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Select restaurants around the nation are testing table-based credit card readers that allow customers to pay for there meal at the table. The news scare in the past year regarding waitresses and waiters stealing customer’s credit card information led to the transformation of a new industry involving products that protect consumer’s credit card information.

The restaurants that are participating in the credit card reader beta launch were reluctant at first to participate because they feared diners would feel rushed. Fast food restaurants such as McDonald’s allow customers to pay at the counter with their credit card. Table side payment is different from counter-side payment because diners are actually sitting down and being served by an employee that works mainly on tips. Waitertalk.com, an online forum for waiters and waitresses to vent on topics such as ‘bad tipping customers’ and ‘unruly management’ have formed a discussion forum against these so called ‘table-side credit card readers’. Waiters and waitresses believe the credit card readers will be a deterrent to leaving appropriate tips, especially in casual fast food restaurants such as the Ground Round, that typically attract middle-class customers that are not experienced in tipping and eating at non-chain restaurants. Some waiters believe the credit card readers will be the main focus of the dining experience and the machines will not allow them to upsel to the customer because the customer will be thinking about the bill more than the actual dining experience.

In Europe, it is normal to pay at the table; however, the culture of Europe allows table-side payment to be acceptable. Will table-side payment be the new norm for paying at restaurants or will American’s not accept this because it is more of insurance than a convenience? What do you think? Shouldn’t you trust your waiter? The skimming scams at restaurants that made headline news were part of an isolated incident. However, credit card skimming happens everyday at restaurants and other direct consumer oriented small businesses. These incidents are usually not reported because the victim will not realize he has been scammed until months after the incident. The occurrences of restaurant credit card skimming happened at the same restaurant over a period of a year and claimed many victims who traced their credit card deductions to a restaurant employee.

The only difference between these tableside machines and the restaurant employee processing the transaction is – the restaurant employee will never leave his or her fingerprints on your plastic. You simply slide your credit card through the machine and a printer in the waiter’s area prints your receipt. All you have to do is sign and leave a tip. How convenient is this? You don’t have to wait an extra 4 minutes to have the waiter swipe your card and return with your card and the receipt. Is this convenience or privacy of your most sacred information? Should you trust the person who is serving your food? Most waiters and waitresses put up with a lot from customers to earn below minimum wage.

The manufacturers are betting restaurants will purchase these new Verifone credit card readers. The readers can go for several hundred dollars each. Restaurants benefit because the payment process turns tables quicker, which helps the restaurant earn more money per table and the waiter earns more as his ‘rentals’ are turning quickly.

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Source by Patrick Kompf

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In every restaurant, you can see the same dilemma the employees face whenever they perform their tasks each day. Too much supply can spoil, but too little can affect the kinds of dishes the chefs can make for diners. The latter situation leads to problems with customers, which affects how the restaurant fares in the public eye. Remember, a less than smoothly managed restaurant loses the potential to earn.

Smooth management requires good organization and time management skills from a restaurant manager. An effective way to keep your work in line uses restaurant forms. Each process in restaurant operations uses a restaurant form to record information and to guide each employee’s actions in the process.

Consider these possible scenarios in restaurant management:

• Each day, the staff does inventory management to control the number of supplies, dates for delivery and inventory costs. Ordering too many of an ingredient will soon spoil it, especially when it is rarely used in dishes. However, purchasing too few will also put the restaurant menu in jeopardy, especially when certain dishes are a hit with customers.
• The kitchen team members prepare the ingredients, taking note of the prep time allowed for certain ingredients. Over-prepping the food can produce inconsistent flavors that affect how the dish will taste to restaurant patrons. On one hand, lacking an ingredient or two can also affect the overall quality of a recipe.
• Support staffs, such as janitors, dishwashers, and electricians, make sure the lights and kitchen appliances are functioning. They also make sure the place is always clean before the restaurant opens and when it closes.

In every scenario, we see the need for restaurant checklists and inventory schedules for employees to record and track information. In the first scenario, inventory checking at the end of the day controls costs when the manager tracks the number of supplies in the pantry. Once the numbers reached the critical point, the manager knows in advance the number of items to purchase from the supplier, and when to purchase them. This also helps accountants to manage the money spent for each month.

In the second scenario, employees need to use kitchen prep sheets and order forms to keep track of information, such as the type and amount of ingredients needed and prep instructions, the menu items ordered by customers, and personal preferences of some diners, i.e. no tomatoes, no cheese.

In the third scenario, although most restaurants do not hire separate staff for janitorial and electrical services, the importance of using restaurant forms to keep track of cleaning schedules, laundry days (for curtains and table clothes), and machine maintenance should be given time and attention.

These scenarios are just examples of how a manager can use restaurant forms to help organize restaurant operations. A well-organized business saves time and effort, which leads to less food and labor costs expended.

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Source by Jerome Chiaro

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Not only can writing restaurant reviews be an enjoyable experience because you can try all sorts of different foods, it can also be a creative way to express your opinion. There are a number of different rules to follow when writing a quality review. It is important that you understand how to determine the quality of food as well as the restaurant.

The following list highlights a number of tips on how to write a restaurant review:

1. Restaurant Selection: Pick a restaurant that you find interesting and make a reservation. Make sure that it is food that you normally eat and like.

