How to Start a Restaurant

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A great meal in your favorite restaurant can truly make a day (or a night). Whether you’re out to celebrate a birthday, enjoy an anniversary, or just want to avoid cooking for a night, restaurants offer convenience and the luxury of being waited on. If you’ve always enjoyed going out to eat and have a passion for creating or enjoying delicious food, this industry might be a great fit for your interests and talents. Starting a restaurant is a large undertaking, but it can also be a profitable long-term business with options for expansion. 

Business Overview

Restaurants sell prepared food, and many diners also choose restaurants based on the overall dining experience. There is huge variety in the restaurant industry, and restaurants specialize in everything from fast food to organic dishes to fine dining. Some facilities are designed to offer a relaxing sit-down experience, while others are more casual and may offer limited seating with no waitress or waiter service. 

When diners go to restaurants, they’re paying for the convenience of food that is ready to eat. They may be on the road and unable to cook for themselves, or may want to enjoy a meal that is too complicated for them to prepare at home. Because there are so many restaurants and so much variety, this industry is highly competitive. With the power of social media and online reviews, restaurants need to focus on providing quality customer service and putting out their very best food every with every single service. 

Industry Summary

The restaurant industry continues to steadily grow. According to the National Restaurant Association, in 2000, the restaurant industry’s sales totaled $379 billion. In 2010, those sales totaled $590 billion, and in 2019, sales are projected to increase to $863 billion. Restaurant employment has also grown, and 15.3 million people are expected to be employed in the industry in 2019, which is equivalent to about 1 in every 10 Americans working in a restaurant. By 2029, restaurant industry employment is projected to increase to 16.9 million people. 

Industry Trends

Just like many other businesses, restaurants are currently feeling and responding to the evolution of new technologies. According to Entrepreneur, restaurants are now engaging with their audiences through apps and social media. Customers can now order meals through apps, and delivery services and convenience continue to transform the face of traditional restaurants. 

An increased focus on healthy eating and dietary restrictions has also prompted restaurants to revise their menus. Gluten-free, vegan, and vegetarian options are must-haves for many restaurants today. As awareness of environmental issues grows, restaurants need to offer sustainably sourced foods, too. Health-conscious and environmentally conscious customers are also seeking restaurants that source locally grown or farmed foods for their dishes. 

Who is the target market for your restaurant?

Restaurants vary greatly in their business models, so target markets will vary, too. A fast-food restaurant will market toward busy professionals, families, and travelers on the go who are looking for a fast, affordable meal. A fine dining establishment will have a very different market, focusing on diners who want to take their time and savor a meal, and who are looking for the very finest quality food. 

When determining a restaurant’s target market, think about the brand that you’re establishing, the menu selections, the price point, and the atmosphere when defining who your ideal market will be. 

Skills, experience, and education useful in running a restaurant

While plenty of restaurant owners start their businesses without any formal business education, there are certain skills and experiences that will give restaurant owners an advantage as they start up their businesses. 

Culinary and restaurant experience. An understanding of how restaurants function and the unique challenges managing them poses will give any restaurant owner an advantage. The same is true of culinary experience, which is important when designing or evaluating menus and assessing food quality. Ideally, a restaurant owner will have worked in restaurants in some capacity, and if that owner has worked in multiple positions in the industry, they’ll have a better understanding of what goes into keeping a restaurant running smoothly. 

Customer service skills. Customer service is a large part of the restaurant business, and a restaurant owner with great customer service skills can help to make that restaurant stand apart from others. 

Management experience. If the restaurant owner also manages the restaurant, previous business management experience will be an advantage. An owner who is experienced in hiring and managing staff can create a positive environment that attracts quality staff, increasing the chances of the restaurant being a success. 

A restaurant owner (or manager) has to control food costs and ensure proper oversight and training so employees aren’t wasting food. 

Multi-tasking skills. Owning and managing a restaurant requires great multi-tasking skills, and owners need to be able to stay focused on multiple priorities to keep the business running well. 

Attention to detail. Detail matters in everything from plate presentation to menu design and the overall cleanliness of a restaurant.

Marketing abilities. Some basic skills are an advantage in the highly competitive restaurant industry. If an owner can find new ways to make the restaurant stand out, they can attract new and recurring customers. 

Costs to Start a Restaurant

The cost to start a restaurant can vary significantly depending on the size, type, and location of the restaurant. A smaller restaurant can cost $275,000 to start, while larger fine dining establishments may cost as much as $1 million. Keep in mind that restaurants can expand and grow, so starting a smaller restaurant may be a safer way to test your success before later expanding the business into a larger space. 

Common startup costs for a restaurant include: 

  • Property lease and renovation costs
  • Furniture, like booths, tables, and chairs
  • Kitchen equipment and appliances
  • Supplies, like silverware, plates, cooking supplies
  • Signage and menus
  • Inventory (food)

Steps to Starting a Restaurant

Step 1. Write your Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan.  Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related:
How to write a restaurant business plan
Free sample business plans

Step 2. Form a Business Entity

A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from which include the sole proprietorship, partnership, corporation and LLC.  Each type of entity has its own pros and cons such as liability exposure, costs and administrative requirements. 

