Growing a New Restaurant Business

Let’s say you have come up with a restaurant/QSR concept and have invested in setting up 1 unit. If the unit is doing reasonable business, how do you go about getting investment and scaling up your business?

Though the answer to this would depend very much on the concept, the founding team etc., I have tried to provide some broad guidelines on the areas you can focus on depending on how well your single/few units are doing.

The Key Figure you need to look is “Operating Margins”.

Operating Margins = Revenues – Costs (Food Costs + All Other Overhead Costs). You need to look at average figures (atleast for 6 months).

Typically most founders pretty much work full-time running the business, but do not take a salary in the initial few years. If you are running the business on a full time basis, and are not taking a salary, you should include a salary component for yourself (equivalent of what you would need to pay someone to do what you do) and then calculate these figures. Essentially, you should consider that you are playing 2roles - one of an investor and one of a employee.

If after including all these costs,
1) Your margins are over 25%, you have a really good business going on. VCs and Institutional investors may be interested.
2) If your margins are between 15-25%, you have an OK business going on. You may be able to find a high net worth indvidual/angel investor to establish your ability to successfully operate multiple units.
3) If your margins are below 15%, you are not ready for outside investors yet. More than scaling, you will be better off figuring out ways to improve your margins. Any additional investment required may have to come from yourself, friends & family.

Remember this: For an entrepreneur
1) Revenues, Number of locations, brand etc. is Vanity
2) Profitability is Sanity
3) And Cash is Reality

Given that the restaurant business is a Cash Flow generating business (unless you run a catering business), Collections is a non-issue. So I would urge you to focus on Profitability and figure out ways to get it up to the 25% level.

If you believe that you can get profitability to the 25% mark, by opening 2/3 more units (atleast your salary costs will get averaged out across the units) then you need to do that using your own resources (maybe with help from friends & family).