Ready to turn that idea of a restaurant into a reality? Congrats! You’re on the path to becoming a restaurateur...along with two-thirds of a million other people in the United States alone.
Needless to say – you’ve got your work cut out for you in this industry. Aside from challenges like finding staff members and addressing high food costs, you’ve also got to make yourself stand out against established competition if you want to become a restaurant owner.
But it can be done – and the first step to getting investors, landlords, and potential customers excited about your restaurant is with a restaurant feasibility study.
In this article, we’ll define a feasibility study, outline the sections a restaurant feasibility should have, and identify the best practices you should follow when conducting one.
To learn more about what it takes to open a restaurant and the numerous steps to take to ensure the restaurants success read How to start a Restaurant: Your 13 Ingredient Recipe
What is a Feasibility Study?
A feasibility study is an analysis of the practicality of a project or an idea. Those who run a feasibility study seek to evaluate the necessary steps to bring an idea to fruition and determine if those steps and the desired outcome are collectively feasible. The study concludes when all parties involved decide if the project should move forward or if it should be abandoned.
Any businesses doing a feasibility study might want to look at how attainable their financial projections are and how impactful their marketing would be. For a restaurant, running a feasibility study might involve answering the following questions:
- Will my concept stand out in this market?
- Will my concept appeal to those in this market?
- Will my projected revenue exceed my costs?
- Will I hit my financial goals? If so, when?
If this sounds similar to your business plan, that’s okay – it should. But it’s important to remember that a restaurant’s feasibility analysis is not a replacement for its business plan. The feasibility study is more of a companion piece to a business plan to see if the ideas fleshed out in the business plan can reasonably and successfully be brought to life.
Another factor unique to the feasibility study is the ultimate decision of whether or not to move forward with the project – referred to as the “Go or No-Go Decision.” If all signs point to profitability and practicality, you’ve likely reached to a Go Decision and should be able to convince others (and yourself) that you’re restaurant could feasibly work. If not, you’ve reached a No-Go Decision, and will have to go back to the drawing board and rethink your location, concept, pricing, and/or expenses if you still want to make the idea work.
Restaurant Feasibility Study Outline
A restaurant’s feasibility study should tow the line between brief and detailed. There’s opportunity to highlight countless factors in any feasibility study, but resist the temptation to elaborate in areas where it’s not necessary. That said, investors and stakeholders will want to know exactly how you came to the conclusion you reached, so when it comes to financial projections, don’t skimp on the details.
To help organize your ideas, research, and conclusions, ensure your restaurant’s feasibility study is outlined with the following sections.
Section 1: Executive Summary
Your finished feasibility study should start off with an executive summary, though this should be the final section that you write. This is because your executive summary should be a few paragraphs or a page worth of content, summarizing the high-level findings of your research and your final recommendation pertaining to the Go or No-Go Decision.
Areas to cover in your executive summary – again, briefly – could include the following:
- Overview of your restaurant.
- Projected revenue and profit.
- Projected costs and expenses.
- Break-even point in dollars and in time.
- Competitive advantage for your area.
- Market research and proof of concept.
- Your Go or No-Go Decision.
Section 2: Market Overview and Analysis
This section should highlight how feasible your restaurant idea is in the market you intend to serve. Just because the restaurant that inspired your idea does well in Los Angeles doesn’t mean it’s an automatic success story elsewhere in the world.
A compelling Market Overview and Analysis section will require thorough research into the current state of your intended market – both industrial and demographic. Some questions you might want to answer include the following:
How saturated is the restaurant industry where you’re looking to operate?
If your area has an abundance of restaurants already, it can be hard to make a name for yourself. Conversely, a drought of restaurants might suggest your market isn’t as receptive to restaurants as other areas. No matter the current state of restaurants in your intended area, be prepared to defend why your restaurant would make a splash there despite the existing number.
Are there other similar restaurants in the area?
Consider not just the type of food you’re offering, but also the general concept. Let’s say you’re looking to open a fast casual Greek restaurant, and you think the area’s millennial white-collar population that has expressed interest in ethnic cuisine would certainly flock to your place. You’d be the only Greek spot in town – and that’s great! However, if you open up in an area with a dozen other fast casual restaurants, this could make it more difficult to grab a sustainable share of the fast casual market.
What is the demographic of your market?
This is where idea meets actuality. If you’re looking to own a bar – and cite the steady industry growth and annual revenue of $27 billion – you might be able to make it work. However, if you’re pitching the idea in a suburb where 90% of households represent married couples with children under 18, you probably won’t see the same sales if you opened that same bar in a city where 70% of the population is aged 22-35.
Finding accurate information on your area’s demographics can be tricky, but a good place to start is the government. For example, census.gov links to numerous demographic reports and lists how often they’re updated. You can also reach out to local administration to see what information is available to you as an aspiring business owner, and/or look into conducting your own market surveys.
Recommended Reading: 5 Restaurant Market Research Tactics that Will Save You Thousands
Section 3: Business Explanation
This is where you’ll highlight your restaurant’s concept, its cuisine type, and its competitive advantages. Speak to how and why it will appeal to the market you just outlined in the previous section.
You’ll also want to highlight what you’ll personally be bringing to the venture. Are you an entrepreneur with multiple successful business launches? Do you have decades of restaurant experience you’ll be bringing to the business? Are you partnering with a well-known chef who can elevate the prestige of the restaurant before it opens? All of these make your restaurant idea seem more feasible.
