Several years ago, Richard Sutton was looking for an investment. As senior vice president with Brown & Brown of Indiana, a division of one of the largest insurance brokers in the world, Sutton had no industry experience, but thought that a restaurant might be a good side business for him.
Choosing what he thought was a lower risk entry into the business, Sutton signed up to become a Hurricane Grill & Wings franchisee. He invested $1 million in building out and opening the restaurant. He liked the concept, but the restaurant lost money.
After a year or so, Sutton converted the restaurant to a different concept, Scotty’s Brewhouse, also a franchise. He invested an additional $1 million to do the conversion.
“Hurricane Grill was more fun, but it lost money,” he says. “We converted to Scotty’s and made money, but the food was not as good.”
Sutton ended up selling the restaurant and getting out of the business. The experience taught him several lessons.
Lesson #1—Franchisees Don’t Always Control Their Destiny.
“The cost to build out the first restaurant could have been a lot lower as an independent,” Sutton says. “You don’t have an opportunity to put construction out for bid as a franchisee. We were kind of forced into using their suppliers. And we ended up with a restaurant that was twice the size of what we needed. It was way too big and cost too much—$11,000 a month to lease the space.”
Franchise companies don’t just dictate what the space looks like and how it’s built, they also set specifications for kitchen equipment, furnishings and decor, as well as food, often down to specific brands and models, and sometimes from specific distributors or dealers. That doesn’t leave much wiggle room for negotiations on price. When restaurant margins are tight, the inability to shop for lower price items of equal quality can spell the difference between making and losing money. (Read also: Deciding What Type of Restaurant to Open: Independent, Franchise or Food Truck.)
Lesson #2—(Some) Employees Will Take Advantage of You.
“Restaurant margins are really thin,” says Sutton. “You can’t afford to let money walk out the door. Lots of bartenders will take advantage of you by overpouring or giving away free drinks to improve their tips. The same thing happens with food and some of the kitchen staff.”
Employee theft is all too common in the restaurant industry because wages are relatively low. It’s often easy to steal from restaurants, and employees rationalize it by figuring the restaurant owes them or that what they take won’t hurt the restaurant’s bottom line.
Managers often don’t see what’s going on because they can’t be all places at once, and if they aren’t running profit-and-loss statements frequently, they might not know where losses are coming from. Managers also are sometimes reluctant to fire employees because it leaves them short-handed in a tight labor market.
#3—You Have to Pay Attention to—and Understand—the Numbers.
In Sutton’s case, like most franchisees, the franchise company generated a variety of reports and sent them to the restaurant.
“You can’t just take them for granted,” he says. “You have to study them and make sure they’re right. I once saw a purchase order for patio furniture, and we’d just ordered new furniture eight months before.”
#4—You Can’t Run a Restaurant as a Hobby.
Sutton loved the camaraderie of the people in the business and ended up okay financially when he sold the restaurant. But he considers himself lucky.
“I’m an insurance guy,” Sutton says. “I was not on-site that much; I relied on managers. But you have to put in the time. I did it as a sideline, and that’s a good way to lose a million dollars.”
Hope has been a Content Specialist since November 2015, where she brings to the table years of experience in the food service industry in a variety of roles. Throughout her time with Central, Hope has focused on learning all things possible about everything from cooking equipment to concession and specialty products in order to empower operators with education on commercial equipment and supplies. Hope is a wife, new mom, avid crafter, and food lover (french fries please!).