So, You Want To Open A Restaurant? Strategies for the Self Employed Business Owner

People with big bank accounts and dreams of restaurant ownership often approach Frank Diaz for advice at dinner parties.

"What many people have is an urge, a fantasy, to be around food," says Diaz, a restaurant consultant at Diaz-Schloss Communications in Montclair, N.J., "but not a great understanding of what it takes to run a restaurant."

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Diaz is not being cynical, just realistic. After 14 years of consulting, he's seen how brutal the business can be. Yes, it can be exhilarating and rewarding. But running a restaurant is as relentless as it is unpredictable.

And, compared with other 100-hour-a-week jobs, the money isn’t even that great. New York restaurateur Danny Abrams, who has opened popular and successful Manhattan venues like the Red Cat, the Mermaid Inn, and his latest, Smith's, says he remembers some of his "silent" Wall Street investors laughing out loud when he proudly announced they were netting 16% at the Harrison, a downtown establishment they had helped back, which was packing in diners with modern twists on classic American fare.

"I told them 16% was considered top dollar for the industry, and they said, 'you work this hard for that kind of money? You're crazy!' "

But, surely, there's a glamour dividend?

"Yes, some nights it can be a charmed existence. But some nights, you're plunging toilets," says Bill Stenehjem, a former high school intervention counselor for New York City public schools, who, after 50, opened the Stonehome Wine Bar in his Brooklyn neighborhood with his artist wife, Rose Hermann.

His advice: Have fat reserves.

"Start-up costs are always far beyond what you imagined," he says. "You think you're going to spend a $100 per bar stool. But then you see the $300 bar stool and you think, ‘It's so much nicer and I'm going to make that money back immediately.' That's the other fallacy." He estimates that Stonehome’s start-up costs, by the time it opened its doors, were about $450,000. “Also keep in mind that it takes a few years to begin turning a profit.”

One study by researchers at Ohio State University showed that up to 60% of restaurants failed within three years, with the first year seeing the most casualties. (That figure is even higher in places like New York where the competition is fierce).

Richard Gordon, a Boston criminal prosecutor turned restaurant owner, came close to calling it quits within the first year. Gordon, 44, had always been an armchair restaurateur. "I'd see a great spot and say, 'wouldn't this make the perfect little bakery?' "

When the ideal space became available just down the street from his house in Boston's South End, he thought it was fate. His business partner, a banker, bought it as an investment.

"It was too small for my bakery/catering concept, but I thought I would just open it and everything would fall into place." After spending hundreds of thousands of dollars remodeling, Gordon says, "I walked in and thought: This is never going to work." The kitchen was still only 400 square feet--too tight for catering, and for the chef, apparently, who walked out. His start-up costs, including buying equipment, initial inventory, and the space itself, plus paying a chef for several months as the opening was delayed by construction, came to about $850,000.

Fortunately, he'd chosen a good name, South End Buttery, and he'd had the good marketing sense to name his signature cupcakes after his three dogs, Madison, Harriet and Simon. That got him buzz-worthy mentions in the local press. But Gordon never sat down and figured out just how much those cupcakes cost to make. The good-natured young people he had hired couldn't compensate for his experiential shortcomings.

"I was bleeding money, wearing all the management hats and sleeping four hours a night," remembers Gordon. He called Michela Larson and Gary Sullivan, two established restaurateurs, and begged them to buy him out. Instead, Larson and Sullivan, who were in the throes of opening Rocca Kitchen and Bar, also in Boston's South End, helped him with his business plan.

In many ways, Gordon's mistakes were textbook, they said.

What new restaurateurs don't realize is that "80% of the restaurant's success is sealed before you open the doors," says Sullivan. Developing a unique concept, finding a great location, negotiating a smart lease, making good hires and figuring out your budget, all are the price of admission.

Even with these elements in place, says Larson, who has opened five restaurants in the Boston area, "Restaurants are like babies. They take six months before they can sleep through the night."

Richard Melman has opened over 130 restaurants nationally as the founder of Chicago-based Lettuce Entertain You Enterprises. He says Larson's comparison is apt. "Unlike banking or real estate, restaurants require a lot of mothering. That's why a good businessman doesn't necessarily make a good restaurateur." Once the doors are open, there's a level of personal involvement required that few people are able to give.

The first Chicago restaurant Melman opened 30 years ago was so successful out of the gate that he moved to California for some extended relaxation. After six months, his accountant had some sobering news: "He told me we'd netted $2,300. I nearly fell off my chair," Melman says. "Just because you're busy doesn't mean you're making money, and if you're not paying attention, it can all slip away."

Despite his early stumbles, Gordon, the former Boston prosecutor, is now expanding. He's hired the right staff so he can sleep again, and he has learned to stick to his budget. A couple of weeks ago, he was walking home from work when he overheard three women chatting about their favorite neighborhood eating spots.

"Have you tried the South End Buttery?" asked one. "I couldn't live without the Buttery," said the other. Gordon kept mum.

"It was all the affirmation I needed that I'd made the right decision to pursue my fantasy," he says. "I don't think I'll ever go back to practicing law."

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