How to Start a Restaurant

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How to Start a Restaurant

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 expansion options. 

Business Overview

Restaurants sell prepared food, and many diners also choose restaurants based on the overall dining experience. There is a huge variety in the restaurant industry, and restaurants specialize in everything from fast food, quick service to organic dishes to full-service, 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 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 grow steadily. 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 guests are also seeking restaurants that source locally grown or farmed foods for their dishes.

 

Who is the target market for your restaurant?

Restaurant concepts vary greatly, so your target market will vary, too. A fast-food restaurant may market to 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. Likewise, menu options such as steak, vegetarian, or focusing on ethnic foods will determine the ideal market for your restaurant. 

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

Checklist for Starting a Restaurant

Starting a restaurant can be an incredibly rewarding experience, but it’s important to make sure you’re prepared for the challenges ahead. Use this checklist to help get your business off on the right foot.

Step 1: Write your Business Plan

After deciding to start a restaurant, 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

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 Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a restaurant, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities, and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: 3 steps to forming your LLC

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 3: Name the Business

Finding the perfect business name can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a restaurant

Step 4: 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.

According to TotalFoodService.com, rent is the largest fixed expense for a restaurant and should not exceed 10% of sales. Due to the high cost and limited number of viable locations that have high visibility, most restaurants rent their building.

According to 2019 survey from TouchBistro, 58% of restaurants spend $7,000 per month on rent.

Related: Choosing a business location

Step 5: 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 are subject to health and food safety regulations and regular inspections from the Health Department. If serving alcoholic beverages, 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 6: 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 startup costs. To get a small business loan, lenders will look to the borrower(s) having good credit and be able to personally invest 15-25% towards the total start-up costs. A Small Business Administration (SBA) guarantee may be necessary to secure a loan as startup restaurants are considered very risky.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.

Step 8: 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.

Social media marketing on sites like Facebook, Twitter, and Instagram, can quickly get curious new customers in the door who are wanting to try new restaurants in the area. Also, don’t forget traditional 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.

Because seating is limited and restaurants see peak periods of dining during breakfast, lunch, and dinner, in addition to the weekends, profitability is impacted by the availability to consistently bring back customers and efficiently turn over tables. Having a solid marketing strategy and enticing customers with early bird specials to come in during off-peak hours, offering daily specials, and a loyalty program will help bring in profitable repeat traffic.

Related: Low-cost ideas to market a new business

One important task while working on the marketing is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 9: Get Business Insurance

Restaurants need multiple types of insurance to be fully protected. Some of the more common types of restaurant insurance include: 
General liability insurance protects a restaurant owner in case a customer is ever injured, such as if they’re burned by coffee or if they fall in the restaurant. Additionally, general liability will cover claims for illness caused by the food.
Liquor liability offers protection for claims that arise from serving alcohol to a minor or over-serving alcohol to a patron. Any third-party injuries, property damages, and bodily injuries are insured.
Commercial property insurance helps to cover damage to the restaurant or its equipment during an event like a fire or theft.
Business interruption insurance provides coverage for lost wages, expenses, and temporary relocation if a restaurant is closed for an extended period.

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.

Related: Types of insurance a restaurant may need

Step 10: Hire Employees

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 to hire the best people who can help make a restaurant a success.

According to RestaurantOwner.com, labor cost runs between 25% – 39% of a restaurant’s sales. Since labor is one of the largest costs for a restaurant, good staff management is essential.

Labor turnover is a huge concern for restaurant owners. Finding reliable staff to work in a demanding environment for minimum wage is difficult. As a restaurant owner, you will likely face a shortage in staff, so planning on consistent advertising for openings and having a plan for when those shortages occur is critical.

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

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your restaurant.

Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a restaurant?

The cost to start a restaurant can vary significantly depending on its size, type of food served, and location. 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 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 like commercial ranges, ovens, dishwashers, walk-in coolers, etc.
– Supplies, like utensils, plates, cooking supplies
– Signage and menus
– Inventory (food)
– Startup capital to cover lease, insurance, payroll, etc.
– Grand opening advertising

How profitable is a restaurant?

The annual income for restaurant owners varies widely. A fine dining restaurant in a high-end location may bring in $100 per guest, while a fast-food restaurant may see $6-$10 per guest. Volume plays a part in annual income, but this is a hard number to estimate as some locations rely heavily on tourists, while others focus on local residents.

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.

Toast reports that restaurant owners make anywhere from $20,000 to $155,000 a year, on average.

Pricing your menu items is important as it is all too easy to underprice and thus not make a profit. In general, food costs should be around 1/3 of the menu price (typically higher for protein-heavy and alcohol at 25%. Food vendors are extremely helpful in working with the restaurant to price the individual ingredients of a meal.

It’s also important to not overlook alcohol sales, which can increase the average ticket. According to Modern Restaurant Management, alcohol sales average 20%-25% of sales. Profit margins are typically 75%- 80%, which will significantly add to your bottom line.

Are there grants to start a restaurant?

It’s extremely rare to find a grant to start a restaurant. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.

What skills are needed to run 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.

Starting and running a restaurant is a lifestyle, and this type of business requires an understanding of the industry 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.

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 business owner will have worked in restaurants in some capacity. If that owner has worked in multiple positions in the industry, they’ll better understand 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 make that restaurant stand apart from others.

Management experience. If the restaurant owner also manages the restaurant, previous business management experience or experience in the foodservice industry 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 restaurant’s chances of 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 food preparation, to 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.

What is the NAICS code for a restaurant?

The NAICS Code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

NAICS codes for restaurants vary depending on the type of restaurant.
– Full-Service Restaurant NAICS – 722511
– Pop-up Restaurant NAICS – 722511
– Limited-Service Cafe NAICS – 722513
– Carryout Restaurant Buffet NAICS – 722513
– Buffet Restaurant NAICS – 722513

Resources: 
American Restaurant Association
FSR Magazine
Green Restaurant Association
National Restaurant Association
Restaurant Business
Restaurant Owner

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