Starting a restaurant is an exciting type of business that many individuals dream of. While the concept of serving delicious food may sound perfect for your skills and interests, it’s important to recognize that launching a successful restaurant requires more than having great culinary skills.
There are countless details to consider and financial concerns, but our guide will help you through the process by providing an overview of the business, steps to get started, and answers to common questions.
Business Overview
At its core, the restaurant business involves creating a space where diners can enjoy a delicious meal and have a memorable dining experience. There is a huge variety of concepts in the restaurant industry, and restaurants specialize in everything from fast food and quick service to organic dishes to full-service and 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.
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Industry Summary
The restaurant industry is highly competitive, with 749,000 restaurants in the US. In 2022, restaurants generated $898 billion in sales, and in 2023, are expected to generate close to $1 trillion in revenue. This means that while there’s plenty of opportunity for aspiring restaurateurs, there’s also fierce competition.
While the industry has high failure rates, the growth potential makes restaurants an attractive small business opportunity. Most restaurants are small operations, with fewer than 50 employees, that are open year-round and generate $500k to $1M in annual sales. To succeed in the restaurant industry, you need to offer something unique that sets you apart from the competition, whether it’s your menu, your atmosphere, or your prices. Aside from this, good management, excellent customer service, marketing, and financial stability are all must-haves for starting a successful restaurant.
Steps To Start A Restaurant
Step 1: Research the Market
If you’re considering starting a restaurant, one of the first steps to take is assessing the market to determine if there is an opportunity for another establishment. Conducting this research can help you gauge the potential success of your business and uncover any gaps or niches you can fill.
To better understand the potential target market for your restaurant, analyze the demographics of your area, such as age, income levels, and cultural diversity. For instance, a fast-casual restaurant may market to busy professionals, families, and travelers on the go who are looking for a decent, 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, the price point, and the atmosphere.
Next, research the existing restaurants in your area and look at their strengths, weaknesses, and unique selling points. By understanding what customers already have access to, you can identify gaps or potential opportunities where your concept can differentiate itself. For instance, if there are already several Italian restaurants, consider specializing in a different cuisine or offering unique menu items not readily available.
Step 2: Write a Business Plan
Writing a business plan for a restaurant is the next step after you’ve gauged the potential for your new restaurant. The restaurant industry is one of the most competitive sectors in the business world, and with numerous establishments opening every day, it can be challenging to stand out from the crowd. Many entrepreneurs think that they can wing it, but the reality is that a business plan is an essential part of launching a successful restaurant.
A business plan is essentially a detailed action plan that outlines the steps you need to take to launch your restaurant. It includes everything from deciding on your restaurant concept and identifying your target market to choosing a location and hiring staff. This roadmap helps keep your startup process organized and on track, making it easier to execute tasks efficiently and effectively.
Without a clear plan, you may find yourself overwhelmed by the many responsibilities of starting a restaurant. But with a well thought out plan, you can break down the process into manageable steps and ensure that nothing falls through the cracks.
A business plan also helps with financial planning by outlining startup costs, projected revenue, and expenses. By forecasting revenue, expenses, and expected profitability, you can evaluate whether your business has the potential to generate enough income to cover costs and make a profit. This assessment is essential for both yourself and potential investors or lenders.
Related: How to write a restaurant business plan
Step 3: Secure Funding
Once you’ve determined that there’s a market for your restaurant and have completed your business plan, the next step is to figure out how to fund your new venture. Given the high failure rate of restaurants, funding a new restaurant can be very difficult. Here’s the common types of funding to consider:
Self-funding: The first source of funding to consider is your personal savings. If personal savings aren’t enough to cover the startup costs, external funding sources may be necessary.
Bank loans: Banks are a traditional source of funding for restaurants. When applying for a bank loan, lenders typically require a borrower to invest at least 15% of their personal funds towards the total cost of the project, have a good credit score, and have sufficient collateral. If the bank considers the loan too risky, they may choose to use a Small Business Administration (SBA) loan guarantee to help secure the loan. This can make it easier for you to get approval and favorable loan terms.
Friends and family: Friends and family can also be a source of funding. They may be willing to invest in your restaurant because they believe in your vision and want to support you. However, borrowing from friends and family can strain relationships, especially if the business doesn’t do well. To avoid misunderstandings and protect relationships, it’s crucial to put all agreements in writing, clearly defining the terms of the loan or investment.
Microloans: If your funding needs are relatively low or you’re unable to secure credit through a bank, microloans could be an option. These are small loans, usually less than $50,000, offered by local economic development organizations. Some microloan providers also offer business training and mentoring programs, which can be invaluable for new restaurant owners.
