CHAPTER ONEINTRODUCTION

• Reasons to Open a Restaurant• Liabilities of Restaurant Operation• The History of Restaurants• Buy, Build, or Franchise?

2

WHY GO INTO THE RESTAURANT BUSINESS?

• Money• The potential for a

buy-out• Place to socialize• Challenge• Habit• Firm lifestyle• Opportunity to

express yourself

3

LIABILITIES OF RESTAURANT OPERATION

• Long hours• Excessive fatigue /

health problems• Little security for

managers who work for others

• Family life can suffer• For owner, possibility of

losing investment and investors

4

REASONS FOR RESTAURANT FAILURE

• Starting with a lack of sufficient capital• Poor management• Rapid expansion and competition from

other restaurants

5

FAILURE REASONS CONT’D

• Economy is at a downturn or recession• Family problems• Owner loses interest in the operation

6

THE RESTAURANT FAILURE RATE

• Failure rate of 59% for a three year period

• Highest failure during first year- 26%

• Second year- 19%

• Third year- 14%

7

HISTORY

• 1767: M. Boulanger, the father of the modern restaurant, sold soups called restorantes, which means restoratives– Origin of the word restaurant

• 1794: French Revolution caused many chefs to flee to America– Paypalt brought the term restaurant to the US

• 1827: Delmonico’s, the first restaurant in the US, opens

8

BUY, BUILD, FRANCHISE, OR MANAGE?

• Several career option in the restaurant industry:– Manage for someone else– Purchase and operate a franchise– Buy an existing restaurant and change it

or operate as is– Build and operate a new restaurant

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ADVANTAGES TO BUYING

• Satisfies an aesthetic personal desire• High rewards if successful• Risks cut with knowledge of why previous

restaurant failed

10

DISADVANTAGES OF BUYING

• High financial losses if restaurant fails

• High psychological losses if restaurant fails

• Difficult to overcome reputation of previous operator

11

ADVANTAGES OF BUILDING

• Freedom for personal preferences in all aspects of creation

• High psychological gains if successful

• No previous failures on the site

12

DISADVANTAGES OF BUILDING

• Very risky in all aspects• Extremely high amount of capital

required• Difficult to find investors

– Millions of dollars in investment can be lost

13

ADVANTAGES OF FRANCHISING

• More likely to be successful

• Proven concept• Building design,

menu, and marketing plans already created and tested in market

• Training and management support available

14

DISADVANTAGES OF FRANCHISING

• Must pay franchising fee, a royalty fee, and advertising royalty

• No guarantee that if concept worked in one area, it will work in another

• Franchiser/ franchisee relations can be strained

15

ADVANTAGES OF MANAGING

• Least financial risk• No investment needed• Structured working environment

16

DISADVANTAGES OF MANAGING

• Psychological cost of failure is high• Limited say, if any, in operating

procedures, concept changes, etc.

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BUY / BUILD / FRANCHISE / MANAGEADVANTAGES & DISADVANTAGES

Original Investment Needed

Experience Needed

Potential Personal stress

Psychol. Cost Failure

Financial Risk

Potential Reward

Buy medium high high high high high

Build highest high high highest highest high

Franchise low to medium

low medium medium medium to high

medium

Manage none medium to high

medium medium none medium

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The End