Section 4: Financial Projections
This is the section investors will probably flip to immediately – they’ll want to know their investments are likely to be made back, ideally several times over.
This section is not one to short change. It should have supporting charts and documents like a pro forma income statement and a sales forecast – all with clear rationale for how you came to the numbers you reached.
You’ll also have to outline your expected expenses, revenue, break even point, and capital requirements.
The cost of opening a restaurant can quickly add up – the median total startup costs will set you back $375,000. You’ll have to look at immediate opening expenses like furniture and equipment, long-term fixed costs like rent and insurance, and long-term variable costs like food costs. List all of these expenses out (that’s right – all of ‘em), what they will cost, and how you came to the cost. Consider referencing quotes and estimates from websites, realtors, contractors, and accountants you’ve consulted for added certainty.
Offer a complete breakdown of how much money you expect to make in the first year and where it will come from. You can base these numbers off of projected menu prices, average guests served per day or week, and average ticket size, which in turn should be based off of similar menu prices in the area and estimates from food providers.
When it comes to revenue and financial projections, be hopeful but honest with your expectations. Your sales forecast should take into consideration the slow start your restaurant could face before your business becomes established in the eyes of your target market. “Recognize that projected sales and expenses seldom match actual results in the first few weeks and months of operation,” advises Roger Fields in his book Restaurant Success by the Numbers. “It is much better to underestimate sales and overstate expenses than the other way around!”
Investors will want to know how quickly they’ll get their money back. You’ll be able to show them this with a break even analysis, which determines how much food you’ll need to sell and at what point in time your costs to open the business will be offset by the revenue you’ve generated.
In the briefest of terms, break even point in a restaurant is calculated by dividing total fixed costs by the difference between average revenue per guest and average variable cost per guest. To see break even fleshed out in further detail, read more about it here.
Lastly, your financial section should make it clear how much money is necessary to get this idea off the ground and how large of an investment you’re seeking from investors. Here is where you may want to consider asking for working capital. As described by Fields in Restaurant Success by the Numbers, “Working capital is extra capital, a reserve fund if you wish, to meet any unforeseen expenses and to keep the business afloat during the early months until it becomes profitable.”
Additionally, in reference to the previous section, you may want to reiterate a timeline for when investors can expect their money back on top of the money they will continue to receive as a return on their investments.
Section 5: Conclusion
Alright, it’s time to make a decision.
By this point, you’ve covered findings pertaining to your market, your finances, and your leadership capabilities. Provide a Go or No-Go Decision on whether or not you believe the restaurant idea is feasible based off of what you’ve covered in this study.
As an example, your conclusion section may read as follows.
“Based off of our financial projections, we conservatively believe we will see [sum] worth of profit at the end of our first year. This is taking into account the expected earnings of [total revenue], minus our opening and first year costs of [total expenses]. We reached this conclusion as a result of multiple factors, such as [list reasons for decision]. As a result, it is with full confidence that we state [restaurant name] is a feasible business venture in the restaurant industry.”
Tips for How to Conduct a Feasibility Study for a Restaurant
Seeing the feasibility study through will undoubtedly take great time and effort – but it’s a necessary step to bringing the idea of your restaurant to life. If this is a totally new area for you, here are five tips to help you conduct a respectable feasibility study for your restaurant without wanting to tear your hair out.
Work With a Consultant
If business ownership and the restaurant industry are new to you, that shouldn’t deter you from trying to see this project through. To come at your restaurant’s feasibility study with a more seasoned angle, consider working with a consultant who has experience in entrepreneurship, restaurants, or – ideally – both. He or she will be able to provide answers to questions from experience, which will quickly prove to be valuable. While helpful, this route can be pricey, so be mindful of that if money is already a concern.
It’s easy to get caught up in the potential and the excitement surrounding your restaurant, but keep in mind the feasible angle of a feasibility study. Put aside your emotions and try to keep this report as factual as possible. It never hurts to get a second opinion or to source information from multiple outlets for added accuracy.
Know Your Industry
The restaurant industry is among the most unique in the world, so put the time into understanding it better. Subscribe to restaurant blogs and podcasts. Join local or national restaurant organizations or associations. Keep up with restaurant technology trends. Speak to friends and family with restaurant experience. The more in tune you are with the restaurant world, the more realistic a feasibility study you’ll produce.
Location, Location, Location
You cannot put too much emphasis on your location. From the town or city you choose to operate in to the building you intend to occupy, so much of your restaurant’s success is contingent on where its home is. To conduct an extra thorough feasibility analysis, consider exploring and including the feasibility of multiple locations – both store-wise and city-wise – to see which location would yield the most feasible path to restaurant success.
Remember, if your initial restaurant feasibility study suggests a No-Go Decision, that’s okay! It simply means you need to reconsider some factors. Consider looking into a different food supplier, exploring a different location with cheaper rent, tweaking the concept to fit the demographics of the population, or conducting another round of market research to dig into the price sensitivity of your target customers. That said, if multiple rounds of a feasibility study for the same restaurant idea continue to suggest a negative outcome, the business simply may not be feasible.
You’re Good to Go!
Once you complete your restaurant feasibility study and secure investors, you’re one step closer to a thriving restaurant business. Just remember to make the report thorough, well-researched, and as objective as possible, and you’ll be having your restaurant grand opening in no time.