Related: Comparison of Business Entities

Step 3. Select your Location

Visibility, closeness to customers and ease of parking are all important considerations when selecting a restaurant location.  Lease costs can vary significantly according to a property’s size and location. Properties that are in prime, high-traffic areas often bring higher lease costs, but the value of the public awareness and walk-in traffic these settings offer can offset the higher lease costs. 

Related: Choosing a business location

Step 4. Apply for Business Licenses and Permits

Restaurants need to hold a variety of licenses and permits in order to operate. Depending on the restaurant, you may need food handling certification, a food service license and approval from the Health Department.  If serving alcohol, a liquor license will be required as well.

In addition to these food-specific licenses, restaurants may also be required to hold certain business licenses and permits such as a sales tax permit, Employer Identification Number, and Occupancy Permit among others. 

Related: Common business licenses, permits and registrations by state

Step 5. Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a restaurant is another.  Funding to start a restaurant can be difficult due to the high costs.  In order to get a loan, the borrower(s) will need to have good credit and be able invest 15-25% of their money towards the total start-up costs. 

Related: Finding the money to start a business  

Step 6. Get your Marketing Plan in Place

Restaurants depend on effective marketing to bring in customers every day, but marketing costs will vary depending on the type and volume of marketing. Common marketing techniques for restaurants include the use of social media, paid advertising in print magazines, radio advertising, and more. 

It’s important to have a plan in place, or a company to manage, social media as reviews on sites like TripAdvisor, Yelp and Google largely influence whether someone will try a new restaurant.

Related: Low-cost ideas to market a new business

Step 7. Get Insurance

Restaurants need multiple types of insurance to fully protect them: 

  • General liability insurance protects a business in case a customer is ever injured, such as if they’re burned by coffee or if they fall in the restaurant
  • Commercial property insurance helps to cover damage to the restaurant or its equipment during an event like a fire or a flood
  • Workers comp insurance is required for restaurant employees. It provides coverage for expenses like lost wages or medical bills if an employee is hurt while working. 

The cost of a policy will depend on restaurant-specific factors like its location, the number of employees, and the value of the property and its equipment. To get the most accurate idea of what insurance will cost, request quotes from multiple companies. Then, compare the quotes while paying attention to variables like deductibles, coverage limits, coverage exclusions, and the overall policy’s cost. 

Step 8. Hiring Employees

Even the smallest restaurants will need multiple employees, which can be a significant expense. According to Payscale, waitresses and waiters make an average of $6.09 per hour, while hosts and hostesses make about $9.28 per hour. Executive chefs make an average of $17.34 per hour, and sous chefs make about $15.05 per hour. Bartenders make about $8.16 per hour. 

In addition to budgeting for employee salaries, don’t forget to also include workers comp insurance, unemployment insurance, and health insurance contributions or paid time off for full-time employees. 

Related: Hiring your first employee

How much can you potentially make owning a restaurant?

Restaurant owner annual income varies widely, and Toast reports that restaurant owners can make anywhere from $20,000 to $155,000 a year, on average. A restaurant’s profits and the owner’s income are affected by many factors, including the restaurant’s profit margin, number of years in business, location, and overall popularity. 

Things to consider before starting a restaurant

Starting and running a restaurant is a lifestyle, and this type of business requires an understanding of the industry in order to be successful. Previous experience working in or managing a restaurant is highly valuable, and that past experience can play a major role in a restaurant’s success.  While all your friends may like your cooking, if you don’t have much experience in a restaurant, consider getting that experience before committing your money to start one.  There is a big difference between cooking for friends and cooking for hundreds of people each day.

The restaurant industry is highly competitive, so being able to differentiate the restaurant from others and fill an existing need in the community can help a business to get ahead. Be prepared to become a problem-solver, especially in the early days when your business is still getting established. 

Pricing your menu is important as it is all to easy to underprice and thus not make a profit. In general food costs should be about 1/3 of the menu price and alcohol at 25%.  Food vendors are extremely helpful in working with restaurant to price the individual ingredients of a meal. 

Restaurants largely depend on the quality of their staff, especially since the staff will be engaging directly with diners. In addition to managing the hiring process, you will need to establish plans for training and staff management. Finding quality staff can be a challenge, so many restaurant owners learn how to quickly identify the traits they’re looking for during interviews in order to hire the best people who can help to make a restaurant a success. 

Resources: 
American Restaurant Association
Green Restaurant Association
National Restaurant Association

Amazon has several helpful books that go into detail on starting and running a restaurant:
How to Start, Run & Grow a Successful Restaurant Business: A Lean Startup Guide
QuickBooks for Restaurants a Bookkeeping and Accounting Guide: A Must-Have QuickBooks Guide for Restaurant Owners and Operators
Your First Restaurant – An Essential Guide: How to plan, research, analyze, finance, open, and operate your own wildly successful eatery.
Starting and Running a Restaurant (Idiot’s Guides)