2. Restaurant Features: When you dine at the restaurant, note the decor, atmosphere, wait staff, kitchen staff, parking, cleanliness, other diners, and location.

3. Write Review: Right after dining, find a place to write a review.

4. Describe your Impression of the Style and Decor of the Restaurant: This includes color scheme, decorations, themes, and seating arrangement. Describe the arrangement of the table. Also, you should discuss the exterior of the restaurant. Is it in an accessible location? How was the parking? Was the exterior attractive?

5. Dicuss the Patrons and Staff. What types of people were dining at the restaurant? (Professionals, families, informal diners) Was the staff helpful and nice? Did you have to wait long to receive your food? Did you have to wait long for a server?

6. Discuss the Food: What type of food does the restaurant serve? (Italian, Mexican, Fast Food… etc.) Provide a few of the different foods they offer as well as the cost. Was your food the right temperature? How did the food taste? Was it fully cooked? Was the plate of food appealing to look at? What did you like? Was there anything you did not like? Was the food mushy or have a nice texture? How fresh was the food? Did the food have a nice aroma? Was the review worth the price you paid? The food must have the most words in the review.

7. Organization of the Review: Structure the review chronologically. Write about the moment you entered the restaurant until you paid and left. Write with clear and concise words. Keep topic discussions together and not scattered throughout the review. Use vivid words like amazing, breath taking. Discuss the ingredients. Write using your own personality to make it unique. Don’t make your review a story about your visit to the restaurant. What makes the restaurant so unique? Make sure you provide a recommendation.

8. Writing Mechanics: Describe the restaurant in the present tense. Write in the second person or using a passive tense. Do not make the sentences too short. The review should flow when one is reading it. Avoid pronouns as much as possible.

Writing a review that includes a variety of features about the restaurant will make your review very professional. By implementing a number of writing tips, your review will educate and inform the consumer. Writing a review is an enjoyable way to express your view.

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Source by Amy Nutt

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It takes a special person to manage a restaurant and interact with restaurant customers and restaurant staff. Not everyone is cut out to be a restaurant manager.

Managers need to be on their feet for long periods of time-anywhere from 8 to 12 hours a day. Managers also need to be trained to be aware of labor and food costs, customer service and how to manage people. They need to be trained in every aspect of the restaurant business.

Five key aspects for every manager are:

1. Keeping an open mind

2. Being able to accept criticism

3. Retaining large amounts information

4. Having excellent customer service skills

5. Knowing how to understand both sides of the story

Sometimes it takes years to fully train someone in this business. There are two ways people usually become a manager, either earning a college degree or moving up in the ranks.

I have been in the restaurant business for over 25 years, and I have worked with both kinds of management. There are advantages and disadvantages to both paths. From either path, it’s important that you provide managers with training to understand their role in the restaurant.

Most managers straight out of college had very little hands-on training in a restaurant. Maybe they have some experience working in fast food, or as a cook or server in an independently owned restaurant or chain restaurant. Maybe they have no restaurant experience at all. The experience they have in life will be part of what they bring to the management role. A college graduate may have the head knowledge without a clear understanding of the restaurant industry. He or she may not realize the complexity of the job. Even with a degree, it’s important to train the new manager in your restaurant. Everyone will benefit from training.

People who have worked their way up through the ranks may have a greater understanding based on the path they took. However, the person will need some additional training to understand the manager’s role. It is not always easy for someone to move into management from other positions. Training is important for the person moving into manager’s role. That person will need to be prepared to look at the restaurant from a different perspective.

Some people think becoming a restaurant manager is easy, but it is not. Managers have a lot of responsibilities. Managers are exposed to stressful situations throughout the day, they must keep their composure and react to any situation in a calm manner. Every manager deals with situations differently.

It is like an automobile shifting its gears; before you shift into a certain decision you must think about the outcome. Think before you shift. Don’t automatically shift on impulse thoughts. In-fact, most managers make mistakes in their career. The key is to learn from those mistakes.

You will make new mistakes, although hopefully you will not make the same mistakes over and over.

I am going to give you some insight and tips on how to be the manager people will respect.

1. Be open-minded to change and embrace it. Changes happen every day, especially in the restaurant business. Procedures and policies are revamped constantly. As a manager, you must adjust to these changes. You may not like them or agree with these changes, but it is the manager’s responsibility to adhere to these changes and help implement them to the staff members. If you disagree with a change, don’t just go to complain and don’t complain to other staff members. Go to your supervisor with possible reasons and alternatives. Have the attitude that you want to follow their policy, but would like to suggest some reasons that this may not be the only path. Don’t say they are wrong, but say that you have other ideas on how to handle the situation. Open communication with your supervisor is vital to maintaining your credibility and upholding respect for your supervisor.

2. Managers must be able to take criticism from others. Taking criticism from others, simply means, that other employees may tell you that they do not agree with your decision on a certain topic. As a wise manager, you will use this towards your advantage and correct yourself. Listening to other people may offer other ways to get the same job done. Your way is not always the right way. Sometimes there is no “right way,” but just different options that may return better results.

