It’s not controversial to say that owning a restaurant is a very expensive proposition. There is an enormous amount of expense and a very thin profit margin — often as little as 5 percent — so managing every cost down to the penny is critical for success. This is especially true for restaurants just starting out or looking to extensively remodel.
The choice between buying or leasing some of the elements central to your restaurant’s success can be difficult. Particularly in America, where home ownership has been woven into our cultural DNA since World War II, the idea of leasing anything (even when starting out) can raise an eyebrow. But balancing short term costs and long term savings may or may not have an impact on whether buying or leasing is going to be right for you in three key areas: your restaurant space, your kitchen equipment, and your linens.
Space
The decision to buy or lease your restaurant space is likely the biggest one you’ll have to make when starting out. There’s no absolute right answer to the question. It all depends on your particular set of circumstances.
Do you have the money for a significant down payment on a building or unit? Is the property worth the long term investment? Like any first-time homebuyer, you may want to investigate if the property and area is expected to appreciate significantly in the coming years.
Are you prepared for the long term commitment? Leases give you the option to renew or not at the end of the contract, which gives you a little flexibility and a safety net in case the restaurant doesn’t work out. No one starts a business thinking they could fail, but being stuck with a mortgage on a property you are no longer using would be one more heartache if your restaurant were to close prematurely. There’s also the chance you’ll want to move your restaurant down the line, which is much easier to do if you’re under a lease than if you own the property.
Remember: you also have to have enough money to buy a space AND fund all the necessary equipment, furniture, and marketing needed to get your new restaurant on its feet. Leasing guarantees you can spread that expense over a considerable period of time, a huge positive when so many other items are exclusively upfront expenses.
On the other hand, is your restaurant model unique enough that you going to need to make significant renovations off the bat? Do you have a restaurant business track record or line of capital that would make a downpayment easier to come by? If this is your second or third (or tenth) restaurant, the decision to buy or lease might seem much more clear cut.
When buying your space, you don’t need to worry about your lessor finding a better offer and not renewing your lease at any point. And as a property owner, your mortgage amount will be predictable month in and month out. The only variable over time would be the amount of property tax, depending on the volatility of your particular area’s worth and business interests.
Of course, location may end up being a factor as much as finances. If the only availability in an area with high foot traffic (and near other complementary businesses) is leasable property, you may not have any other option. In that case, negotiate wisely and protect yourself with a commitment that you feel comfortable with.
New business owners in particular should be wary of getting locked into a multiple year lease that would become a burden should the restaurant fail. But by the same token, if your lease is cut short in the midst of success, the cost of relocating (especially if you’ve remodeled) could be crippling. A lease agreement both protects your interests and can be the foundation a long-term positive relationship between you and the property owner, if negotiated right.
Do engage a licensed real estate agent or broker to walk through these decisions and find the property that’s right for you. Like lawyers, accountants, and human resources professionals, real estate agents are experts at what they do, and they can do it much more efficiently — and effectively — than a business owner needing to juggle one thousand things on the way to a restaurant opening.
Want a look at the ramifications of adjusting your space in a renovation? Check out our eBook “The Secret to Remodeling Your Restaurant”:
Equipment
When it comes to kitchen equipment, the choice of whether to buy or lease seems pretty clear-cut. While leasing an oven or refrigerator for your own home might raise an eyebrow, leasing industrial equipment that will experience much more wear and tear makes quite a bit more sense.
Once you factor in the cost of repairs on a piece of equipment you own, many restaurateurs find that the monthly cost of a lease — with the guarantee from the lessor to keep it in working condition or replace it — can not only save money upfront, but guarantee fewer surprise expenses (and time wasted managing repairs) down the road.
As technology improves, a leased machine — be it a dishwasher, oven, refrigerator, or other kitchen essential — is much easier to upgrade, and in fact, many leases include set timing for replacement over the course of a contract. Items which have shorter lifespans like coffee makers, dishwashers, and ice machines are ideal for leasing, if only because semi-regular replacement can be disruptive to your daily business.
Purchasing equipment also comes with some unknown dangers, particularly if your budget only allows for acquiring used kitchen appliances. Without a manufacturer’s warranty to back you up, you are on the hook financially for any defect unknown at the time of purchase, or any that subsequently develops.
Equipment sold “as-is” can be a huge albatross for your team’s daily routine if the stove or cooling unit doesn’t function properly day in and day out. And the likelihood of used equipment taking advantage of the latest in energy efficiency could end up costing you more money in utilities down the road.
No matter whether you buy or lease your equipment, be aware of the tax benefits associated with deducting costs you’re granted by the IRS as a business owner. Consult your accountant in order to maximize your opportunities for tax deductions.
Want more tips on how to organize equipment upgrades in a renovation? Check out our eBook “The Secret to Remodeling Your Restaurant”:
Linens
There’s a lot to do in a day to make sure your restaurant is running efficiently and profitably: food preparation, cleaning, customer service, fulfilling and reconciling tickets, tracking inventory, staff management, handling the money, and more. Are you prepared to add laundry on top of the list?
Keeping up with the demands of cleaning your linens (not to mention pressing and folding them) is not without cost, both in money and time. If you have a laundry machine on site at your restaurant, it may seem like an easy addition to your staff’s task lists to launder tablecloths, napkins, dishtowels, aprons, and uniforms. In reality, it’s an enormous chore. Think about how unpleasant it can be to do laundry at home. Now imagine doing the equivalent of a week’s worth every day, forever.
And if you don’t have laundry service on-site, the costs go up considerably. You’re no longer just on the hook for detergent (which is not cheap), but for the entire cost of the outside laundry service as well as the transport back and forth.
Linen services can be expensive, but they take the anxiety and wasted time off your plate — time that your staff could be using to ensure a great dining experience for your guests. Linen services will replace table linens that are soiled beyond bleaching, so that you never have to worry about a customer side-eyeing a sauce stain or finding threadbare spots in your tablecloth.
Of course, there are ways to cut back on the kinds of linens you use, whether through renting or owning. Many linen manufacturers will recommend simply purchasing tablecloths and maintaining them by placing them underneath custom sheets of glass. This is, frankly, not a very sophisticated look, and if you’re not diligent, can lead to trapped crumbs and scratched surfaces that look just as bad as stains.
Instead, consider surfaces for your restaurant that don’t need tablecloths, like sealed natural woodgrain or (if your restaurant is a little on the hip side) old school Formica tops. But be aware that in terms of cost, there will be a trade-off. When you spend less on linens, you may inevitably have more to spend on the furniture itself to guarantee a high quality finish.
And don’t forget the same holds true for safety mats and rugs. Both of these items can be maintained, cleaned, and replaced on a regular basis if leased, keeping your team safe and customers pleased over time.
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