Real Estate

The Do’s and Dont’s of Leasing a Restaurant

If you have written up your business plan and know the details regarding the soon-to-be restaurant you are creating, you are ready to find a location and finagle the details of a lease. If you don’t have your business plan prepared, you are not ready. Consider the basics before setting out to find your location and sign your lease.

The Basics

You probably already have in mind the type of restaurant you are hoping to pursue, be it ethnic, barbeque, bistro or fine dining. Set a goal for your average check amount for each service and how many patrons you hope to average. From this you can determine your projected sales. Then consider these general industry standards.

  • Food costs generally run between 25 to 35 percent dependent on restaurant type.
  • Alcoholic beverage costs vary per type. Liquor is 18 to 20 percent. Bottled beer is 24 to 28 percent. Draft beer is 15 to 18 percent and wine is 35 to 45 percent.
  • Non-alcoholic beverages run between 10 to 20 percent and include soft drinks, tea and coffee.
  • Labor, including salaries and wages, falls around 33 percent.
  • The general goal for rent is to keep it at 6 percent of sales or less.
  • To maximize profits, sales per square foot should average approximately $280 for full-service and $350 for limited-service. Sales per square foot equals annual sales divided by the square foot.
  • Determine your profit margin by dividing net income by sales. Net income equals gross revenue-operating expenses. The most common profit margins fall between 3 to 5 percent. This can vary widely depending on the type of restaurant.

You may be wondering how you can estimate these figures before opening the doors. In order to accomplish this you must have already determined your menu and pricing. Until you have these figures, it is impossible to determine your target audience, the square footage you are looking for and the rent you can honestly afford. All these are required before choosing your restaurant location.

 

The Lease

You’ve figured out what you can afford to pay for rent and where your target audience lives or works. In so doing, you’ve found the ideal restaurant to lease. Now it’s time to negotiate. Not quite. First, determine what expenses you are looking at if you choose this site. If the site was previously used for a restaurant, your expenses will most certainly be reduced. It will most likely already have public bathrooms and outside ventilation. It may, or may not, have a commercial hood. Determine renovation and repairs—it’s important to bring these figures to the negotiating table.

 

Negotiating

If the space has been vacant for a while, your restaurant would be considered an anchor tenant, or the landlord is enthusiastic about your project, you will have some space to negotiate. Consider the following when determining the rent:

  • The landlord may be willing to provide funds for renovation in exchange for equity in the restaurant.
  • They may be willing to reduce rent or not start billing until the restaurant is ready to open its doors.
  • They may pro-rate rent—charging a low rent during the initial start-up period and increasing as the restaurant becomes more profitable.

In addition to price and length of time, consider including the following:

  • If you begin renovation only to find that there are additional costs associated with the building itself, such as electrical or plumbing, having a stipulation that the landlord covers any unforeseen expenses in relation to the building itself will save you a lot of headache and expense down-the-line.
  • Incorporate a provisional or opt-out clause should the site not pass various inspections.
  • Request an exclusivity clause if there are additional tenants in the building or premise. This keeps the landlord from renting to any other restaurants that are similar to yours and would be considered direct competition.

You have undoubtedly heard about the high-failure rate of restaurants during their first year. Many of these are directly related to jumping into the business without doing the groundwork necessary to ensure success.

 

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