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How to Open a Restaurant

Updated on January 19, 2022

How to Open a Restaurant

How to Open a Restaurant

In every city and almost every town in the United States, you will find a bounty of restaurant options. People enjoy the experience of dining out and trying different foods. If you are a chef with tasty recipes of your own, opening your own restaurant could be a great opportunity for you to make a name for yourself and make good money.

Starting any kind of business, however, takes a lot of work. The key is to gain the necessary knowledge and move patiently through the business development and launch process. By taking it step by step, as detailed below, you’ll avoid many of the more common pitfalls.

Fast Facts

Investment range

$178,700 - $641,300

Time to build

3 – 6 months

Industry trend

stable

Profit potential

$40,269.85 - $144,000 p.a.

Commitment

Full-time

Step 1: Decide if the Business Is Right for You

Photo of uncertain doubtful young woman look hold hands scales empty space choose product isolated on pink color background

Starting a restaurant requires time and effort. Before you jump in, you need to fully understand what is involved before you decide if a restaurant is right for you. You will be taking a significant risk, so educating yourself is critical before deciding to develop and launch your business.

Pros and Cons

Every business has its advantages and disadvantages, which you would be wise to weigh before moving forward.

Here are some basic pros and cons of starting and running a restaurant.

Pros

  • Following your passion and using your chef skills
  • Creativity and self-expression
  • People like to eat out, so demand is constant
  • You can control your financial future

Cons

  • Restaurant competition can be intense
  • Marketing is necessary to build a customer base
  • Building name recognition takes time
  • Long workdays and late hours

Industry trends

The US restaurant industry took in $659 billion in 2020, which was $240 billion less than expected, according to the National Restaurant Association.[1]https://restaurant.org/research-and-media/research/industry-statistics/ The pandemic had a huge impact on the restaurant industry, due to shutdowns and stay-at-home orders. The market is expected to bounce back sharply in 2021, up to an estimated $899 billion, as the economy recovers.

Restaurant industry performance tends to follow that of the broader economy because dining out is a discretionary expense that declines during economic downturns. Competition in the industry is intense.

How much does it cost to start a restaurant?

Restaurant startup costs range from around $80,000 to open a coffee shop, to more than half a million to open a high-end dining destination. The largest investment is building out the space that you rent or buy. If you rent a smaller space that needs little renovation, you can significantly cut your costs.

Start-up CostsBallpark RangeAverage
Setting up a business name and corporation$200 - $200$200
Business licenses and permits$200 - $300$250
Insurance$100 - $500$300
Business cards and brochures$200 - $300$250
Website setup with online purchasing capabilities$1,000 - $3,000$2000
Initial Marketing Budget$5,000 - $20,000$12,500
Lease security deposit or down payment for space$2,000 - $12,000$7,000
Space Preparation$50,000 - $350,000$200,000
Kitchen and cooking equipment$50,000 - $150,000$100,000
Furniture and Tableware$50,000 - $80,000$65,000
POS System$20,000 - $25,000$22,500
Total$178,700 - $641,300$410,000

How much can you earn from a restaurant?

Your profit will vary depending on:

  • Customer numbers
  • Expenses and menu prices
  • The size of your space

The average profit margin for a restaurant is 3-6%, according to restaurant software firm Restaurant365. Restaurant industry advisory One the Line puts the average monthly revenue for a restaurant in its first year at just over $110,000. This would give you an annual revenue of $1.32 million. At a profit margin of 3%, you will net about $40,000.

As your brand gains recognition and repeat customers, you may see $200,000 in monthly revenue, giving you annual revenue of $2,400,000. If you can get your profit margin to 6%, your net profit will be $144,000. Not a bad haul!

What barriers to entry are there?

There are several barriers to entry for a restaurant. Your biggest challenges will be:

  • Standing out from the competition
  • High start-up costs
  • Finding a unique and appealing concept

Step 2: Hone Your Idea

Now that you know what is involved in starting a restaurant, it’s best to hone your idea before entering this highly competitive market.

Why? Identify an opportunity

One good way to stand out from the competition is to research your local market and identify a gap. What type or style of restaurant is missing in your area?

You might also begin to develop a handful of signature dishes, which you could make for family and friends to draw feedback. This way you could start marketing your menu even before you open.

You could start your marketing by posting photos of your dishes on social media and announcing your menu and planned opening date.

What? Determine your products or services

Make a list of all the dishes that fit into your concept and narrow it down to the best of the best. Determine if you want to offer certain dishes as specials on certain days of the week, or if you want to offer specials periodically. Your menu is crucial to your success, so it’s a good idea to make it as strong as possible right off the bat. Even so, you should be willing to change it if it’s not working.

How much should you charge for your dishes?