3. Managers must be able to retain a large amount of information. Managers must have a thorough knowledge of all aspects of the restaurant. You must know the menu and restaurant style, and have knowledge of the operations of each area. You need to know how to cook, serve, greet, prep, and wash dishes, along with the manager’s responsibilities. This includes watching labor, knowing if there are too many people working or more people are needed. You need to be aware of food costs, realizing if food is being wasted or even stolen. You also need to know how to handle money and count cash. The toughest part is that you also need to be able to juggle all this knowledge every minute of the shift.

4. Managers need excellent customer service skills. Managers are constantly dealing with the public and staff members. The way you speak to people must be in a professional manner. Always think before you speak. Some people react to their first thought, but this may not always be the best way to handle the situation. If employees are not getting along, you will need to know how to help them work together, without a negative attitude. You also need to know how to handle difficult customers, as well as the pleasant customers. Knowing how to take a compliment is as important as knowing how to take a complaint in a positive professional manner.

5. There are always two sides to a story. This is especially true when staff members disagree. The manager needs to listen to both sides and see the perspective of each staff member. People often choose, or fall into a specific role at the restaurant because of their skills and abilities. Cooks may or may not have terrific people skills. Servers may or may not have any idea how to cook. Keep the personality of each staff member in mind as you approach them. A cook may be offended by a customer complaint about a dish that the cook feels proud of. The server may see the customer’s side. As a manager, you will have to deal with the customer’s complaint and see their side. You also have to know how to communicate the customer concerns to the cook without offending him or her. Think before you speak on both sides. You learn a lot more by listening and asking open-ended questions, not just yes or no questions. Don’t make assumptions that you know their answer before someone responds to your questions. Take the time to listen and fully understand.

Keep these five key aspects in mind if you are the manager or if you are the person who is hiring managers. All managers should keep an open mind, be able to handle criticism, retain large amounts of information, have excellent customer service skills and know how to understand both sides of the story. If every restaurant was managed by people who have those key aspects as part of their skill set and knowledge, then the issues would decrease, and profit would increase in those restaurants. Training your managers is one way to make that happen.

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Source by Jeffrey Schim

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I have seen different types of training techniques for restaurant staff. Some restaurants send new hires to their corporate training school; others hire experienced staff thinking they already know how to work that position. I think all new staff members should receive quality training regardless of previous experience.

Each role in a restaurant is important for the restaurant’s success!

Management must be able to work in every position. Their knowledge of each job is vital. Managers must step into those other roles to maintain customer service. Some reasons could be if there is a call-out, or if the sales are higher than projected.

If people tell you that managing a restaurant is easy, they are dead wrong. In-fact it is the most difficult position in the restaurant. Running a restaurant is challenging; management needs to be able to multitask, give direction, and follow-up on that direction. Managers must be able to retain large amounts of information and make quick decisions and be ready to step into any position.

Managers are not born to run a restaurant; they are developed into that position. The same goes for the rest of the staff. Train the management staff, then the trainers. Management will oversee the trainers as they train the rest of the staff.

The most effective restaurant training techniques are:

• Show-Do-Review: The trainer shows the staff member how to do the task. Then the trainer observes the trainee actually doing the task. After completion, they review the task together and the trainer gives feedback to the new hire. The Show-Do-Review technique is especially effective in learning recipes, kitchen duties, cleaning tasks, or service tasks.
• The Memory Game: Once the new hire has some understanding of their new job, the trainer shadows the staff member and helps the new hire remember different key components of the job. Periodically the trainer will ask the trainee a question. If the trainee does not answer the question correctly, then the trainer will provide the answer. The trainer will continually repeat the question all throughout the day or night until the trainee answers it correctly. The purpose of the exercise is getting the staff member to retain the information. The Memory Game can be used to remember important food time and temperature, menu and recipe knowledge, service steps, or even manager responsibilities.
• Role-Playing: Role-playing is one of the most effective training techniques to use in creating top-notch performers. Existing staff members and new hires experience real life situations and “learn by doing”. The trainees will experience “real life” situations in a simulated and controlled environment. This technique allows the trainer to evaluate the trainee’s strengths and areas to improve. This also helps to develop an action plan so that the trainee can overcome any obstacles to their success. “Practice make perfect.” This technique allows the employees to see different perspectives, build confidence, and form good habits. The trainer will observe the role-playing and my correct the staff members periodically to ensure they on the right path. Role-playing is a great technique for service staff and managers to learn the proper way to handle customer questions or complaints, how to approach a table, and the steps of service.
• Shadowing: The trainee shadows the trainer, and the trainer shows the trainee the correct procedures in completing the assigned task. The trainer should ask open-ended questions in reference to the task. Once the trainee is more comfortable, then the trainer will shadow the employee. Communication between the staff members is crucial in developing the trainees. Shadowing could be used for nearly any role, especially on the first days and last days of training.

Once the trainer evaluates the staff member and determines that the employee has mastered that position, then that person is ready to work independently.

Management should observe or be involved in the training process to ensure that employee is receiving quality training. The general manager/owner oversees the managers. The general manager/owner may have the final say in whether a new employee is ready to work solo.

