By Chris Tripoli

One morning about two months ago I was having coffee with a senior executive of an energy supply company. I remember how excited he was as he described the small bakery cafe he wanted to open and operate with his wife. He felt the timing was right because their children were grown and almost out of college. They had very little debt and had saved nearly $200,000 for the project. His wife was excellent with pastry, and he wanted to support her in starting a business.

Their plan was to provide wholesale bread products to area restaurants and hotels while offering a small coffee, bakery and cafe menu to the public. He mentioned the various recommendations he received from his friends. Some told him the first thing he needed was to secure the right location, because without a good location his venture would fail. Others told him the first thing he needed to do was to complete his concepts menu, because without it he wouldn’t be able to properly project revenue or build an opening cost budget.

Imagine his surprise when he asked me which of these items he needed to do first and I answered neither. I told him both menu and location are incredibly important but that they would get answered during the concept development/business planning stage. What he needed to do first was to get comfortable with the limit of liability he and his wife would bear.

I told him to go home and sleep that night with the thought of $250 per square foot, because that is likely what the total cost of this project would be. If he woke up after a good night’s sleep, it was a pleasant dream and perhaps he had the mindset to continue. But if he woke with a headache because that figure gave him a nightmare, he might want to reconsider.

He couldn’t believe that a small concept like he had in mind would cost that much and insisted I must be mistaken. I assured him that a 2,000-square-foot space able to produce the concept he described would indeed cost $500,000 — and maybe more.

It isn’t uncommon for first-time restaurant owners to underestimate the costs involved. Another common and related error is to underestimate the amount of personal liability it takes to raise the funds needed to properly open. More than 40 percent of all first-time restaurant concepts fail within the first two years of operation. Inadequate funding is one of the main reasons. This doesn’t mean that raising funds is anything to be scared of, but it is something to be fully prepared for.

Most start-up restaurants are funded by what we call the “combo platter” because it is the combination of the landlord’s contribution commonly referred to as tenant improvement (TI) dollars, owner-operator equity, investor-partners and a small loan or equipment lease.

First, a myth: We have all heard that banks do not loan to restaurants. But the truth is that banks do not lend to all restaurants. It may be a difficult process but it is possible to obtain bank financing for a part of the funding required. The lending process starts early on. It is best to discuss your idea with several banks in order to gauge their interest and gain a comfort level.

Gary Henderson of Allegiance Bank Texas notes, “The SBA loan programs can help to bridge some of the weaknesses inherent in lending to the restaurant industry. Not all SBA lenders are alike, as each bank manages its SBA programs differently.” He also advises, “It is best to seek out a loan officer and not a bank. As a potential restaurant owner, you need to find that loan officer who will sit down and listen to you present your plan and describe your dream.”

Developing a business plan is an essential part of the restaurant-financing process. A good plan provides a lender with necessary information about the concept, management structure, opening budget and annual financial projections. A well-developed plan not only informs but also increases the level of credibility in the concept and confidence in its management team. Business plans may cost a small fee to prepare, but as Henderson points out they are well worth the time, effort and money.

Many communities have a Small Business Development Center (SBDC) that provides consultants who assist start-ups and small business owners with these plans. Although the consultants usually do not write the plan, they offer expert guidance and direction. This is an excellent service that is complimentary and will help a potential restaurant owner organize his or her thoughts, create a well-written plan and complete the projections of anticipated sales and expenses the lender will rely on when considering a loan.


There are a variety of sources to refer to for assistance with formatting your restaurant business plan, but I believe the template found on is the most complete. A lender is going to react best to a business plan that includes the following:

CONCEPT DESCRIPTION This paints a picture of the restaurant, including the customer profile and the concept’s point of difference

MARKET SEGMENT ANALYSIS In-depth research of a particular industry segment (e.g. bakery, sandwich shop), including trend data and feasibility of success

LOCATION If a specific location hasn’t been determined, include a sample site in your plan.

SAMPLE MENU Be sure to include a list of dishes, descriptions and price ranges for each part of day (e.g. lunch, dinner, private parties).

MANAGEMENT STRUCTURE Outline the chain of command with duties and responsibilities, staff training and inventory management procedures.

MARKETING PLAN This would include in-store promotions, community relations, social media plan and advertising support

FINANCIAL INFORMATION This section should outline:

  • Capital budget (all opening costs,including a contingency and workingcapital reserve)
  • Annual income projections (include a sample year profit-and-loss statement three ways — conservative, moderate and optimistic)


“Direct management experience is the number one credit issue when considering a loan to a restaurant,” says Henderson. “Due to the nuances involved in owning and operating a restaurant, the background of the owner and management team is very important.” Having experience with customer service, HR issues, vender selection, inventory control and restaurant marketing goes a long way when bankers are considering a restaurant loan application.