Prices will depend on the style of restaurant you choose and the dishes on offer. You may choose to open a value-based restaurant with lower prices, or a perceived value restaurant with premium prices for higher-end dishes. Perceived value means that customers perceive that they are getting a premium product that is worth paying more for.

Research restaurants in your area to learn more about pricing in your market.

Who? Identify your target market

Your target market will depend on the type of restaurant you plan to open. It’s a good idea to try to appeal to as many people as possible.

After you get started, word of mouth referrals will be your biggest source of business.

Where? Choose your business premises

Restaurant location is critical, whether you are buying or leasing. You can find commercial spaces to rent in your area on Loopnet, CityFeet, and Crexi. 

When choosing an office space, you may want to follow these four rules of thumb:

  • Central location easily accessible via public transport
  • Ventilated and spacious, with natural light
  • Flexible lease that can be extended as your business grows
  • Ready-to-use space with no major renovations or repairs needed
Should You Start a Restaurant Business

Step 3: Brainstorm a Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words.

You probably want a name that is short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some suggestions for brainstorming your business name:

  • Short, unique, and catchy names tend to stand out
  • Names that are easy to say and spell tend to do better
  • The name should be relevant to your product or service offerings
  • Ask around — family, friends, colleagues, social media — for name suggestions
  • Including keywords in the name, such as “restaurant” or “tavern”, boosts SEO
  • Choose a name that allows for expansion: “Jim’s Bakery” rather than “Jim’s Cookies”
  • Avoid location-based names, as they may hinder future expansion
  • Use online tools like the Step by Step business name generator

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names at a web cataloging site such as NameChk. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. And if you’ve exhausted all your creative juices but still don’t have a business name, don’t stress! Instead, check out our business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Step 4: Create a Business Plan

Every business needs a plan, a rough outline that helps guide a startup through the launch process while maintaining focus on key goals. A business plan is also crucial for helping potential partners and investors understand your company and vision:

  • Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
  • Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
  • Product and Services: Describe your catering company’s services in detail.
  • Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
  • Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
  • Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
  • Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
  • Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
  • Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.

Step 5: Register Your Business

Choosing your business location is an important decision because it can affect your taxes, legal requirements, and revenue. Most people will register a business in the state where they live, but if you are planning to expand, you might consider looking around to see if other cities or states offer greater opportunities for the restaurant market.

If you’re willing to move, you could really maximize your business!

Choose your business structure

Businesses come in several varieties, each with its pros and cons. The legal structure you choose for your business shapes your taxes, personal liability, and business registration requirements, so it’s important to choose wisely.

Here are the four main options:

  • Sole proprietorship – The most common structure for small businesses makes no legal distinction between company and owner: you get to keep all the profits, but you’re personally liable for all debts.
  • Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses.
  • Corporation – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly.
  • Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.

We recommend that most new business owners form an LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can quickly and cheaply form an LLC using ZenBusiness’s online LLC formation service (it can take as little as 5 minutes). They will check that your business name is available before filing, submit your Articles of Organization and be on hand to answer any questions you have about the company formation process.

Business structure comparison infographic

Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more.

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate on a calendar year (January–December), or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

The IRS website also offers a tax-payers checklist, and taxes can be filed online. It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Step 7: Fund your Business

Loan Approved Application Form Concept

Securing financing is your next step, and it’s a crucial one for a fledgling restaurant. There are plenty of ways to raise capital:

  • Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
  • SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
  • Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
  • Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
  • Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund an entrepreneur’s vision.
  • Personal: Self-fund your business via your savings, the sale of property or other assets, and support from family and friends.

Step 8: Apply for Licenses/Permits

Starting a restaurant requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses and permits associated with starting a vending machine business may include doing business as (DBA), health license and permit from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents and other intellectual properties, as well as industry-specific licenses and permits.

A restaurant may need the following, depending on the requirements in your area:

  • Foodservice license
  • Food handler’s permit
  • Building health permit
  • Liquor license

You may also need local county or city-based health licenses and permits. Further permits may be required by your state, such as a general business permit or license. The license requirements and how to obtain them vary from state to state, so check your state government’s website or contact the appropriate person to inquire about licenses and permits needed to run a catering business. You could also use the SBA’s guide to identify the required licenses and permits for your industry and your state. Your city, town, or county may also have additional requirements for a restaurant, such as signage and zoning permits. Speak to representatives of your local governments about licensing requirements.

This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties. If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

For peace of mind and to save time, we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state, and provide them to you to make sure you’re fully compliant.

Step 9: Open a Business Bank Account

In order to launch your business, you will need to have somewhere to keep the money you make, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you run your business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer business account options, just inquire at your preferred bank to learn about rates and features.