Utilize any tool available to help achieve the training goals. During the training process using feedback or assessment forms can help track the quality of the training. Documenting the progress of the training and reviewing it with the employee will help the employee to know your expectations. It also gives you a paper trail of that particular employees training.

Using a variety of training techniques for your restaurant is useful in getting all your staff on the same page. It also is more interesting than sitting down with someone and reading a scripted presentation. It will help you retain staff, because too many people are thrown into their jobs without the proper training and get frustrated and quit. Having a training program that is easy and effective is important in your restaurant’s success.

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Source by Jeffrey Schim

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Restaurants are a favorite commercial property for many investors because:

1. Tenants often sign a very long term, e.g. 20 years absolute triple net (NNN) leases. This means, besides the rent, tenants also pay for property taxes, insurance and all maintenance expenses. The only thing the investor has to pay is the mortgage, which in turn offers very predictable cash flow. There are either no or few landlord responsibilities because the tenant is responsible for maintenance. This allows the investor more time to do important thing in life, e.g. retire. All you do is take the rent check to the bank. This is one of the key benefits in investing in a restaurant or single-tenant property.
2. Whether rich or poor, people need to eat. Americans are eating out more often as they are too busy to cook and cleanup the pots & pans afterwards which often is the worst part! According to the National Restaurant Association, the nation’s restaurant industry currently involves 937,000 restaurants and is expected to reach $537 billion in sales in 2007, compared to just $322 billion in 1997 and $200 billion in 1987 (in current dollars). In 2006, for every dollar Americans spend on foods, 48 cents were spent in restaurants. As long as there is civilization on earth, there will be restaurants and the investor will feel comfortable that the property is always in high demand.
3. You know your tenants will take very good care of your property because it’s in their best interest to do so. Few customers, if any, want to go to a restaurant that has a filthy bathroom and/or trash in the parking lot.

However, restaurants are not created equal, from an investment viewpoint.

Franchised versus Independent

One often hears that 9 out of 10 new restaurants will fail in the first year; however, this is just an urban myth as there are no conclusive studies on this. There is only a study by Associate Professor of Hospitality, Dr. H.G. Parsa of Ohio State University who tracked new restaurants located in the city Columbus, Ohio during the period from 1996 to 1999 (Note: you should not draw the conclusion that the results are the same everywhere else in the US or during any other time periods.) Dr. Parsa observed that seafood restaurants were the safest ventures and that Mexican restaurants experience the highest rate of failure in Columbus, OH. His study also found 26% of new restaurants closed in the first year in Columbus, OH during 1996 to 1999. Besides economic failure, the reasons for restaurants closing include divorce, poor health, and unwillingness to commit immense time toward operation of the business. Based on this study, it may be safe to predict that the longer the restaurant has been in business, the more likely it will be operating the following year so that the landlord will continue to receive the rent.

For franchised restaurants, a franchisee has to have a certain minimal amount of non-borrowed cash/capital, e.g. $300,000 for McDonald’s, to qualify. The franchisee has to pay a one-time franchisee fee about $30,000 to $50,000. In addition, the franchisee has contribute royalty and advertising fees equal to about 4% and 3% of sales revenue, respectively. In turn, the franchisee receives training on how to set up and operate a proven and successful business without worrying about the marketing part. As a result, a franchised restaurant gets customers as soon as the open sign is put up. Should the franchisee fail to run the business at the location, the franchise may replace the current franchisee with a new one. The king of franchised hamburger restaurants is the fast-food chain McDonald’s with over 32000 locations in 118 countries (about 14,000 in the US) as of 2010. It has $34.2B in sales in 2011 with an average of $2.4M in revenue per US location. McDonald’s currently captures over 50% market share of the $64 billion US hamburger restaurant market. Its sales are up 26% in the last 5 years. Distant behind is Wendy’s (average sales of $1.5M) with $8.5B in sales and 5904 stores. Burger King ranks third (average sales of $1.2M) with $8.4B in sale, 7264 stores and 13% of the hamburger restaurant market share (among all restaurant chains, Subway is ranked number two with $11.4B in sales, 23,850 stores, and Starbucks number 3 with $9.8B in sales and 11,158 stores). McDonald’s success apparently is not the result of how delicious its Big Mac tastes but something else more complex. Per a survey of 28,000 online subscribers of Consumer Report magazine, McDonald’s hamburgers rank last among 18 national and regional fast food chains. It received a score of 5.6 on a scale of 1 to 10 with 10 being the best, behind Jack In the Box (6.3), Burger King (6.3), Wendy’s (6.6), Sonic Drive In (6.6), Carl’s Jr (6.9), Back Yard Burgers (7.6), Five Guys Burgers (7.9), and In-N-Out Burgers (7.9).

Fast-food chains tend to detect new trends faster. For example, they are open as early as 5AM as Americans are increasingly buying their breakfasts earlier. They are also selling more cafe; latte; fruit smoothies to compete with Starbucks and Jumba Juice. You also see more salads on the menu. This gives customers more reasons to stop by at fast-food restaurants and make them more appealing to different customers.

With independent restaurants, it often takes a while to for customers to come around and try the food. These establishments are especially tough in the first 12 months of opening, especially with owners of minimal or no proven track record. So in general, “mom and pop” restaurants are risky investment due to initial weak revenue. If you choose to invest in a non-brand name restaurant, make sure the return is proportional to the risks that you will be taking.