Investors: Investors can be another source of funding for a restaurant startup. This type of funding typically involves selling a percentage of ownership in the business to the investor. Investors may bring not only capital but also expertise and industry connections to the table.
Related: Finding the money to start a business
Step 4: Register the Business
Starting a restaurant can be exciting, but it’s important to do it right from the start. Here are some suggestions for properly registering your restaurant business and making it legal.
Choose your business structure: There are four main types of business structures: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). It’s important to research and decide on the structure that best suits your needs.
- Sole proprietorship: This is the simplest and most common type of structure for small businesses. It offers the advantage of easy startup and the lowest cost, but it does not provide liability protection for the owner.
- General partnership: This structure is similar to a sole proprietorship but involves multiple owners. The partners share the profits and losses, but they are jointly liable for any debts or legal issues.
- Corporation: This structure is more complex and involves creating a separate legal entity for the business. It offers personal liability protection for the owners, but it can be more expensive and involves more paperwork.
- LLC: The Limited Liability Company combines the advantages of a corporation and a sole proprietorship or partnership. It provides personal liability protection for the owners, but it is simpler and less costly to set up than a corporation.
Related: Comparison of business structures
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!
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
Related: Tips and ideas for naming a restaurant
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Related: Finding a domain name for your business
Obtain restaurant permits and licenses: Operating a restaurant potentially involves a lot of regulations and permits. You will need to research federal, state, and local requirements to determine what permits and licenses you need. This may include:
- Health Department permits: Required for any business that handles food.
- Food service license: Food safety training and certification allows you to prepare and sell food.
- Liquor license: Necessary if you plan to serve alcohol, with varying types depending on whether you serve beer and wine or spirits.
- Building and zoning permits: If you’re building or remodeling your restaurant.
- Fire department permits: Required in some locations, especially if you’re going to have a certain number of people in your establishment.
- Sign permit: If you plan to put up a sign for your restaurant.
- Live entertainment license: If you’ll have live performances.
- Outdoor seating permit: If you’re offering dining outside.
Obtain business licenses and permits: In addition to registering the restaurant, there are a number of general business registrations as well. These could include a business license, seller’s permit, and Employer Identification Number (EIN).
Related: State guides for general business licensing
Step 5: Acquire & Begin Setting Up Operations
After all of the brainstorming and planning, it’s time to turn your restaurant dreams into reality.
The first task in setting up your restaurant operations is acquiring the right location. Next, assess the physical space and plan the layout and design of your restaurant space to optimize workflow, seating capacity, and customer experience. Consider kitchen design, dining area layout, and interior decor to create an inviting atmosphere. Optimize seating arrangements to ensure maximum capacity and efficient table turnover times, and ensure easy bar access to optimize beverage sales. If remodeling or renovation is required, ensure compliance with building codes, health regulations, and safety standards during the construction process.
As the building is coming together, it’s time to start sourcing suppliers. One of the most exciting parts of setting up your restaurant operations is developing your menu. This is where your concept comes to life through the dishes you offer. As you create your menu, lean on your suppliers as they can help you analyze the expenses involved in preparing each recipe, ensuring that you have an accurate understanding of the overall cost of your menu items. Collaborating with suppliers allows you to make informed decisions about pricing, portion sizes, and menu profitability right from the start.
Step 6: Hire Staff
As a restaurant owner preparing to hire employees, there are several responsibilities you should be aware of.
One of the first steps is obtaining an Employer Identification Number (EIN) from the IRS. This is a nine-digit number used for tax reporting purposes and is a requirement for most businesses that have employees.
Before you hire anyone, you must also verify their employment eligibility. In the U.S., this typically involves completing Form I-9, Employment Eligibility Verification, which requires you to examine each employee’s identification documents to confirm they’re legally allowed to work in the country.
State hiring requirements vary widely, so be sure to familiarize yourself with your state’s specific laws and regulations. These could relate to minimum wage laws, overtime rules, meal and rest breaks, anti-discrimination laws, etc. Most states also require businesses to have workers’ compensation insurance, even if they only have one employee. This type of insurance provides benefits to employees who get injured or become ill as a result of their job.
Understanding labor laws is another aspect of being a new employer. Labor laws include wage and hour regulations, anti-discrimination protections, and workplace safety standards.
Related: State guides for hiring your first employee
Step 7: Prepare to Open
Starting a restaurant is a complex process with many moving parts. We’ve gone over the major steps, but there are still several critical tasks to complete before opening your doors. Every business will have different requirements, but here are some of the common things to look at:
Business insurance: Business insurance can cover a range of potential issues, from property damage and theft to liability in case of customer injury. Types of insurance to consider include general liability, property, workers’ compensation, and liquor liability if you serve alcohol.
