Although starting a restaurant business does require an abundance of passion, it is also a highly regulated and capital-intensive endeavor. It takes equal portions of the brain and heart.
In fact, the proclivity for undercapitalization is one of the most common causes of restaurant failure, despite an overall desire to make it work. If you have ever wondered how to start a restaurant business, this article and its comprehensive approach to the matter is for you.
When you set realistic expectations from the outset and focus on structure, compliance, and cost issues, you will give yourself and your restaurant a better chance of success. Read on to learn the “how tos” behind opening a restaurant with longevity.
What makes starting a restaurant different from other businesses?
Looking at how to start a small business is very different from starting a restaurant business. Because a restaurant involves food, there are many additional regulations you have to meet. For example, your restaurant will be subject to health department oversight, and you should also expect long pre-opening timelines due to inspections and health safety requirements.
In addition, restaurant ownership comes along with commercial kitchen requirements, perishable inventory management, specific restaurant licenses and permits, high labor costs, and thin profit margins. This means that opening a restaurant carries higher operational risks than most other service business ideas.
This isn’t to say that owning and operating a successful restaurant isn’t possible. It just takes a more measured approach with a realistic view of the industry.
Plan your restaurant before signing a lease
Now is the time, before signing your lease is the time in which you should complete a restaurant business plan. This will include some market research integration, especially as it relates to risk. You should determine by doing research whether the type of restaurant you are considering has worked in the area and determine the type of restaurant that stands a greater chance of success. You want to define your restaurant concept clearly, not vaguely. Before signing your lease, you want to ensure you have done all the following, which is key in determining your long-term success:
Define your restaurant’s concept: This is more than an idea. It is an actionable plan, concept and clear intention. It is the foundation on which your restaurant is built; the theme, the identity, service style, atmosphere and decor.
Conduct local market research: Find out key information like:
- Who is your target customer?
- What price points are viable in the area?
- How saturated is the cuisine you are considering the area?
Build a Realistic Financial Projection: Don’t plan for the best case scenario, but instead shoot for reality. In other words, plan for the best, but prepare for the worst.
Estimate Build-Out Feasibility: This considers whether a chosen location can financially and technically support your restaurant concept. It includes evaluating structural, electrical, plumbing, and mechanical issues as well as local code requirements, along with any construction costs that might be involved.
Restaurant licenses and permits required
There isn’t a singular “restaurant license” you can get in order to open a restaurant. Instead, it’s a conglomerate of several licenses, permits and registrations. The following is a helpful list of many common requirements:
- Business registration, such as an LLC or corporation.
- EIN: Employer Identification Number (assigned by the IRS)
- Local business license.
- Health department permit.
- Food manager certification/food handler’s license
- Building permits for construction
- Fire inspection.
- Liquor license (if applicable).
- Sales tax registration
It’s important to remember that inspections are mandatory before opening, so you want to make sure you have done your due diligence to avoid issues and delays. You should also know that liquor licenses can take months to acquire, and the exact registration and licensing will vary by city and state. At Tailor Brands, we are happy to help you as an entrepreneur form an LLC, obtain an EIN and organize business documents for permit applications. More on this below.
Restaurant startup costs
There is no way around the fact that restaurants demand substantial upfront capital to get off and running. The following is a breakdown of some of the expenses you can expect to be ready to pay associated with typical restaurant startups:
- Leasehold Improvements: This usually costs between $150 and $750 per square foot with a national average of between $400 and $450 per square foot.
- Kitchen Equipment: This cost is estimated to be anywhere from $50,000 and $150,000 for mid-sized full-service.
- Furniture and Decor: Depending on the concept, you can expect to spend between $60 and $70 a seat for casual dining or $140 per seat for more upscale decor and furnishings. This averages between $15,000 and over $100,000.
- Initial Food and Beverage Inventory: Expect to spend between $5,000 and $25,000 for a month of food and beverages. Obviously, this will vary based on what you serve.
- Permits and Licensing Fees: These fees can range from $2,000 to over $10,000 or even $14,000 plus for liquor licenses. The area in which you are operating will greatly impact this cost structure.
