Ira Spilky & Associates

Laying the groundwork for proper site selection

By Ira Spilky
Published in Nation's Restaurant News, November 1991

During the past year there has been a steady flow to talented and investor-supported chefs who have developed a loyal customer following and reputation for a specific concept or cuisine and have ventured into the ownership arena of the restaurant business.

Those determined individuals have begun the graduation journey from chef to restaurant entrepreneur. They bring with them an array of skills that usually encompass the area of the restaurant fondly know as "back of the house." However, once the prepared menu item leaves the kitchen by way of the service staff and enters the "front of the house," it sometimes also leaves the chef's scope of responsibility. There are exceptions to that pattern, depending on the chef's position in the restaurant as delegated and authorized by the principals of the business.

In the case of chefs that have been fortunate enough to actively and financially participate in the entire operation of the restaurant, the path to full ownership can be a smoother one with less surprises based on the extent of his working experiences. The front-of-the-house duties and responsibilities replete with hosting and customer relations are only the beginning of the ownership level accountability. Before a chef arrives at that point in his journey there comes the most important question of location of the restaurant.

No matter how experienced a chef may be in the restaurant business, when it comes to researching, evaluating, selecting and negotiating a lease or purchase for the best location for his operation, he seems to bring with him only the basic location requirements, such as general area of the city, size of installation and number of seats.

It would seem that when you are making the most important decision in the process of establishing your own business, there would be a need to look at a number of other site selection criteria before you reach a conclusion.

First on the agenda is the availability or inventory of choice locations in the general area of your search. That would include such operations as taking over a closed restaurant, converting an existing operation to your concept, purchasing a business opportunity, purchasing a leasehold opportunity, constructing a restaurant on ground lease, building a restaurant based on a build-to-suit arrangement and purchasing an improved parcel of real estate with restaurant built or options in place.

There is a definite trend to seek out closed restaurants since basic structural improvements, utilities and licenses are in place; however, one should be cautioned by the fact that if your renovation and remodeling program is very extensive, you will trigger the need to comply with new codes and ordinances, such as cooking line requirements and handicap regulations.

The build-to-suit or landlord participation method is sometimes a more prudent business decision based upon the financial assistance you can negotiate from the lessor.

Once you have determined the inventory available and the option you are pursuing, there is a need to have an extensive knowledge of the area where you are seeking to open your restaurant. You will need such information as the major visible and accessible streets and blocks that focus on foodservice and hospitality and the demographics of the area (such as population, income levels, family size, renters or owners of residences, ethnic makeup, consumer habits as they relate to food and restaurant purchases and what is planned for the area in the way of commercial growth).

Most recently, it has become necessary to determine the political and neighborhood climate for opening another restaurant in regard to traffic, noise, environmental, takeout and delivery factors, valet parking requirements, and other mitigating issues.

The next area of research is your anticipated direct and non-direct competition. Direct competition is classified as restaurant concepts that either have a menu similar to yours or are in the same customer profile and are vying for the same marketplace. Indirect competition is foodservice concepts such as gourmet supermarket takeout and downscaled quick-service concepts that derive their income from takeout and delivery. The key statistic is to look at is market-share for your menu and price points (check average).

It is important that you measure your ability to build your business as it relates to your direct competition in the area and relative to your pro-forma profit-and-loss projections as part of your business plan.

If you are anticipating allocating funds for a buyout of an existing restaurant, it is vital that you have a current grasp on market value for restaurant assets, such as lease value, goodwill, fixtures and equipment, and licenses, but also a knowledge of what restaurants have sold for—an analysis of comparables. Finally, once you have narrowed your choices down to the location you are ready to make an offer on, you must have that confident and motivated gut feel that you are ready to go forth.

The negotiation process involves both business and legal issues; therefore it is important that you are represented by both an attorney and a restaurant consultant-broker. Among the many issues that are involved in this process are rent, percentage rent, lease term, options to extend the term, CPI adjustments, parking, time to build or renovate, security deposits, guarantees, and landlord contributions known as tenant improvements. The latter entails a chef with an outstanding track record to put himself in the enviable position of having the landlord or developer step in a his financial silent partner.

The tenant improvement allowance, or landlord contribution, can range from $60 to $150 per foot, depending on your negotiating skills.

For the average restaurant, that translates to anywhere from $200,000 to $500,000 provided by the landlord. When you realize that turn-key full-service restaurants cost between $450,000 and $800,000, you'll understand that having the right professional assistance does pay.

Ira Spilky & Associates   tel: 310-558-3241   fax: 888-588-5933
16130 Ventura Blvd. Suite 512, Los Angeles, CA 91436