Rent is your largest fixed expense. Food costs are variable. If your food costs are too high, you can make menu adjustments, portion size adjustments or, as a last resort, change your chef or cook to better manage your food costs. Some high-end restaurants offer financial incentives to their chefs to maintain low food costs.
Your labor costs are the next largest overhead expense. If your labor costs are too high you can reduce your staff schedule, and thus your labor costs. You might have to adjust to less staff and possibly move yourself from owner to owner/manager, but it is still within your control to adjust. However, if your annual rent is greater than 10% of your sales, and your sales are somewhat maxed out after a series of adjustments to food and labor costs, then your rent is too high.
You have signed a 10-year lease; can you do anything to lower the rent? Not in most cases. The landlord is under no legal obligation to lower the rent.
How do your avoid this painful situation? Sales are influenced by the number of seats you have, and rent is influenced by the price per square foot (SF) you are paying. The important formula is that rent should be no more than 10% of your sales (some restaurateurs feel 8% is the right number).
So, let’s work the formula backwards by dividing the annual rent by 10% to learn how much annual sales is required to afford the rent.
- Example: A 2,000 SF restaurant at a rent of $50 SF has an annual rent of $100,000 which is $8,333.33 per month.
So before you sign a lease you now know that you must do $1,000,000 in annual sales, or $19,231 in weekly sales, in order to afford a rent of $8,333 a month. Is this what you expected from your business plan? Of course, for a complete evaluation, the number of seats must be taken into consideration. Review my post from last month on Square Feet, Seats and Rent.
It is always wise to know what you need to be doing in sales before you sign a lease.