“It’s not a lie, it’s an adjustment. It’s the rule of three….if a guy tells you how many girls he’s hooked up with, it’s not even close to that. You take that number and divide by three, then you get the real total. So if Kevin’s saying it’s been three girls, it’s more like one. Or none!....The Rule of three, it’s an exact science. Consistent as gravity.” – American Pie
If I had a hundred bucks for every time I looked at a set of projections in DC that someone based off of the rumored sales figures of the Old Ebbitt grill or Le Diplomate, I’d be sipping margaritas in a hammock on the coast of Mexico for the rest of my days. Half of the would-be restaurateurs in this city reference these sort of outliers when they create their projections – and point to the highest reported sales figures from nearby competitors (usually obtained from the landlords’ brokers, seldom on paper, never with any sort of legal implications) as further proof that pie-in-the-sky projections will be attainable.
Here’s the problem: everybody lies.
And that’s where the Restaurant Rule of Thirty Percent comes in:
Sales – Whatever you’ve been told, round it down 30%. Everybody rounds up when they tell you how they’re doing. It’s a natural effect. We all want to be seen as successful – especially in the eyes of our peers – so we naturally make things seem better than they are. A lot of GMs will just take the full monthly total of their biggest month and multiply it by 12 to estimate a quick annual figure if they’re giving you a number. A lot of times that might even include sales tax and tips – at the very least, it ignores seasonality. Even non-quantitative answers are usually rounded up. Ask the GM or owner of a place that struggling to break even how the restaurant is doing – I bet they won’t say “We’re mediocre…a couple bucks away from death’s door.” I bet they say ‘Good.’
Action Item: Plan your restaurant to be doing 30% less in sales per square foot than you hear the competition is doing. Strike your rent deals at this point, staff with this sales budget in mind, see if the deal makes sense. If it does, you’ll be successful regardless of whether you hit the sales you think you’ll do, or 30% less.
Construction Time – However long you think it will take to build out your restaurant, add 30%. Maybe more. Every time we sign up a new client, we get an estimated date for opening. If a client says October, I joke with them “OK, so we’re looking around New Years?” They always brush the joke off and we commiserate together and move on with our days. And I put them down for a March start date.
At Preserve, we were almost a year behind schedule when we finally opened. Heading into it, having worked with so many projects in DC, I thought there was no way Annapolis could be worse/slower. I was wrong, and I paid dearly for that misjudgment. If I’d expected the worst from the beginning, I could have planned timing on a number of decisions significantly differently and saved at least $150,000. C’est la vie – but you can bet I’ll be paying attention to the Rule of Thirty Percent on all future projects.
Action Item: Be reasonable in your timeline expectations. Raise enough capital to endure delays. Wait to hire your staff until you are only a week or two, at most, out from having your C of O. You don’t need them before then, but you’ll regret carrying an expensive management team for months if you have typical delays.
Construction / Project Costs – Your project will cost more than you think it will. There’s almost no chance it doesn’t come in 30% more expensive than you think it will cost on the first day you conceptualize the venture. Just accept it. Plan for it and look for ways to mitigate the costs.
Action Item: Be sure you structure your deal to have adequate cash for a significantly over-budget buildout, as well as working capital to last at least six months at a substantial burn rate. If you don’t want to raise these up front, ensure that you have capital call provisions that allow you to easily raise money without legal fees and expensive renegotiations…or adequate debt financing easily available.
Never take anything you hear through the restaurant grapevine at pure face value. You should always trust, but verify. Use trusted expert industry advisors, like the financial team at Culinary Accountants, to check that you’re structuring your business with a reasonable set of expectations – not the 30% better numbers that you’re hearing you can achieve. In the restaurant world, the most successful operations are run by teams that innately understand the Restaurant Rule of Thirty Percent, and plan accordingly.