# Net Profit Margin



## maxs (Oct 29, 2012)

Hi all,
I am consistantly seeing in the literature that for quick service restaurants (e.g., sandwich shop), you can expect a net profit margin of 3-5%. And if you are doing very well, you can supposedly expect 7%. Really?!

I'm not talking about gross profit margin. I'm talking about what's left after EVERYBODY gets paid, including staff, vendors, landlord, bookkeeper, utilities, etc. 

So the common wisdom is that a biz that grosses 1,000,000 bucks only nets 60k??!!


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## peachcreek (Sep 21, 2001)

A very wise person told me decades ago~
'A restaurant is a real estate deal that uses selling food to pay off the note.'


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## sgsvirgil (Mar 1, 2017)

maxs said:


> Hi all,
> I am consistantly seeing in the literature that for quick service restaurants (e.g., sandwich shop), you can expect a net profit margin of 3-5%. And if you are doing very well, you can supposedly expect 7%. Really?!
> 
> I'm not talking about gross profit margin. I'm talking about what's left after EVERYBODY gets paid, including staff, vendors, landlord, bookkeeper, utilities, etc.
> ...


Factor in your tax deductions and other areas where you can cut your overhead and that $60,000 goes up considerably. When it comes to profit margins and other areas of bookkeeping, its never black and white.


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## capecodchef (Jan 19, 2014)

peachcreek said:


> A very wise person told me decades ago~
> 'A restaurant is a real estate deal that uses selling food to pay off the note.'


Not completely factual. Those that rent can still make a good living.


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## maxs (Oct 29, 2012)

capecodchef said:


> Not completely factual. Those that rent can still make a good living.


Thanks for the encouragement.
But, if one can swing it, it's better to buy a bldg.

I gave my landlord 250 thousand bucks over the 8 years I owned my last restaurant. Ugh!


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## sgsvirgil (Mar 1, 2017)

capecodchef said:


> Not completely factual. Those that rent can still make a good living.


Indeed, however, without equity.


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## capecodchef (Jan 19, 2014)

sgsvirgil said:


> Indeed, however, without equity.


Not in the building maybe, but certainly in the business.

In my case, we bought an ongoing business and turned it around, tripling the gross, and quadrupling the net. Buying the building isn't an option as the owner is retired and lives off the 12 or so rents he gets from various tenants. A broker recently told me it's worth 4 to 5x what we paid 5 years ago. Sweat equity, perhaps, but it all spends the same.


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## maxs (Oct 29, 2012)

capecodchef said:


> Not in the building maybe, but certainly in the business.
> 
> In my case, we bought an ongoing business and turned it around, tripling the gross, and quadrupling the net. Buying the building isn't an option as the owner is retired and lives off the 12 or so rents he gets from various tenants. A broker recently told me it's worth 4 to 5x what we paid 5 years ago. Sweat equity, perhaps, but it all spends the same.


What is the net now, not counting your personal wage?


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## capecodchef (Jan 19, 2014)

maxs said:


> What is the net now, not counting your personal wage?


We're an LLC so we can't take a wage. We're breakfast and lunch only so I have an extremely low food cost. Net is 20-25%. (But that % includes two 50+ hour positions with no salary, chef and FOH mgr., plus back office)


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## foodpump (Oct 10, 2005)

Hi Max,

In the final analysis, your net profit is pretty much dictated by your surroundings. 

That is to say if you have a lot of competition, you’re pretty much slicing dimes lengthwise.

What worked for me was to sell something unique, and to focus on wholesale—waiting for someone to walk through the door (for me, anyway) is for eejits. Rather than watch my par levels, I’d go out and get business.

Two years ago I sold the business, but own and lease out the store. Yadonthink I’d make 80 grand of leasehold improvements for a Landlord, do you?


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## maxs (Oct 29, 2012)

capecodchef said:


> We're an LLC so we can't take a wage. We're breakfast and lunch only so I have an extremely low food cost. Net is 24%.


That's great, CCC! What part of the US are you in? I'm in Massachusetts where the minimum wage just went up to $12/hr. Are you open 7days?
Thanks.
M


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## maxs (Oct 29, 2012)

foodpump said:


> Hi Max,
> 
> In the final analysis, your net profit is pretty much dictated by your surroundings.
> 
> ...


FP, I love the idea of wholesale too. But isn't the problem then that you are selling the product for 70% of what it would sell for retail? But I guess you make up for it with less labor and rent.


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## foodpump (Oct 10, 2005)

Put this way:
You have a choice of delivering $500 worth of product that has been agreed on. Or you could make up to $1200 in sales that is not guaranteed.

With wholesale you have the advantage of planning your labour and ingredient purchases without worrying if it’ll be a”slow” day or a “busy” day. That fact saves quite a bit of money—and wastage.

Not saying wholesale is better than a’la carte, both types have their advantages and disadvantages.

What I am saying is that if Johnny across the street is selling apples, you’d better sell oranges, or you will have match or undersell Johnny’s price...


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## maxs (Oct 29, 2012)

foodpump said:


> Put this way:
> You have a choice of delivering $500 worth of product that has been agreed on. Or you could make up to $1200 in sales that is not guaranteed.
> 
> With wholesale you have the advantage of planning your labour and ingredient purchases without worrying if it'll be a"slow" day or a "busy" day. That fact saves quite a bit of money-and wastage.
> ...


