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Why Every Restaurateur Should Understand the Business of Food

By David Natan, CPA, MST, CVA

No one denies that the restaurant industry is a hard business; a love of food (and the ability to prepare it) goes far toward sustaining a restaurant, but cannot be relied on alone to ensure the success of an eating establishment. In addition to that inspiring passion, restaurateurs should understand these few business points to turn their dreams of owning their own restaurant into reality.

Starting out, perhaps the most important thing the restaurant owner can focus on is the restaurant’s business plan, paying special attention to the financial section. Short cuts can be tempting, but higher success rates generally come to those restaurant owners who resist the urge to cut corners.  In particular, the financial section should focus on sources and uses of cash (properly projecting build-out); guest check projects and overall P&L projections; gross profit margins and labor costs; and a determination of the most efficient way to finance the restaurant.  Understanding your numbers, maintaining transparency with investors, and utilizing sound methodology and good data are keys to developing a solid business base.

Next, determining what type of entity your restaurant should proceed with is an important decision, and should be discussed with an accountant and attorney. The two most common are a Limited Liability Company (LLC) or an S Corporation.  An LLC tends to be more favorable when anticipating initial year losses, and offers tremendous flexibility, especially if more than one owner is involved.  If flexibility is not a requirement and the ownership structure is simple, an S Corporation may be a better choice, as utilizing an S Corporation may offer significant potential tax saving opportunities.  With the right planning, a restaurateur could always start with an LLC for flexibility during loss years, and then convert to an S Corporation once the business is established.

Spending time in the beginning to develop proper systems and checks and balances is also crucial. A restaurant’s POS system should properly integrate with the software (and the proper meals tax rates) from the beginning.  While there are different ways to go about this, the end result should be the same:  readily available data and clear and correct monthly management reports.  Using an external accounting firm provides additional checks and balances, and if possible, integrating the segregation of duties will help to avoid attempts at fraud.

Ongoing cash flow management is also important. As soon as possible, integrate cash flow projections by month with assumptions, such as seasonality trends or future expansion.   Additionally, being conservative with expense analyses will help to ward off any unwelcome surprises.

Finally, understanding the tax options available as a start-up restaurant is critical. Depending on the owner’s tax situation, writing off equipment and fixtures in their entirety against profits the first year should be considered.  Bonus depreciation is also something to look at, and allows the owner to drive profits into a loss position.  Leasehold improvements also offer new options with bonus depreciation and other methods that could provide significant benefit to the owner and investors.  Likewise, tip tax credits can help offset the tax burden, but the proper calculation of tip credits from the beginning is vital.  (This is something that most payroll companies that work within the restaurant industry can integrate in the calculations for the owner and outside accountant.)

Thoughtful consideration of these financial issues can help a restaurateur’s dream turn to reality, in the form of filled tables, repeat customers, and rave reviews – and maybe even additional locations!

David Natan is a partner and Certified Valuation Analyst at Newburg & Company, Certified Public Accountants (www.newburg.com). He can be reached at dnatan@newburg.com.

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