Sometimes it is not easy for you to tell if a restaurant is a brand name or non-brand name. Some restaurant chains only operate, or are popular in a certain region. For example, WhatABurger restaurant chain with over 700 locations in 10 states is a very popular fast-food restaurant chain in Texas and Georgia. However, it is still unknown on the West Coast as of 2012. Brand name chains tend to have a website listing all the locations plus other information. So if you can find a restaurant website from Google or Yahoo you can quickly discern if an unfamiliar name is a brand name or not. You can also obtain basic consumer information about almost any chain restaurants in the US on Wikipedia.

The Ten Fastest-Growing Chains in 2011 with Sales Over $200 Million

According to Technomic, the following is the 10 fastest growing restaurant chains in terms of revenue change from 2010 to 2011:

1. Five Guys Burgers and Fries with $921M in sales and 32.8% change.
2. Chipotle Mexican Grill with $2.261B in sales and 23.4% change.
3. Jimmy John’s Gourmet Sandwich Shop with $895M in sales and 21.8% change.
4. Yard House with $262M in sales and 21.5% change.
5. Firehouse Subs with $285M in sales and 21.1% change.
6. BJ’s Restaurant & Brewhouse with $621M in sales and 20.9% change.
7. Buffalo Wild Wings Grill & Bar with $2.045B in sales and 20.1% change.
8. Raising Cane’s Chicken Fingers with $206M in sales and 18.2% change.
9. Noodles & Company with $300M in sales and 14.9% change from.
10. Wingstop with $382M in sales and 22.1% change.

Lease & Rent Guaranty

The tenants often sign a long term absolute triple net (NNN) lease. This means, besides the base rent, they also pay for all operating expenses: property taxes, insurance and maintenance expenses. For investors, the risk of maintenance expenses uncertainty is eliminated and their cash flow is predictable. The tenants may also guarantee the rent with their own or corporate assets. Therefore, in case they have to close down the business, they will continue paying rent for the life of the lease. Below are a few things that you need to know about the lease guaranty:

1. In general, the stronger the guaranty the lower the return of your investment. The guaranty by McDonald’s Corporation with a strong “A” S&P corporate rating of a public company is much better than a small corporation owned by a franchisee with a few restaurants. Consequently, a restaurant with a McDonald’s corporate lease normally offers low 4.5-5% cap (return of investment in the 1^st year of ownership) while McDonald’s with a franchisee guaranty (over 75% of McDonalds restaurants are owned by franchisees) may offer 5-6% cap. So figure out the amount of risks you are willing to take as you won’t get both low risks and high returns in an investment.
2. Sometimes a multi-location franchise will form a parent company to own all the restaurants. Each restaurant in turn is owned by a single-entity Limited Liabilities Company (LLC) to shield the parent company from liabilities. So the rent guaranty by the single-entity LLC does not mean much since it does not have much assets.
3. A good, long guaranty does not make a lemon a good car. Similarly, a strong guaranty does not make a lousy restaurant a good investment. It only means the tenant will make every effort to pay you the rent. So don’t judge a property primarily on the guaranty.
4. The guaranty is good until the corporation that guarantees it declares bankruptcy. At that time, the corporation reorganizes its operations by closing locations with low revenue and keeping the good locations, (i.e. ones with strong sales). So it’s more critical for you to choose a property at a good location. If it happens to have a weak guaranty, (e.g. from a small, private company), you will get double benefits: on time rent payment and high return.
5. If you happen to invest in a “mom & pop” restaurant, make sure all the principals, e.g. both mom and pop, guarantee the lease with their assets. The guaranty should be reviewed by an attorney to make sure you are well protected.

Location, Location, Location

A lousy restaurant may do well at a good location while those with a good menu may fail at a bad location. A good location will generate strong revenue for the operator and is primarily important to you as an investor. It should have these characteristics:

1. High traffic volume: this will draw more customers to the restaurant and as a result high revenue. So a restaurant at the entrance to a regional mall or Disney World, a major shopping mall, or colleges is always desirable.
2. Good visibility & signage: high traffic volume must be accompanied by good visibility from the street. This will minimize advertising expenses and is a constant reminder for diners to come in.
3. Ease of ingress and egress: a restaurant located on a one-way service road running parallel to a freeway will get a lot of traffic and has great visibility but is not at a great location. It’s hard for potential customers to get back if they miss the entrance. In addition, it’s not possible to make a left turn. On the other hand, the restaurant just off freeway exit is more convenient for customers.
4. Excellent demographics: a restaurant should do well in an area with a large, growing population and high incomes as it has more people with money to spend. Its business should generate more and more income to pay for increasing higher rents.
5. Lots of parking spaces: most chained restaurants have their own parking lot to accommodate customers at peak hours. If customer cannot find a parking space within a few minutes, there is a good chance they will skip it and/or won’t come back as often. A typical fast food restaurant will need about 10 to 20 parking spaces per 1000 square feet of space. Fast food restaurants, e.g. McDonald’s will need more parking spaces than sit down restaurants, e.g. Olive Garden.
6. High sales revenue: the annual gross revenue alone does not tell you much since larger–in term of square footage–restaurant tends to have higher revenue. So the rent to revenue ratio is a better gauge of success. Please refer to rent to revenue ratio in the due diligence section for further discussion.
7. High barriers to entry: this simply means that it’s not easy to replicate this location nearby for various reasons: the area simply does not have any more developable land, or the master plan does not allow any more construction of commercial properties, or it’s more expensive to build a similar property due to high cost of land and construction materials. For these reasons, the tenant is likely to renew the lease if the business is profitable.