Related: Types of insurance a restaurant may need
Setting up bookkeeping: Implementing an accounting system to track your daily transactions, manage taxes, and prepare financial statements will help you make informed business decisions and is essential for the long-term financial health of your restaurant.
Opening a business bank account: A separate bank account for your business is important for keeping personal and business finances distinct. It simplifies bookkeeping, makes tax filing easier, and could potentially protect personal assets in case of legal issues.
Purchasing management or point of sale software: Industry-specific software, such as Toast POS, Square for Restaurants, or Upserve, can streamline your operations. These systems can manage everything from sales transactions and inventory to table reservations and customer loyalty programs.
Creating a marketing strategy: A well-crafted marketing strategy is key to letting potential customers know about your new business. This includes creating a unique logo, setting up a user-friendly website, and leveraging social media platforms. Regularly update your platforms with engaging content, details about special offers, events, or new menu items.
Preparing for the grand opening: This involves finalizing every detail from staffing and menu to decor and music. A soft opening, where you invite a select group of people to try out your restaurant before the official opening, can be a great way to gather feedback and make necessary adjustments.
Common Questions When Starting A Restaurant
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 $150,000 to start, while larger fine dining establishments may cost as much as $1 million.
Below is a breakdown of the estimated costs involved in opening a restaurant:
Lease and renovation: This is typically the most significant expense when starting a restaurant. Depending on location, the cost of lease deposits can range significantly. Renovation costs also vary based on the extent of work needed to transform the space into a restaurant. Estimate: $100,000 – $500,000.
Kitchen and cooking equipment: Essential items include ovens, grills, refrigerators, dishwashers, and smallwares like pots, pans, and utensils. Costs can range from $50,000 for a small-scale operation to upwards of $150,000 for a larger outfit. Estimate: $50,000 – $150,000.
Furniture and decor: This includes tables, chairs, bar stools, and decor items that match your restaurant’s theme. Estimate: $20,000 – $50,000.
Initial inventory: This covers the cost of food, beverages, and other supplies needed to start operations. Estimate: $5,000 – $10,000.
Business registration: The cost to register your business varies by state but generally falls in the range of $50 – $1,000.
Insurance: Initial costs for insurance policies, such as general liability and property insurance, can range from $1,000 to $5,000.
Marketing and advertising: Initial marketing efforts might include creating a logo, setting up a website, and promoting your grand opening. Estimate: $2,000 – $5,000.
It’s also important to have additional funds available for operating expenses (like payroll, utilities, and lease payments) for the first three to six months. This buffer can help you navigate the initial period after opening when revenue might be unpredictable.
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, and while it is challenging to provide an exact figure, we can present a general framework using industry statistics to estimate potential profitability.
To calculate potential profitability, we need to consider revenue and expenses. Revenue is typically generated from the sales of food and beverages, while expenses include costs such as food and beverage costs, labor, rent, utilities, and other operating expenses.
Assuming a moderately priced restaurant with 100 seats that is open 6 days a week for dinner service could generate approximately $750,000 in annual revenue. The average dinner check size for a casual full-service restaurant is $25. If the restaurant serves, on average, 500 dinner customers per week for 50 weeks out of the year, revenue would be calculated as follows:
500 customers per week x $25 average dinner check x 50 weeks = $625,000 In addition, annual alcoholic beverage sales usually amount to about 15-20% of food sales. At 20%, another $125,000 in alcohol revenue could reasonably be expected. The total annual revenue for the restaurant would then be $625,000 food sales + $125,000 in alcohol sales = $750,000.
Cost of Goods Sold (COGS): On average, COGS in the restaurant industry range from 25% to 40%. Assuming a conservative estimate of 30%, the COGS for the restaurant would be $225,000 (30% x $750,000).
Labor costs: Labor costs typically range from 25% to 35% of revenue. Assuming labor costs represent 30% of revenue, the restaurant’s labor expenses would amount to $225,000 (30% x $750,000).
Rent and utilities: Rent and utility expenses depend on various factors, such as the location and size of the restaurant. Let’s assume the restaurant’s rent and utility expenses total $100,000 per year.
Other operating expenses: Miscellaneous expenses like marketing, maintenance, insurance, and supplies can account for approximately 15% of revenue. In this case, the other operating expenses would be $112,500 (15% x $750,000).
By subtracting the total expenses from the annual revenue ($750,000), we can calculate the potential profit: $750,000 (Revenue) – $225,000 (COGS) – $225,000 (Labor Costs) – $100,000 (Rent and Utilities) – $112,500 (Other Expenses) = $87,500 (Potential Profit).
What skills are needed to run a restaurant?
While plenty of restaurant owners start their businesses without formal business education, certain skills and experiences will give restaurant owners an advantage as they start their businesses.
Culinary and restaurant experience: 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.
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: 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
