How Much $$$$ SHOULD Your Restaurant Be Making?

Posted by on May 29, 2013 in "The Smoking Log" | 0 comments

My speaking and consulting work over the past several years has given me the opportunity to meet literally hundreds of independent restaurant operators from all over the United States and Canada.

Frequently, I find myself in a conversation with an operator that goes something like this. “I own a restaurant and my food cost is around XX%, my labor is running XX% or so and my rent is $X,XXX per month. How are we doing with a net income of XX%?”

Obviously I don’t have enough information (or time) to make an intelligent response, but to get the operator thinking in the right direction I ask for just two pieces of information about the restaurant. First, I want to know the annual sales volume and second, the approximate square footage of the restaurant. The square footage would be the size of the entire “footprint” of the facility including storage, restrooms, hallways, etc. I then do a quick mental calculation of sales per square foot.

#1 Profit Factor: Sales Per Square Foot
Knowing sales per square foot, in most cases will give you, a fairly accurate sense of the profit potential of a full service or quick service restaurant. For example, if a full service operator is doing $1,000,000 per year in 7,500 square feet ($133 PSF) I would immediately suspect they were losing money and have one overriding problem – insufficient sales volume. Given anything close to market lease rates, it’s probably impossible to make any money in this situation, even if they are doing a fabulous job of controlling their operating costs.

Conversely, take a 7,500 square foot full serve independent restaurant doing $2,000,000 ($266 PSF). If their occupancy costs are not excessive and they are doing a reasonable job of controlling their operating expenses, I would expect them to pull in at least $100,000 (5% of total sales before income taxes) and as much as $200,000 (net income before tax).

The point, obviously, is that there is usually a direct correlation between the sales per square foot of a restaurant and it’s profit or it’s profit potential. The following chart is based on a rather unscientific combination of sources that includes operator surveys compiled in the NRA’s Industry Operations Reports as well as my own experience working with independent and chain restaurant companies which operate literally thousands of full service and quick service restaurants.

Restaurant Industry Guidelines for Assessing Profit Potential:

Full Service

Quick Service

Losing Money

$175

$225

Break-even

$175 – $275

$225 – $325

Moderate Profit

$275 – $400

$325 – $450

High Profit

Over $400

Over $450

 

Please note that I would define “Moderate” Profit as a NIBT (Net Income Before Tax) of between 5% to 10% of Net Sales. “High” Profit would a NIBT of over 10% of net sales.

There Are Exceptions
Keep in mind that this chart reflects a compilation of a large number of restaurants and also reflects averages for certain operating costs that can vary widely depending on geographic location and other factors. A good example is rent expense. In some areas prevailing rental rates may be more than twice the industry average. Such a location, is midtown Manhattan where I know operators who pay rental rates in excess of $60 PSF annually (plus ad valorem taxes, utilities and insurance). Obviously the above sales PSF numbers would be low when dealing with rental rates above the prevailing industry average of between $13 and $19 PSF (triple net).

Another issue that impacts the profitability of every independent restaurant is the compensation paid to the owner. It’s not uncommon for many owners, when a restaurant is getting established, to take no or nominal compensation, even though they are actively engaged in the business. It’s also not uncommon for the owner of a highly successful restaurant to pay themselves a substantial income. For example, I know of an independent operator’s W-2 that consistently runs in seven figures, from ONE restaurant. That one restaurant however does over $700 in sales per foot per year.

To equalize the effects of high or low compensation paid to a working owner, consider this: Assuming the owner is involved in the business full time and performing the functions of say a chef or GM, subtract the actual gross compensation paid to the owner, and insert a figure equal to 3% to 4% of net sales. A fairly good rule of thumb for figuring a GM or chef’s total gross compensation is roughly 3% to 4% of net sales. In most cases, this allows you to do a better comparison of your restaurant’s profit potential and P&Ls to industry averages.

The point is to that sales per square foot is the single biggest profit driver in the business and is a good place to start, when assessing the profit potential of most any restaurant.

MARTY BOMBENGER…”the Miami & Florida Keys Restaurant Broker”    305.310.1982

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