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You’ve long had the dream of opening a restaurant and you’re finally ready to get serious about it. But where to begin? How much does it cost to start a restaurant? What kind of licenses do you need? How do you attract customers?You’ve got questions, and this article has plenty of answers — everything from how much it costs to open a restaurant to profits you can expect to tips for writing your business plan. Read on for a beginner’s guide to opening a successful restaurant.
How Much Does It Cost to Open a Restaurant?
Your first concern may be how much it will cost you to open a restaurant business. That number, of course, will depend on a multitude of factors, including the restaurant’s service style, decor, size, and location. Opening a coffee shop in Des Moine, for example, will typically cost considerably less than opening a steakhouse in New York City.To get an overall gauge of the cost of opening a restaurant, however, RestaurantOwner.com surveyed over 350 restaurant owners and operators, and found that the median cost to open a restaurant in the U.S. was $375,000. The costs involved with opening a restaurant include (but certainly aren’t limited to):
Building or remodeling
Equipment
Decor and furnishings
Food inventory
Staff and training
Marketing and advertising
Typically, you’ll have more up-front costs to launch your restaurant than you will have month-to-month once you’re up and running. (If you need help with those startup costs, this guide to restaurant loans may be helpful.)
Are Restaurants Typically Profitable?
Restaurants are notorious for having low-profit margins, ranging anywhere from 0% to 15%, with the average landing around 3 to 5%. That’s not to say you won’t make a solid profit. However, you’ll want to have realistic expectations about how much profit you can generate with a restaurant business going in. Since gross revenue and expenses can vary significantly depending on the type of restaurant you open, it can be a good idea to research what profit margins tend to be for your particular niche.
Pros and Cons of Starting a Restaurant
Opening a restaurant has benefits and drawbacks you should carefully consider before diving in.
Pros
Cons
Gives an opportunity to be creative with cuisine
Can have low profit margins
Wide range of options, from food trucks to full-service restaurants
May have high startup costs
Every day will be different and challenging
Depending on your community, competition may be fierce
If you’re game to give the restaurant business a go, here are 13 steps that can help you turn your restaurant vision into a reality.
1. Choosing a Restaurant Concept
A major key to restaurant success is to fill a niche that no one else is serving in your area. Here are some of the components to consider when coming up with your restaurant concept.
Service Style
Will you offer fast-casual service, with high-quality, yet affordable cuisine? Or, do you envision a white tablecloth experience for fine dining? The service style your restaurant provides will determine its clientele and price point. Consider what’s lacking in your town and try to build around that need.
Food Type
You may want to open a restaurant that offers family recipes handed down through generations, or you might prefer to offer a particular type of ethnic cuisine no one else is serving in your town. As you consider food type, you’ll want to take the tastes of the locals into consideration, as well as how easy it will be to source ingredients.
Branding and Decoration
Often, half the fun of eating in a restaurant is being surrounded by visually-appealing decor. And if it’s Instagrammable? So much the better. If customers post on social media and tag your restaurant, that translates into free marketing for your business. Ideally, you’ll want to have decor and design that is functional and appealing, without breaking the budget.
2. Creating a Business Plan
One of the biggest tips for anyone considering how to start a restaurant is to begin with a plan — a business plan, that is. This will help you organize your thoughts around who your restaurant will cater to, how you will market it, and your overall budget. As you create your restaurant business plan, here are some issues you’ll want to address.
Legal Structure
Your business plan should outline the legal structure of your restaurant. Many restaurant entrepreneurs opt for incorporating or becoming a limited liability company (LLC), both of which help protect your personal assets should the restaurant ever be sued.
Value Proposition
It’s important to detail your value proposition in the business plan. What makes your restaurant unique from all others in the area? How will you offer a standout experience to your guests?
How Long to Turn a Profit
In planning and budgeting for your restaurant, it’s important to have realistic expectations about when it will turn a profit. Typically, restaurants do not earn a profit in the first one to two years. More commonly, restaurants will start seeing profits in year three to five. You’ll want to keep this in mind when determining how much capital you’ll need to run the business in the early years.
3. Researching Funding Options
Speaking of capital, many restaurant entrepreneurs simply don’t have enough cash laying around to cover the startup and ongoing expenses of opening a new restaurant. Fortunately, there are several types of loans for businesses you can use to start a restaurant business and operate it until you reach profitability. Here’s a look at some of your financing options.
Business Loans
If you have good to excellent credit, you may be able to get a small business loan with low interest from a bank or credit union. If you don’t have good credit, there may still be loans available to you (especially through online lenders). However, you may pay more in interest for them.Another option is a line of credit, which gives you access to funds when you need them. With a line of credit, you’re given a credit limit and can then borrow what you need up to that limit, pay it back, and, later, borrow more.If you specifically need capital to buy machinery or kitchen equipment, you may want to consider equipment financing. Because the equipment you’re buying acts as collateral for the loan (which lowers the risk to the lender), you can generally find low interest rates for equipment loans.Another option is to get a business credit card, which can be ideal for purchasing inventory and office supplies. You can often find business cards with rewards, cash back, and other perks for spending. Unless you can get a 0% APR introductory offer, however, you’ll want to be sure to pay your balance in full each month, since interest rates may be high.Recommended: Guide to Applying for and Getting Small Business Loans
Personal Savings
If you have money set aside for starting a restaurant business, you may not need to borrow money and pay interest on it. Just be sure to put some extra room in your budget for emergencies and unexpected expenses. If you don’t have enough savings to cover your entire budget, you could start with savings and then borrow money down the road when you need it.