Financing Considerations

In general, the interest rate is a bit higher than average for restaurants due to the fact that they are single-tenant properties. To the lenders, there is a perceived risk because if the restaurant is closed down, you could potentially lose 100% of your income from that restaurant. Lenders also prefer national brand name restaurants. In addition, some lenders will not loan to out-of-state investors especially if the restaurants are located in smaller cities. So it may be a good idea for you to invest in a franchised restaurant in major metro areas, e.g. Atlanta, Dallas. In 2009 it’s quite a challenge to get financing for sit-down restaurant acquisitions, especially for mom and pop and regional restaurants due to the tight credit market. However, things seem to have improved a bit in 2010. If you want to get the best rate and terms for the loan, you should stick to national franchised restaurants in major metros.

When the cap rate is higher than the interest rate of the loan, e.g. cap rate is 7.5% while interest rate is 6.5%, then you should consider borrowing as much as possible. You will get 7.5% return on your down payment plus 1% return for the money you borrow. Hence your total return (cash on cash) will be higher than the cap rate. Additionally, since the inflation in the near future is expected to be higher due to rising costs of fuel, the money which you borrow to finance your purchase will be worth less. So it’s even more beneficial to maximize leverage now.

Due Diligence Investigation

You may want to consider these factors before deciding to go forward with the purchase:

1. Tenant’s financial information: The restaurant business is labor intensive. The average employee generates only about $55,000 in revenue annually. The cost of goods, e.g. foods and supplies should be around 30-35% of revenue; labor and operating expenses 45-50%; rent about 7-12%. So do review the profits and loss (P&L) statements, if available, with your accountant. In the P&L statement, you may see the acronym EBITDAR. It stands for Earnings Before Income Taxes, Depreciation (of equipment), Amortization (of capital improvement), and Rent. If you don’t see royalty fees in P&L of a franchised restaurant or advertising expenses in the P&L of an independent restaurant, you may want to understand the reason why. Of course, we will want to make sure that the restaurant is profitable after paying the rent. Ideally, you would like to see net profits equal to 10-20% of the gross revenue. In the last few years the economy has taken a beating. As a result, restaurants have experienced a decrease in gross revenue of around 3-4%. This seems to have impacted most, if not all, restaurants everywhere. In addition, it may take a new restaurant several years to reach potential revenue target. So don’t expect new locations to be profitable right away even for chained restaurants.
2. Tenant’s credit history: if the tenant is a private corporation, you may be able to obtain the tenant’s credit history from Dun & Bradstreet (D&B). D&B provides Paydex score, the business equivalent of FICO, i.e. personal credit history score. This score ranges from 1 to 100, with higher scores indicating better payment performance. A Paydex score of 75 is equivalent to FICO score of 700. So if your tenant has a Paydex score of 80, you are likely to receive the rent checks promptly.
3. Rent to revenue ratio: this is the ratio of base rent over the annual gross sales of the store. It is a quick way to determine if the restaurant is profitable, i.e. the lower the ratio, the better the location. As a rule of thumb you will want to keep this ratio less than 10% which indicates that the location has strong revenue. If the ratio is less than 7%, the operator will very likely make a lot of money after paying the rent. The rent guaranty is probably not important in this case. However, the rent to revenue ratio is not a precise way to determine if the tenant is making a profit or not. It does not take into account the property taxes expense as part of the rent. Property taxes–computed as a percentage of assessed value–vary from states to states. For example, in California it’s about 1.25% of the assessed value, 3% in Texas, and as high as 10% in Illinois. And so a restaurant with rent to income ratio of 8% could be profitable in one state and yet be losing money in another.
4. Parking spaces: restaurants tend to need a higher number of parking spaces because most diners tend to stop by within a small time window. You will need at least 8 parking spaces per 1000 Square Feet (SF) of restaurant space. Fast food restaurants may need about 15 to 18 spaces per 1000 SF.
5. Termination Clause: some of the long term leases give the tenant an option to terminate the lease should there be a fire destroying a certain percentage of the property. Of course, this is not desirable to you if that percentage is too low, e.g. 10%. So make sure you read the lease. You also want to make sure the insurance policy also covers rental income loss for 12-24 months in case the property is damaged by fire or natural disasters.
6. Price per SF: you should pay about $200 to $500 per SF. In California you have to pay a premium, e.g. $1000 per SF for Starbucks restaurants which are normally sold at very high price per SF. If you pay more than $500 per SF for the restaurant, make sure you have justification for doing so.
7. Rent per SF: ideally you should invest in a property in which the rent per SF is low, e.g. $2 to $3 per SF per month. This gives you room to raise the rent in the future. Besides, the low rent ensures the tenant’s business is profitable, so he will be around to keep paying the rent. Starbucks tend to pay a premium rent $2 to 4 per SF monthly since they are often located at a premium location with lots of traffic and high visibility. If you plan to invest in a restaurant in which the tenant pays more than $4 per SF monthly, make sure you could justify your decision because it’s hard to make a profit in the restaurant business when the tenant is paying higher rent. Some restaurants may have a percentage clause. This means besides the minimum base rent, the operator also pays you a percentage of his revenue when it reaches a certain threshold.
8. Rent increase: A restaurant landlord will normally receive either a 2% annual rent increase or a 10% increase every 5 years. As an investor you should prefer 2% annual rent increase because 5 years is a long time to wait for a raise. You will also receive more rent with 2% annual increase than 10% increase every 5 years. Besides, as the rent increases every year so does the value of your investment. The value of restaurant is often based on the rent it generates. If the rent is increased while the market cap remains the same, your investment will appreciate in value. So there is no key advantage for investing in a restaurant in a certain area, e.g. California. It’s more important to choose a restaurant at a great location.
9. Lease term: in general investors favor long term, e.g. 20 year lease so they don’t have to worry about finding new tenants. During a period with low inflation, e.g. 1% to 2%, this is fine. However, when the inflation is high, e.g. 4%, this means you will technically get less rent if the rent increase is only 2%. So don’t rule out properties with a few years left of the lease as there may be strong upside potential. When the lease expires without options, the tenant may have to pay much higher market rent.
10. Risks versus Investment Returns: as an investor, you like properties that offer very high return, e.g. 8% to 9% cap rate. And so you may be attracted to a brand new franchised restaurant offered for sale by a developer. In this case, the developer builds the restaurants completely with Furniture, Fixtures and Equipment (FFEs) for the franchisee based on the franchise specifications. The franchisee signs a 20 years absolute NNN lease paying very generous rent per SF, e.g. $4 to $5 per SF monthly. The new franchisee is willing to do so because he does not need to come up with any cash to open a business. Investors are excited about the high return; however, this may be a very risky investment. The one who is guaranteed to make money is the developer. The franchisee may not be willing to hold on during tough times as he does not have any equity in the property. Should the franchisee’s business fails, you may not be able to find a tenant willing to pay such high rent, and you may end up with a vacant restaurant.
11. Track records of the operator: the restaurant being run by an operator with 1 or 2 recently-open restaurants will probably be a riskier investment. On the other hand, an operator with 20 years in the business and 30 locations may be more likely to be around next year to pay you the rent.
12. Trade fixtures: some restaurants are sold with trade fixtures so make sure you document in writing what is included in the sale.
13. Fast-food versus Sit-down: while fast-food restaurants, e.g. McDonalds do well during the downturn, sit-down family restaurants tend to be more sensitive to the recession due to higher prices and high expenses. These restaurants may experience double-digit drop in year-to-year revenue. As a result, many sit-down restaurants were shut down during the recession. If you consider investing in a sit-down restaurant, you should choose one in an area with high income and large population.

