After the cost of food and the cost of labor, the next biggest single expense in starting a restaurant is the restaurant location itself. Most restaurant owners lease their spaces to being with and may, if success permits and the option becomes available, decide to buy the property down the road. In the beginning however it is usually more cost effective and a better choice to start with a lease.
The general rule of thumb is the lease should not be more than ten percent of your sales, and ideally not more than five percent. My more vague interpretation of this rule is to always get the best space you can for the least amount of money.
What does this mean in practice? It means that your choice of a restaurant location is one of the most critical decisions you will make in starting a restaurant. If you overpay you will find it very hard to make any kind of decent profit and may even end up going out of business.
This is one of the most common problems I see new restaurant owners make- they sign a very expensive lease and then spend tens or even hundreds of thousands more to decorate and build out only to belatedly realize the location will never support the investment.
On the other hand, selecting a space because it is “cheap” may also mean your business fails because no traffic ever materializes or the neighborhood is too poor or crime ridden or deserted to support your concept. In that case the cheap rent doesn’t save you if your sales are even lower than your “cheap” rent.
So when I say get the best place at the lowest price I mean avoid a place the is a poor location because it is cheap and avoid a place that may seem great but cost more than is justified. Not an easy task!
What is easy is doing the financial for it. Just plug in your monthly expenses plus whatever you expect to spend on leasehold improvements (divided by the total square footage because that is typically how the estimates are done- price per square foot for improvements) and you’ll have your costs calculated. Then compare these costs with your estimated sales. Is the total lease amount (lease plus cam plus other charges you pay every month) less than 10% of your month’s sales? Less than 5%? If not, either negotiate a better lease or keep looking in your search for a place.
The utilities are even easier- just plug in the numbers. No idea what it will cost? Try calling the utility company or talk to another restaurant owner in the area and compare what they are paying with the size of business they do and then do some estimating from their. You should come pretty close and if you aren’t sure still just round up a little- better to be high than low in doing financial forecasting for expenses.