But it is a good idea to look at a few options, as banks vary in terms of offerings, and you want to find the plan that works best for you. Once you choose your bank, you just need to bring your EIN (or Social Security Number if you decide on a sole proprietorship) and your articles of incorporation or other legal documentation that proves your business is registered.

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked but is vital to your success as a restaurateur. Insurance protects you from unexpected events that can have a devastating impact on your life and business.

Here are some of the different types of insurance to consider:

  • General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
  • Business Property: Provides coverage for your equipment and supplies.
  • Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
  • Worker’s compensation: Provides compensation to employees injured on the job.
  • Property: Covers your physical space, whether it is a cart, storefront, or office.
  • Commercial auto: Protection for your company-owned vehicle.
  • Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
  • Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business.

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.

You can create your own website using services like WordPress or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web developer to create a custom website for your business.

Essential software and tools

Being a restaurateur means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, a number of excellent websites and digital tools can help you with many business tasks. Sites such as Restaurant 365, lightspeed, and toast offer professional guidance on building your menu, optimal floor plans, cost-saving staff scheduling, and much more.

Marketing

Much of your business will be walk-by customers, but you should still spend time marketing yourself! Especially as a new business, it’s important to get the word out so customers are aware of you.

Social media is a particularly good way of promoting your business because you can create engaging posts that advertise your products:

  • Facebook: Great platform for paid advertising, allows you to target specific demographics, like men over age 50 in the Cleveland area.
  • Instagram: Same benefits as Facebook but with different target audiences.
  • Website: Search engine optimization (SEO) will help your website appear closer to the top in relevant search results, a crucial element for increasing sales.

Accounting

  • Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
  • If you are unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Equipment

You’ll need several key items to open your restaurant, starting with:

  • The restaurant space, your largest expense
  • Kitchen equipment
  • Furniture and tableware
  • Bar equipment
  • Dishwashing equipment
  • Storage equipment
  • Point-of-sale (POS) system

Step 12: Build Your Team

No matter the size of your space, you will need to hire a number of employees for various job roles. Potential restaurant employees include:

  • General manager
  • Waitstaff, host, bartender
  • Kitchen staff, from cooks to dishwashers and busboys
  • Marketing lead

Your business may at some point need to hire all of these positions, or just one or two of them, depending on size and need. You might also hire multiple workers for a single role, or a single worker for multiple roles, again depending on your needs.

Free-of-charge methods to recruit employees include publishing a job post on platforms such as LinkedIn or Facebook, or using free classified sites like Jobs and AngelList. You might also use a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Finally, you could hire a recruitment agency to help you find talent.

Step 13: Start Making Money!

Focus on USPs

Unique selling propositions, or USPs, are the unique characteristics of a product or service that sets it apart from the competition. Customers are inundated with buying options and need to be able to quickly grasp what’s novel about your vending machines and how they fulfill their wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.

You can differentiate your restaurant via the following potential USPs:

  • Creative menu with signature items
  • Farm-to-table concept
  • Vegetarian and vegan-focused menu
  • Unique atmosphere, perhaps with a strong theme
USP venn diagram

Kickstart Marketing

  • Website and SEO – Create a website and optimize it for search engines.
  • Social media marketing – Create a strong social media presence, especially on Facebook, Twitter and Instagram, by posting regularly.
  • Competitions and giveaways – Via email or social media, generate interest by offering prizes to people who buy a certain product or from a specific machine.
  • Signage – Use eye-catching designs and signage on your machines.
  • Promotional Materials – Distribute flyers around your machine locations and at industry events and tradeshows.

Niche Your Market

You might consider creating a niche market for yourself by specializing in certain dishes. This will jumpstart your word-of-mouth marketing within your niche market. You can continue to add to and refine your menu as you go.

Build Affiliate Relationships

Affiliate marketing is advertising in which you compensate third-party publishers, who are your affiliates, in order to generate traffic to your website.

You will develop long-term relationships with these affiliates so that they are helping you to generate traffic on an ongoing basis.

Restaurant FAQs

How much does it cost to open a small restaurant?

In general, the cost to open a new restaurant ranges from $200,000 to $600,000. Most of this cost goes to readying your restaurant space. If you find a smaller space that needs little renovation, your costs will be lower. Costs also depend on the quality of your kitchen equipment and furniture.

Can I open a restaurant with no experience?

Of course you can, but you will need to do your homework so you know the nuts and bolts of running a restaurant. It would also be wise to get advice and insight from other restaurant owners and to hire an experienced general manager.

How hard is it to open a restaurant?

Opening any business takes a lot of hard work, and a restaurant has its own challenges. You will need a great concept that draws customers and have to manage a lot of moving parts – building out and maintaining a pleasant space, purchasing inventory, cooking and serving quality food, and wrangling your staff. The first thing to do is research — and the second thing too. Make sure you fully understand what’s required before diving in.