I get all that, FP. What I'm saying is that if you sell a quart of soup for $8 retail, then you can only sell it for $4-6 wholesale or the retailer won't be able to mark it up.
Thanks,
M


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## capecodchef (Jan 19, 2014)

maxs said:


> That's great, CCC! What part of the US are you in? I'm in Massachusetts where the minimum wage just went up to $12/hr. Are you open 7days?
> Thanks.
> M


Same min wage here and yes to 7 days. We try to pay better than min. so the raise in min. wage doesn't affect our payroll or business model.


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## maxs (Oct 29, 2012)

capecodchef said:


> Same min wage here and yes to 7 days. We try to pay better than min. so the raise in min. wage doesn't affect our payroll or business model.


Duh. Dumb question. Cape Cod is right in your name. I'm on the North Shore.


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## foodpump (Oct 10, 2005)

maxs said:


> I get all that, FP. What I'm saying is that if you sell a quart of soup for $8 retail, then you can only sell it for $4-6 wholesale or the retailer won't be able to mark it up.
> Thanks,
> M


Well, yes, of course the retailer has his mark up. What I'm saying is that if you sell the soup yourself there are no guarantees it will be sold before before expiry, and as well you will need a cashier and display refrigeration.

On the other hand, you make the soup to the retailer's request, and you get your money, (pretty much..)guaranteed with no need for retail overhead.

Not saying one method is better than the other, but there are pros and cons to consider


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## maxs (Oct 29, 2012)

foodpump said:


> Well, yes, of course the retailer has his mark up. What I'm saying is that if you sell the soup yourself there are no guarantees it will be sold before before expiry, and as well you will need a cashier and display refrigeration.
> 
> On the other hand, you make the soup to the retailer's request, and you get your money, (pretty much..)guaranteed with no need for retail overhead.
> 
> Not saying one method is better than the other, but there are pros and cons to consider


What do you think are the best items to wholesale?


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## foodpump (Oct 10, 2005)

Whatever the retailer likes to sell...


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## brandon odell (Aug 19, 2012)

capecodchef said:


> We're an LLC so we can't take a wage. We're breakfast and lunch only so I have an extremely low food cost. Net is 20-25%. (But that % includes two 50+ hour positions with no salary, chef and FOH mgr., plus back office)


Who told you you can't take a wage just because your business is an LLC? If that was an accountant, fire them. That's not only wrong, is really bad advice. You SHOULD be taking a w2 wage if you are working in your own business. You should be taking whatever you would have to otherwise pay someone else to do the same job to keep your budget and books straight. You should also be using that w2 wage to get yourself pre-tax benefits like health insurance, life insurance, dental, vision, and retirement with a company match.


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## brandon odell (Aug 19, 2012)

maxs said:


> Hi all,
> I am consistantly seeing in the literature that for quick service restaurants (e.g., sandwich shop), you can expect a net profit margin of 3-5%. And if you are doing very well, you can supposedly expect 7%. Really?!
> 
> I'm not talking about gross profit margin. I'm talking about what's left after EVERYBODY gets paid, including staff, vendors, landlord, bookkeeper, utilities, etc.
> ...


Somebody is giving you bad information. According to the National Restaurant Associations annual report on the restaurant industry, the average full service restaurant nets about a 4% profit and the average quick service restaurant nets about a 10% profit. Now, those "averages" include the 59% of restaurants that never make money and eventually fail in the first three years.

"Real" expectations for a full service restaurant would be around 12% profit if it would run fairly well. A great full service concept can net 20%. An average net for a profitable quick service restaurant would be 12-20%. Some very well run deli and pizza shops can get very close to a 30% net. That should be achievable without an owner working for free. If you're filling a position in your restaurant, you should be paying yourself as an employee whatever you would otherwise have to pay someone else. Only then can you tell how much money the business is actually making.


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## maxs (Oct 29, 2012)

maxs said:


> Hi all,
> I am consistantly seeing in the literature that for quick service restaurants (e.g., sandwich shop), you can expect a net profit margin of 3-5%. And if you are doing very well, you can supposedly expect 7%. Really?!
> 
> I'm not talking about gross profit margin. I'm talking about what's left after EVERYBODY gets paid, including staff, vendors, landlord, bookkeeper, utilities, etc.
> ...


What I was missing in this equation is this:
When people bandy about figures like 3% or 6% net profit or cash flow, they aren't really saying anything about what the owner(s) actually earns. For example if my business makes enough money to pay me 100k/yr, then I don't mind a 3% cash flow. I can just take the 3% and put that into growing the business. Dang! I'm glad I figured THAT out.


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## brandon odell (Aug 19, 2012)

maxs said:


> What I was missing in this equation is this:
> When people bandy about figures like 3% or 6% net profit or cash flow, they aren't really saying anything about what the owner(s) actually earns. For example if my business makes enough money to pay me 100k/yr, then I don't mind a 3% cash flow. I can just take the 3% and put that into growing the business. Dang! I'm glad I figured THAT out.


Those average profits do not include any owner draw from the business. An owner draw would be included in the profit. What wouldn't be included in the profit is any w2 income the owner takes from working in the business. Any salary taken is supposed to be within industry norms, but there's no way for the IRS to police that unless they audit the business. Anything taken out other than a salary that would otherwise be paid to an employee filling that same position would be considered "profit".

In my post above, I quoted averages published in the annual NRA report. Those profit percentages do no include money an owner takes out of the business other than for a w2 position they fill that they would have to other pay an employee to do.


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