How To Start A Restaurant (Part 4)

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Restaurant Fixtures and Equipment

Whether an existing restaurant is purchased, or a new operation takes over a previously occupied space, some or all of the fixtures and equipment may be offered for sale to the new owner. Regardless of the concept, many of the fixtures and equipment found in a typical restaurant are common to all restaurants. For example, some concepts may require that a certain style of furniture be used or that the kitchen include certain specialized equipment. But the need for much of the higher cost kitchen equipment, such as refrigerators, freezers, and stoves, is common to virtually all restaurants. Ordinarily, the new operator should evaluate the suitability of the fixtures and equipment by:

a. Obtaining (or compiling) a complete list of the available furniture and equipment.

b. Noting the age and condition of each item.

c. Identifying any equipment that is unusable or unsuitable for the new operation.

d. Determining if any of the fixtures and equipment is leased.

Starting a new restaurant is not cheap. In fact, the cost of building and outfitting a free-standing, full service restaurant can easily exceed $1.50 million (not including land costs).

Converting an existing restaurant site, therefore, can result in large savings. However, you should approach any conversion with caution. There are reasons why restaurants fail, and understanding those reasons is critical. With this in mind, taking on a former restaurant site may not be a good bargain if the costs of overcoming the flaws are too high.

Operating Considerations

There are literally dozens of steps that must be completed after deciding on the restaurant concept and determining where to locate it, before it is ready to open. These considerations are divided into the following categories:

a. Administrative matters.

b. Accounting and control systems.

c. Marketing and promotion.

d. Purchasing and inventory.

e. Hiring personnel.

f. Fixed asset acquisition.

Adopting an Operating Plan…

The time from the original decision to open a restaurant to the actual opening can stretch for many months. Failure to consider a step early enough in the process could impact the success of the opening. For example, in some cases, a liquor license may only be obtained after negotiations with the local municipality which can last for several months.

If the application is not started in time, the operations may not have a liquor license in place by opening day. Accordingly, it is imperative that the restaurateur adopt a plan that includes a timetable to ensure that the operation’s opening is successful.

Administrative Matters.

Like any start-up business, a new restaurant must address a variety of administrative matters. Some of the more important issues include:

a. Restaurant name.

b. Form of entity.

c. Permits and licenses.

d. Insurance coverage.

The restaurant name. In most cases, the restaurant name is determined when the restaurateur decides on the restaurant concept. However, before ordering signs and menus, the owner should register the name and determine that no other entity has the rights to that name. A restaurant that inadvertently uses a name that has been reserved by another entity could be forced to incur the expense of changing signs, menus, and any other feature in the restaurant that carried that name. Also, any marketing efforts that focused on building name recognition for the restaurant would be wasted if the name is changed. Trade names are generally registered with the state agency that handles incorporations. In most cases, an attorney should be consulted to register the name.

Form of entity. The owner will also have to consider the advantages and disadvantages of the various forms of entity that can be chosen. Restaurants typically choose one of the following forms of entity:

a. Proprietorship

b. General partnership

c. Limited partnership

d. Corporation (either S corporation or C corporation)

Once the form of entity is decided, the restaurant can apply for the identification numbers, including the Employers Identification Number (EIN) from the Internal Revenue Service. The restaurant must also obtain certain permits and licenses that are unique to their operations including:

a. Health permit

b. Liquor license

c. Music copyright license.

The requirements for health permits vary substantially between jurisdictions, with some areas being stricter than others. Virtually all health permits are granted only after the restaurant passes a health inspection. Therefore, it is important to understand the local requirements early in the process to ensure that any planned kitchen or dining room configuration will be in accordance with the local health department rules. The local restaurant association can often provide information about required permits and licenses.

A word about music copyrights. If the restaurant plans to play live or recorded music (including music played on a iPod), it must obtain a copyright license from the appropriate music licensing agency. The two primary agencies are the American Society of Composers, Authors & Publishers (ASCAP) and Broadcast Music, Inc. (BMI).

Insurance Coverage. Restaurants typically have a significant amount invested in their facilities. Accordingly, the restaurateur should arrange for appropriate insurance coverage. Some of the common coverage includes:

a. Liquor liability.

b. General liability.

c. Worker’s compensation.

d. Fire.

e. Business interruption.

f. Burglary.

g. Glass breakage.

h. Contents.

i. Sprinkler damage.

j. Key person.

k. Fidelity.

l. Employee benefits (life, health, disability).

This step is typically accomplished by consulting with the restaurant’s insurance agent.

Accounting and Control Systems

A restaurateur can expect to incur substantial costs as part of preparing a restaurant for opening. Accordingly, it is important to establish an accounting and control system early in the process to ensure that expenses are properly tracked. Establishing an account system includes the following steps:

a) Adopt a chart of accounts and general ledger.

b) Establish banking relationships and cash handling procedures.

c) Designate persons responsible for cashier function.

d) Adopt a weekly profit and loss report and other forms.

e) Assign responsibility for preparation of reports.

Adopt a Chart of Accounts and General Ledger. What must be decided is whether or not the restaurant will employ a bookkeeper to maintain the ledger and accounting records. Many restaurants choose to have their CPA write up the monthly transactions and update the ledger.

Establish Banking Relationships and Cash Handling Procedures. While the restaurant is preparing for opening, it will be necessary to pay contractors and other parties, such as suppliers and employees involved in the remodeling. Therefore, most restaurateurs will establish a banking relationship early in the start-up process.

Designate Persons Responsible for Cashier Function. It will be necessary to make certain cash disbursements as the start-up phase progresses. In many cases, the owner personally writes those checks. In other cases, especially if the owner is not always present, he or she may delegate the authority to pay start-up expenses. Although the restaurant has not opened, the restaurant should determine how the cashier function will be handled. A restaurant can have a central cashier or have a server that acts as a cashier. That decision may affect the restaurant’s layout and personnel hiring decisions.

Adopt Weekly Profit and Loss Report and Other Forms. Although it is not strictly necessary to adopt a weekly profit and loss format until the restaurant is ready to open, a restaurateur should have an idea of the type of information that he or she wants from such a form before the point of sale system is ordered.

Assign Responsibility for Preparation of Reports. Although preparation of the weekly profit and loss report (and its related forms) will not occur until after the restaurant has opened, the owner should decide who will be responsible for preparing the various reports prior to opening. By assigning this responsibility early, the owner is able to establish the work flow for information, and determine if the restaurant’s information needs will impact the level of staff needed or the type of point of sales system to install.

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