The lending process doesn’t necessarily get much easier as you become more established, either. Industry veteran Tracy Vaught and husband Hugo Ortega recently opened Caracol in the BBVA Compass building on Post Oak Boulevard. With a well-defined concept, site selected and years of experience behind her Vaught spent much time visiting with banks before finding successful funding. Caracol’s “combo platter” of financing included personal equity, the tenant improvement (TI) dollars that were available and an SBA loan.

“I was once told the lending process would be much like buying a home because the critical items for both are debt, credit score and available cash. In truth, securing lending for a restaurant is like house financing on steroids,” says Vaught. “Banks are leery of lending to restaurants unless there is 100 percent collateral or the SBA behind it,” she says. “They would much prefer you bought the property so there would be something tangible to attach. That usually costs more, and at this location buying wasn’t a possibility.”

Vaught reminds us that bank financing requires current and accurate information. She had to provide financial information on her other businesses (Backstreet Cafe, Hugo’s and Prego) as well as personal borrowing history, personal credit score and three years of tax returns. This information required updating as the lengthy lending process continued.


  • Tenant Improvement (TI) dollars usually range from $30 per square foot to $100 per square foot.
  • Opening cost per square foot in Houston ranges between $200 and $500.
  • An opening budget should include a contingency equal to five percent of total budget.
  • Management should be on salary two to three months before open.
  • Budget enough for training. Tipped employees are to be paid minimum wage during pre-opening.
  • Double-check beginning inventory to have enough for equipment testing, staff training and opening.
  • Set aside working capital in a separate account or line of credit so it doesn’t get used during the opening process.
  • Use industry specialists for legal, real estate, design, construction and accounting work.

The 8000-square-foot Caracol was completed after four months of permitting and eight months of construction. Vaught points out that even with the experience of previous openings it is possible to miss your target on a budget. Caracol went over budget on staff-related costs. “We must have hired over 100 people,” says Vaught, “and training took longer than anticipated. Thankfully we had a contingency built into the capital budget.”

Vaught recommends five percent of the opening budget for contingency. She also points out that being an experienced restaurateur doesn’t negate the need for a personal guarantee on bank lending. There is an ongoing requirement of timely and accurate financial information being available for the bank. This information normally includes year-end P-and-L statements, tax return on the business and personal tax returns.

For many restaurants seeking financing, having partners becomes necessary. When selecting partners it is best to visualize a puzzle. The best partners are the ones that compliment you and fit nicely within the framework of your company. Just as the puzzle cannot be completed if the pieces are all the same, a restaurant partnership doesn’t work well if all partners overlap.
Too often restaurants attract the wrong partners to invest. A bad partnership, unlike wine, doesn’t usually get better with time. Be specific when interviewing potential investors in order to be certain you select the ones who are interested in you and fit within your structure.
I was very fortunate to have had excellent investor-partners when I owned my restaurants. They were wise in the areas of finance and real estate, and I was not. I learned much from them. They were not interested in day-to-day operations, which was my expertise. Just like pieces of a puzzle, things fit together.
This isn’t always the case, as we see investor-partners who have no restaurant experience yet want to become involved in the day-to-day operation. Well-defined roles and written documentation from the beginning is the best way to organize things and prevent the possibility of confusion later. I also believe the best partnerships are the ones with structured communication. An annual operating plan with the distribution of monthly financial statements and a quarterly meeting or phone conference work well.
Another component of financing is the use of an equipment lease as an alternative to or in addition to bank financing. Some equipment leases are available to fund the purchase and installation of kitchen and bar equipment as well as furniture and systems such as POS and sound, light and video. Much like bank lending, credit scores are important, and personal guarantees are usually required. Careful attention must be paid to your operating projections as there will be the additional monthly cost of the lease payment until such time as the obligation has been fulfilled and the equipment is paid in full.
Bank loans, equipment leases, investor-partners, all personal equity or a combination of these — whatever your financing, Jane Bennett of Keystone Business Services recommends using an experienced restaurant accountant and following standard restaurant chart of accounts for developing capital budgets and annual income statements. These are the forms most recognized by SBA lenders and provide the type of detail that seasoned investors look for.
Bennett goes on to say that an opening budget without a contingency and working capital is incomplete much like annual income projections without their assumptions. More and more, it seems, the restaurant industry is attracting successful people from other businesses. Using services for legal, realty, construction and accounting that specialize in restaurants is the best way I know to ensure you have a fair opportunity of experiencing the same success in this business.