- Payroll Throughout Training Period: You should plan to spend around $1,252 per an employee for training and development. This equates to a typical new restaurant pre-opening payroll ranging from $5,000 to more than $20,000.
- Insurance: New startup insurance is usually between $3,000 and $4,300 for small to medium-sized restaurants. Overall, restaurant insurance ranges from $1,000 to $10,000 annually.
- Marketing and Branding: The cost of branding and marketing a new restaurant can range from right at $2,000 to over $20,000 at initial launch.
Build-out and rent are the largest startup cost drivers. Be prepared to have working capital available for several months at least (if not longer), getting you through until your restaurant becomes profitable.
Staffing and operational setup
Another large initial and ongoing expense when starting a restaurant is staffing and operational related costs, or labor costs. When planning for success, you have to focus on the real operational complexity you will experience, such as the following costs:
- Hiring kitchen staff.
- Front-of-house hiring.
- Payroll compliance.
- Scheduling systems.
- Vendor contracts.
- Inventory management.
- Point of Sale (POS) system selection.
Be aware that turnover is generally higher in the food service industry when compared to other sectors. The restaurant industry averages 75% to 100% turnover annually, which is double the rate for other private sectors. Therefore, labor will be and will continue to be one of your largest ongoing expenses when starting a restaurant (and perhaps a bit of frustration). Know this operational cost and plan for it to give your restaurant the best chance of success. Aim to create a pleasant work environment to hopefully see this trend change for you.
How to start a restaurant business with no money
Traditional brick-and-mortar restaurants require capital and a good amount of it. Therefore, if you find yourself in a situation where this isn’t a realistic pathway for you, you might consider some of the following cost-saving alternatives. These are applicable if you don’t have the money necessary to go the traditional route but want to dip into the industry nonetheless:
- Start a catering business before opening a full restaurant.
- Open a pop-up restaurant.
- Consider sharing a commercial kitchen space.
- Try your concept in a food truck first.
- Seek out partnerships and investors to share the cost.
- Offer revenue-sharing chef agreements to save labor expenses.
Let’s face it, zero-capital full-service restaurants are rare. Typically, financing is necessary for a build-out. Therefore, starting a restaurant business should be a financial choice first and foremost, not only a passion or dream fulfilled. That’s not to say there aren’t some ways to reduce upfront costs initially or to still dream big!
List of things to do before opening a restaurant
Consider the following actionable checklist of things to do before opening a restaurant:
- Finalize the lease.
- Secure all permits and inspections.
- Complete kitchen build-out.
- Install POS system.
- Hire and train staff.
- Confirm insurance coverage.
- Set up vendor contracts.
- Conduct soft opening.
- Register for sales tax.
- Preparing opening marketing.
Start a restaurant in New York
To start a business in New York, especially New York City, then you need to know that this city has stricter permitting requirements and higher operating costs overall when compared to virtually any other city in the nation. The following is a look at New York specific costs that you should be prepared to cover when opening a restaurant in this location:
- NYC Department of Health requirements.
- Food Protection Course.
- Building and fire department approvals.
- Liquor license through NY State Liquor Authority.
- Inspection timelines: initial inspection after opening, then once a year.
- Higher rent and build-out costs: Rent and lease rates range from $200 to $400 per square foot annually and build-out costs range from $300 to more than $450 per square foot. This is significantly higher than the national average.
- Borough-specific rules: This includes rules and guidelines on sidewalk and roadway dining as well as guidelines on removable structures.
Conclusion
Restaurants are capital-intensive and highly relegated with mandatory licensing requirements and inspection schedules. In addition, your choice of lease can determine the long-term viability of a new restaurant. To make a successful go of it, your passion must be matched with financial discipline, involving comprehensive cashflow management as well as a commitment to continued staffing excellence.
The main points to remember are to remain steady and realistic throughout the process and go in facing your do-list head on, ensuring that nothing blindsides you and throws you off track. At Tailor Brands, we are happy to come alongside you and help you through this process. Contact us today to learn more.