those sales. Looking at the factors involved in driving your sales during peak times will help you decide your seating requirements. For instance, how many home games are there during the year, and how often does the venue fill the space with other live events that will drive sales? The answers to those questions determine the possibilities for both your seating capacity and hours of operation.
In the industry, a rule of thumb is to accommodate 12 sq feet of space for every customer you seat, before accounting for kitchen and workspace. So if the restaurant space you are looking at has a seating capacity of 200 people or 2,400 square feet plus kitchen/serving areas, you are probably looking at a building north of 4,000 square feet (not including parking). At an average of $30 per square foot, you’re looking at a rent of $10,000 a month or $120,000 a year. Deciding whether or not this is a workable price to pay will take a bit of math.
It’s important to use this math, versus the number of days you can bank on being busy. If your max capacity days can cover your weekly or monthly costs, you’ll set yourself up to succeed.
Generally, when looking at rent/building costs, you want to keep the overall costs of the property, including rent and renovations, below 10% of your overall sales. This way, you keep room for other expenses related to running your restaurant without cutting into your revenues immediately. In order to determine whether or not your property can be profitable, you should weigh these locational expenses against potential revenues, which tend to be made up largely of business from so-called “peak” business days. If the business you turn on your best nights significantly outweighs the cost you put into property and management, you’re set up for success. If not, then your slow hours cause your business to bleed funds, and it’ll be a tough path forward.
For these reasons, it’s important to evaluate any potential restaurant spaces in terms of the best and worst crowds that will be routinely brought in. With a good idea of the expected volume and estimated cost of a property, you should perform an assessment of the cost-to-sales ratio of your potential space.
How Do You Evaluate The Cost-To-Sales Ratio Of A Restaurant Space?
The cost-to-sales ratio of a business compares the expenses of conducting business versus the sales revenues gained across a period. In the restaurant industry, this is a particularly important figure, as you’ll need to be able to ensure revenues outweighing rent and operational costs on a rolling basis. A quick example of a cost-to-sales ratio assessment is below.
For this exercise, we will use a venue near a basketball arena that will utilize the NBA schedule (41 home games) as well as off-weekends for concerts. Using the 100 games/concerts that the arena can deliver for our math, we can see the projected revenue of the space versus that of the cost of the building. You want to look at three different factors: best case, worst case, and average of your sales projection. Though your restaurant may be located near a great venue that provides a strong customer base, you cannot count on the same business each night, and potential revenues may fluctuate.
If you have a capacity of 200 people and a prime location next to a venue that holds 30,000 people, you would think that you can turn 1% of the attendees into potential customers. The math that is important comes into play when you are open seven days a week, regardless of the venue being open or not. Balancing the weight of your sales during peak to cover non-peak is paramount when deciding the size and location of your restaurant.
Filling your restaurant only on the weekends might not cut it in terms of covering the costs of operation, so it’s best to find a location that is cost-effective for your expected business needs.
Choosing the right location for your restaurant is especially important during unexpected economic downturns or emergencies like the COVID pandemic. While rent relief, government aid, and restaurant business loans can help lessen the impact of prolonged closures and capacity restrictions, the biggest factor in determining your business’s longevity is the cost you put into your location.
When opening a new restaurant, it’s important to balance the funding you’re putting into your space with an honest expectation of the money you’ll bring in each month. For some, this means that purchasing a space will be best, for others it means finding a space with low rent and existing machinery. No matter your experience in the industry, the best way to succeed is by finding a space that not only drives business but meets your financial needs in the short and long-term.