Friends and Family
Another option for financing a new restaurant is borrowing money from friends or family. However, you’ll want to be careful not to jeopardize your personal relationship by putting business into the mix. To avoid any misunderstandings down the road, it can be a good idea to draw up a simple promissory note that details how much you are borrowing and what the repayment schedule (with or without interest) will be.
4. Necessary Licensing and Permits
Part of learning how to open a restaurant is knowing what licenses and permits you need. And you will, likely, need several. Your city, county, and even state may require you to have permits to serve food and/or alcohol, as well as a general business license.It’s a good idea to research what permits will be required well before you plan to open your doors. This ensures you have enough time to schedule inspections and/or take any required training courses. If you don’t have everything done to the letter, you may risk being shut down before you even get up and running.
5. Registering a Business
You will most likely need to register your restaurant business name. Exactly where and how your register will depend on your business structure. Sole proprietorships and general partnerships typically need to register at the county level, while LLCs and Corporations generally need to register on the state level.
6. Finding a Location
The location of a restaurant can make it or break it. Ideally, you’ll want to open your eatery in a well-trafficked area with a parking lot that’s easy to get in and out of. At the same time, you don’t want to be located too close to a similar type of restaurant, particularly if it’s already well-established and popular.
7. Designing Your Layout
Once you choose your location and sign the lease, the fun can really begin. As you design the layout of your restaurant, you can get creative about where the kitchen and dining area will be and the space will look like.
8. Procuring Restaurant Equipment
You’re going to need industrial kitchen equipment for your restaurant. You can buy new or you may decide to save money by looking for gently used equipment on sites like Craigslist or through a restaurant supplier. Also, keep in mind that you may be able to get an equipment loan for these purchases. You may also have the option of leasing vs buying equipment.
9. Hiring Staff and Management
Of course, you can’t have a successful restaurant without staff. Even if you want to launch bare-bones, you’ll likely need servers, cooks, and hosts to run the front of house, while you manage the restaurant, order supplies, and balance the books in the back.Also keep in mind that you’ll need time to properly train all new hires on the protocols you establish so everyone knows how to provide stellar service to diners before you open.
10. Creating a Menu
As you develop your menu, you may want to think about it as a working document. The reason is that the menu you start out with may change over time as you learn what your customers like, what ingredients cost, and seasonal availability. You may also want to invite feedback from customers and use it to tweak your menu.
11. Marketing Your Restaurant
To be successful these days, you typically need a strong online presence, meaning at least a website and social media profiles for your restaurant. You may also want to actively promote your restaurant within your community. For example, you might offer specials for different days of the week to drive foot traffic, or give coupons to local businesses that they can pass out (you can reciprocate and pass out their coupons too).Remember: Marketing your restaurant will be an ongoing effort, not a one-and-done project. If you aren’t able to dedicate time to it, consider hiring a marketing manager.
12. Grand Opening
Once your restaurant is ready to go, you’ll want to open with a bang. But even before that, consider hosting a special VIP sneak peek event where local influencers can try your cuisine for free. You can invite food bloggers and writers from local newspapers and magazines. If it’s a hit, they’ll spread the word, and business will soon follow.
13. Building a Loyal Following
Your customers will be your lifeblood, so you’ll want to treat them right. Consider creating an email marketing list where you send coupons and special offers to customers to get them coming back again and again. Another idea is to offer a loyalty program so that the more they dine with you, the more perks they get, like free food and discounts.
Other Things to Consider
Once you’ve done the hard work of opening a restaurant, you’ll want to keep an eye on the future. After a few years of success, for example, you might consider expanding your restaurant, such as adding a new location in another town.It can also be a good idea to keep tabs on the restaurant industry — both nationwide as well as locally — to make sure that you are always ahead of the curve and continue to offer a cutting-edge dining experience to your guests.
Small Business Loans
Opening a restaurant is an exciting but also daunting project. One of the biggest hurdles you may face early is getting the financing you need to bring your vision to life. If you’re curious about what type of restaurant loan you might qualify for, Lantern by SoFi can help. With our easy online lending tool, you can review offers from multiple small business lenders that meet your needs and qualifications. There’s no obligation and you only need to fill out one application.
Frequently Asked Questions
How much does it cost to open up a restaurant?
Is opening a restaurant a profitable investment?
Can you run a restaurant with no experience?
Photo credit: iStock/monkeybusinessimages
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
