Starting any business demands a considerable amount of time, energy, and money. However, due to the unique nature of the restaurant business, getting off the ground often requires a little extra effort.
With the median start-up cost coming in at $250,000, a significant investment is warranted to guarantee everything goes according to plan.
Understanding the breakdown of average restaurant start-up costs can be extremely important, ensuring no stone goes unturned in the process of starting your business.
Defining Your Salary
While some business owners choose not to draw a salary while getting started, you will eventually have to pay yourself – after all, the goal of opening your own restaurant is intended to be an investment that supports you financially. However, the amount you choose to take can affect the money you’re left with and, subsequently, the amount you have to invest in your business.
Most restaurant owners pay themselves a percent of expected sales, while others just take the bare minimum needed to make ends meet. Few people get rich quick owning restaurants, especially in the early days, but a successful restaurant can provide a stable livelihood. In the first one to four years of operation, owners can expect to make between $36,000 to $72,414.
Estimating Business Costs
Coming up with a great idea may be free, but turning a business plan into a functional operation usually isn’t. Here’s what you need to know about the costs associated with your new restaurant.
To begin commercial operations, you will need to form a business entity, submit fees to your state of residence, pay franchise taxes, and work with an attorney to ensure all legal needs are met.
Most companies choose to incorporate or become a corporation, a legal structure that offers significant protection. This process can cost $100 to $250 in filing fees, depending on the state. Franchise tax fees can cost an additional $800 to $1,000, with government filing fees adding an extra $50 to $100 to your expenses.
For businesses that choose to work with an attorney to make sure all requirements are met, you will also have to pay legal fees. Depending on the work necessary, legal bills can range from $1,000 to $5,000 or more. If any other fees or filing requirements apply, your attorney can help you navigate these as well.
Rent and Renovations
The location you choose can have a significant impact on your day-to-day operations and the number of customers coming through your doors. Space can be expensive, creating a sizable cost your food sales will have to support.
Rent costs can vary significantly from one area to another. In Manhattan, cost per square foot is a whopping $120; pricey LA areas clock in at $52-per-square-foot, while San Francisco restaurants can expect closer to $45.
These costs don’t include utilities, insurance, or property tax; the industry average equals $160 with these factored in. With a national average size of nearly 4,000 square feet, restaurant owners can expect a significant expense in securing a property alone.
Note that most landlords will expect a security deposit and first month’s rent, so include these additional expenses in your calculations.
Don’t forget about variable costs like utilities; as a restaurant, you’ll likely use large amounts of electricity, water, and gas, requiring a little extra cost on top of rent. Even if you have a lease that’s affordable, you’ll need to account for an additional $500 to $1,500 a month in utilities.
Unfortunately, few spaces are turn-key upon purchase. Even a property that used to house a restaurant and is already set up for kitchen equipment, refrigeration, and running water may require extensive renovations to create an appropriate appearance. Renovations can cost anywhere from $5,000 in paint, window treatments, and flooring to $50,000 or more.
When shopping for property, attempt to find an option that that is already built out for food service use. A customized kitchen build-out can cost as much as $250,000 – a significant expense many new restaurant owners aren’t prepared to accommodate.
Equipment and Supply Costs
Opening a restaurant requires a significant investment in equipment and supplies. Kitchen appliances, for example, can be extremely costly, making a restaurant far more expensive than most other small business start-ups. In your restaurant, you will likely need:
- Cooking equipment, like ovens and stoves, grills, griddles, pasta cookers, steamers, broilers, fryers, and immersion cookers.
- Kitchen equipment to support the cooking process, walk-in fridges and freezers, dishwashers, heat lamps, condensation hoods, espresso and coffee machines, ice machines, and soda fountains.
- Workspaces like counters, storage spaces, food coolers, prep tables, steam tables, and cold food tables.
Cooking utensils, like knives, spatulas, cutting boards, gloves, containers, ladles, and brushes.
- Dishes and serving materials, like plates, silverware, glasses, tablecloths and placemats, and napkins.
Furniture, like chairs, tables, booths, and stools.
- Bar equipment, including glasses, mixers, liquor, garnishes, napkins, straws, and cocktail shakers.
Without ensuring every detail is accounted for, your restaurant will run into challenges during service that can compromise the diner experience. In general, expect to spend an average of $115,655 for kitchen and bar equipment. Furniture and tables can cost $40,000 alone, so be sure to plan accordingly.