Sale & Lease Back

Sometimes the restaurant operator may sell the real estate part and then lease back the property for a long time, e.g. 20 years. A typical investor would wonder if the operator is in financial trouble so that he has to sell the property to pay for his debts. It may or may not be the case; however, this is a quick and easy way for the restaurant operator to get cash out of the equities for good reason: business expansion. Of course, the operator could refinance the property with cash out but that may not be the best option because:

1. He cannot maximize the cash out as lenders often lend only 65% of the property value in a refinance situation.
2. The loan will show as long term debt in the balance sheet which is often not viewed in a positive light.
3. The interest rates may not be as favorable if the restaurant operator does not have a strong balance sheet.
4. He may not be able to find any lenders due to the tight credit market.

You will often see 2 different cash out strategies when you look at the rent paid by the restaurant operator:

1. Conservative market rent: the operator wants to make sure he pays a low rent so his restaurant business has a good chance of being profitable. He also offers conservative cap rate to investors, e.g. 7% cap. As a result, his cash out amount is small to moderate. This may be a low risk investment for an investor because the tenant is more likely to be able to afford the rent.
2. Significantly higher than market rent: the operator wants to maximize his cash out by pricing the property much higher than its market value, e.g. $2M for a $1M property. Investors are sometimes offered high cap rate, e.g. 10%. The operator may pay $5 of rent per square foot in an area where the rent for comparable properties is $3 per square foot. As a result, the restaurant business at this location may suffer a loss due to higher rents. However, the operator gets as much money as possible. This property could be very risky for you. If the tenant’s business does not make it and he declares bankruptcy, you will have to offer lower rent to another tenant to lease your building.

Ground Lease

Occasionally you see a restaurant on ground lease for sale. The term ground lease may be confusing as it could mean

1. You buy the building and lease the land owned by another investor on a long-term, e.g. 50 years, ground lease.
2. You buy the land in which the tenant owns the building. This is the most likely scenario. The tenant builds the restaurant with its own money and then typically signs a 20 years NNN lease to lease the lot. If the tenant does not renew the lease then the building is reverted to the landowner. The cap rate is often 1% lower, e.g. 6 to 7.25 percent, compared to restaurants in which you buy both land and building.

