Beware success on a shoestring

The good news?  There’s a low barrier to entry in the restaurant business. The bad news?  Well, you know.

Most people think inferior locations, service, food or atmosphere are the factors that most often doom a restaurant.   While those are all important, having enough cash in the bank can enable a start-up to survive them all.

I have a friend who figured out that the best way to get through college would be to pay students smarter than him to write his papers.  It worked well in his freshman, sophomore, and junior year.  As a senior, he ran out of money to pay for papers.  “I would have graduated,” he said.  ”But I was undercapitalized.”

Last week the Dallas Business Journal’s Steven R. Thompson reported on shoestring startups, Pecan Lodge Catering and Maple and Motor, and an expansion, Il Cane Rosso for his article “Restaurateurs Find Minimalist Recipes for Success.”

In the article, Steven asked me to compare a typical restaurant opening budget to that of the operations he was writing about.  He said their opening budgets were between $100K and $125K.  I just laughed.  That budget range is smaller than the cash reserves most professionally managed restaurants open with.  Most of our clients would spend half that amount on pre-opening traning alone!

Don’t get me wrong.  I am a big fan of Il Cane Rosso.  Their pizza ranks in the top tier of pizza in Dallas.  And Maple and Motor found a spot on my “Clean Plate Awards” list for Restaurant Business magazine a few years ago.   I look forward to enjoying Pecan Lodge’s catering, too.  But the business plans for each of these operations really pushed the limits of risk tolerance, opening with tiny budgets that were all they could afford.

An important part of any business is managing risk.  For each one of these fantastic job-creating, great American success stories of undercapitalized restaurants that make it, there are ten more that failed.  They simply tried to do too much with too little.  Most food truck owners aren’t driving around town because they are creative and trendy.  They would much rather be in a brick and mortar location, but they just can’t afford it.

Let’s put it this way . . . if an owner is counting on the first weekend to be busy in order to pay a contractor, then the risk tolerance is off the charts.  I’m glad for these successful operators.  Each one took a high risk and have been successful.  But if their story is inspiring to you, my recommendation is to understand what the best operators know:

The greatest chance for success results from having an appropriate amount of capital on hand relative to the needs of your business.