Insurance is an essential part of a functional business, especially for restaurants that want to be fully protected from liabilities. In an atmosphere that sees so many guests, and puts employees at risk for injuries in a busy kitchen full of dangerous equipment, adequate protection is critical. At the minimum, most restaurants will need:
General liability insurance, to protect against everyday accidents and incidents.
- Product liability, in case any equipment malfunctions and causes injury.
- Liquor liability, a special policy for restaurants that serve alcohol.
- Workers’ compensation policies, to keep employees protected in case of injury.
- Commercial vehicle insurance for any restaurant that offers delivery.
- Restaurant insurance, a specific form of coverage that takes into account industry-specific risks.
- Loss of income insurance, a specialty policy that can provide a safety net if something like a fire or robbery forces you to close temporarily.
Insurance will vary based on size, function, and location, but most restaurant start-ups can expect costs of around $6,000 a year. While low-principal plans with high deductibles may seem appealing, be sure you can afford to pay multiple deductibles simultaneously in case something like a kitchen fire resulting from product malfunction closes your restaurant and injures employees.
Permits and Licenses
No restaurant can function without permits. The United States regulates the food and beverage industry aggressively, and failure to obtain the right licenses could cause you to close your doors for good before opening day. Most of these permits will require a financial component, so be prepared to pay for the privilege of opening your new business.
While exact requirements can vary from one state to another, most of these licenses will be required:
- Food service license: Essential for any business serving food, this permit requires a simple application and a visit from the state health department, and can cost anywhere from $100 to $1,000 based on location and specifics related to the size and scale of your operations.
- Liquor license: Required for any business planning to serve alcohol, the application process for this license varies from one state to another and can be involved and costly, with full-service licenses starting around $12,000 and beer and wine licenses costing as little as $3,000.
- Food handler’s permit: An employee health permit that signifies you meet regulations for handling food, these licenses cost around $100 to $500.
- Employer Identification Number: Also known as an EIN, these numbers are required to file taxes and are available for free from the IRS.
- Sign permit: If you plan to hang a sign, a sign permit from your city is required. Expenses are minimal, often no more than $50.
Accounting and Payroll
Bookkeeping is a must for any company, and that includes your fledgling restaurant. Accounting software is often your best bet, but this doesn’t have to break your budget. Small business options like QuickBooks Online that can integrate seamlessly with your POS system will help increase efficiency and minimize accounting errors. Instead of tracking sales and expenses by hand, your POS can feed information directly to QuickBooks, making sure every last detail is included.
Your Point of Sale system may seem like an afterthought, but this can actually be a central part of how your business operates. The investment in a good POS can save you both time and money in the long run, helping to automate processes like inventory management, sales tracking, analysis of sales trends, product orders, and even integration with accounting software like we previously mentioned. All of these benefits can be well worth it, especially in the early days of your business.
However, as a small restaurant, you don’t necessarily need to spend tens of thousands of dollars for a robust system that has way more features than you’ll ever use.
An iPad POS like ShopKeep can support your needs perfectly, offering fast and efficient resources ideal for your business. With the ability to minimize costs and maximize productivity, an innovative small-scale POS can help you save thousands on what is often a significant expense.
For small businesses without thousands to spend on marketing, social media and digital strategies can be very valuable. They offer a good balance between affordability and reach of potential customers — promoted ads costing no more than a few hundred dollars.
Social media goes hand in hand with a robust digital presence. Make sure your restaurant has a website utilizing a responsive design for mobile compatibility, and ensure all content is high quality and adheres to current SEO practices. If you have experience with writing, you may able to do this independently, but if you’re not sure you’re up to the task, outsourcing to a freelancer can be very cost-effective, often $500 or less. Target local directories and review sites as well as free advertising avenue; your presence here can build your reputation as a destination worth visiting.
If you’d like to utilize more traditional options, like radio and TV, your marketing budget will need to be more substantial. The average regional radio campaign costs $20 to $80 per ad spot on the airwaves, while a costly TV ad can require a total of $200 to $1,500 per 30-second spot on a local station.
Ensure Your Restaurant Succeeds
The start-up capital for a new restaurant can be quite steep, but the investment is well worth it. By taking time to understand the breakdown of restaurant start-up costs, you can arm yourself with the knowledge necessary to open a restaurant — and succeed.