Since the tenant has to invest a substantial amount of money (whether its own or borrowed funds) for the construction of the building, it has to be double sure that this is the right location for its business. In addition, should the tenant fail to make the rent payment or fail to renew the lease, the building with substantial value will revert to you as the landowner. So the tenant will lose a lot more, both business and building, if it does not fulfill its obligation. And thus it thinks twice about not sending in the rent checks. In that sense, this is a bit safer investment than a restaurant which you own both the land and improvements. Besides the lower cap rate, the major drawbacks for ground lease are

1. There are no tax write-offs as the IRS does not allow you to depreciate its land value. So your tax liabilities are higher. The tenants, on the other hand, can depreciate 100% the value of the buildings and equipments to offset the profits from the business.
2. If the property is damaged by fire or natural disasters, e.g. tornados, some leases may allow the tenants to collect insurance proceeds and terminate the lease without rebuilding the properties in the last few years of the lease. Unfortunately, this author is not aware of any insurance companies that would sell fire insurance to you since you don’t own the building. So the risk is substantial as you may end up owning a very expensive vacant lot with no income and a huge property taxes bill.
3. Some of the leases allow the tenants not having to make any structure, e.g. roof, repairs in the last few years of the lease. This may require investors to spend money on deferred maintenance expenses and thus will have negative impact on the cash flow of the property.

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Source by David V. Tran

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Every year Michael Winner spends his Christmas holiday in Barbados, staying at the world renowned Sandy Lane Hotel. It is arguably one of the most exclusive places in the world to see and be seen at that festive time of year, with room rates approaching $3,000 per night with a 14 night minimum stay required. Food and drink not included. Release the hounds!

And as he does every year upon his return to London, Michael Winner publishes a Barbados Restaurant Review in the Sunday Times “Winners Dinners” column. Restaurant managers and owners are known to go into DEFCOM 3, high alert when “Winner, Sandy Lane, 444-2000” appears in their reservations book. His ascerbic (some claim cruel) wit and take no prisoners style of restaurant reviewing has both fans and detractors agreeing on one thing: you either love him or hate him.

Michael Winner has made more than 30 films in his career as a director. His best known film was probably DEATH WISH, starring Charles Bronson. But his weekly Winner’s Dinners column for The Sunday Times is how he is best known to foodie’s in the UK and USA. He visits the world’s top restaurants and then delivers a tell all recap of what went wrong, right or both.

In his recently published Barbados Review on February 10th, Michael Winner mentioned how the food at Sandy Lane had dipped last Christmas season. However, he still ate 35 lunches and dinners there, only going out seven times. One of the restaurants he visited was The Fishpot – a restaurant he had never visited in the 25 years of coming to Barbados. The Fishpot Restaurant, with its 21 room hotel across the street, is owned by Andrew and Patricia Warden. Winner declared The Fish Pot to be “absolutely terriffic…”

Mr Winner was not so kind to The Cliff, calling it “that so-called great Barbados dump.” Twisting the knife, he went on to say it was “the most overbooked, second-rate place in the world.” Ouch. We do not share Mr Winner’s vitriol having dined there recently ourselves with friends. A bit stuffy perhaps, but we were in our own little world and tuned out the little annoyances such as having the water glasses refilled mid sip—less is more, please. We will agree with his comment about the bored indifference cum affected attitude of the twenty something front desk staff but we found it all vaguely amusing in a WHO IS THE EMPLOYEE AND WHO IS THE CUSTOMER sort of way. All in all, more good than bad.

Another restaurant to feel the wrath of his indigestion was Daphne’s, sister restaurant to Daphne’s in London. Mr Winner said Daphne’s “occasionally has reasonable food but the service is so slow everyone complains in high volume.” We, too, have found the service to be spotty, but GM Marco Pavone works very hard to overcome the island time mentality of some wait staff that is the Achille’s heel for most Barbados restaurants. Daphne’s consistently delivers quality and innovative Italianbbean cuisine and you simply can’t beat the view.

But No. 1 on Mr Winner’s Barbados Hit List was The Fishpot. “You turn left out of Sandy Lane and drive 25 minutes, passing endless hoardings hiding upcoming apartment blocks and foreboding signs on wasteland reading, Prime residential site for sale. Eventually you come to old Barbados. There are little wooden houses, market stalls by the beach, cane fields and an aura of better times.” That is a Bajan version of MAPQUEST. “At the Fishpot you sit right by the sea, in an old 17th-century fort. It’s tranquil. It’s beautiful. It’s what Caribbean life should be.”

Michael Winner first went for lunch with Richard Hanlon, who he says is his “favourite interior designer”, and was so impressed he returned for dinner with music mogul Lucian Grainge and his wife.

“For lunch the Fishpot had fresh local lobsters, which is more than Sandy Lane could offer at the time. They presented lobsters from Belize which must have been on ice so long all their spirit and structure had departed.”

There is another Restaurant Review coming out shortly and we understand he talks about another of our favourite restaurants, the Lone Star. Winner has long been a fan of Lone Star but you just never know if an ill WINNER will be blowing. We await your words, kind Sir, with bated breath.

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Source by Billy O’Dell