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Restaurant Startup Costs: The Real Cost of Opening and Operating a Restaurant

Restaurant Startup Costs: The Real Cost of Opening and Operating a Restaurant

According to a survey from Restaurant Owner, restaurant startup costs can range anywhere between $175,500 and $750,500. That’s a lot of money, but how do you know exactly how much money you’ll need? 

With a lot of careful planning. 

Thanks to razor-thin profit margins, high operational expenses and fierce competition, one of the best things you can do to assure that your restaurant will eventually turn a profit is to project your startup costs and projected ongoing expenses before applying for loans and financial assistance.  

In this post, you’ll learn how to project the following costs for your restaurant-to-be: 

Once you project each of these expenses, you’ll have a good idea of how much it will cost you to open and operate a restaurant. Let’s dive in! 

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Restaurant expenses vs. restaurant costs

Before we jump into restaurant startup costs and expenses, it’s important to clarify the difference between the two. 

A restaurant expense is a recurring payment like rent, food costs, payroll, marketing and utilities. A restaurant cost is any one-time expense for things like kitchen equipment, dishes or furniture. 

 

Restaurant startup costs

While your startup costs will fluctuate depending on whether you decide to rent or own your retail space, renovation costs, which equipment you need and more, the things each restaurant needs to buy before opening their doors largely falls into these categories: 

  1. Commercial space
  2. Renovations and decor
  3. Kitchen supplies and equipment
  4. Restaurant technology
  5. Licenses and permits
  6. Marketing

1. Commercial space

There are two ways to secure commercial space for a restaurant: leasing and buying.

When you sign a commercial lease, you’ll need to commit to several years of occupancy at once and pay a refundable deposit—usually three to six months’ worth—to secure your spot. 

So how much should you save for a deposit? Well, that depends on where you set up shop. 

The average rent for a restaurant space in downtown Los Angeles, for example, is $2.95 per square foot. For a 2,000-square-foot space, this rate translates to $5,900 each month. In this scenario, you’d need to have between $17,700 and $35,400 for a deposit. 

If you’re buying a commercial space you should expect to pay a downpayment of between 15% and 35%. A space valued at $1 million, for example, would require a $150,000 to $350,000 down payment.

2. Renovations and decor 

Once you secure a space, it will likely need to undergo some renovations before it’s ready for the public. 

Renovation and decor costs vary greatly depending on your restaurant’s concept, your target market and the condition of the commercial space you inherit. 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.

Our suggestion? Invest only in the essentials from the get-go: The seating, lighting, bar, kitchen service area first. 

While you may want an espresso machine imported from Italy, is the cost justified? Unless the answer is a resounding yes, consider pushing back non-essential expenses until you’re sure you can take them on without sacrificing liquidity. 

When shopping for property, attempt to find an option 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.

Set a budget of what you’re comfortable spending on renovations and stick to it. If you’re feeling thrifty, there are plenty of DIY restaurant decor ideas that can help you add personality and charm to your space without breaking the bank. 

3. Kitchen appliances and equipment

Opening a restaurant also requires investing in all of the appliances and equipment you need. In your restaurant, you’ll likely need: 

  • Kitchen equipment: Ovens, stoves, fridges and freezers, dishwashers, etc. 
  • Cooking equipment: Pots, pans, cutting boards, pasta cookers, strainers, ladles, etc. 
  • Workspaces: Counters, prep tables, steam tables, cold food tables, etc.
  • Bar equipment: Mixers, cocktail shakers, ice cube machines, etc.
  • Service equipment: Serving trays, plates, tablecloths, utensils, glassware, etc.

It’s important to make the distinction between essential and non-essential kitchen appliances and equipment. Which ones do your servers, hosts, bartenders, barbacks, dishwashers, line cooks and chefs need to do their job effectively? 

Invest in the essentials from the get-go, otherwise, your staff will run into challenges during service that may detract from your guest’s dining experience

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.

4. Restaurant technology

Modern restaurants need technology to operate efficiently. Tech helps restaurants run more efficiently by automating processes and collecting data that can help optimize both front-of-house and back-of-house operations. You’ll need both software and hardware to run a successful, modern restaurant.

We recommend starting with this software:

This is the hardware you need to open a restaurant:

  • iPads for your POS and kitchen display systems – current models start at $329
  • Payment terminal – prices vary greatly
  • Receipt printer – $100+
  • Cash drawer – $20+

Expect to spend at least $1,000 purchasing new hardware for your restaurant and set aside about $400 each month for software licenses.

5. Licenses and permits

In order to legally operate a restaurant, you’ll need to obtain certain licenses and permits. Since licensing requirements can vary from state to state and even city by city, check your local regulations to make sure that you’re covered.

Most municipalities require restaurants to have a food service license. This license is governed by the local health department, which will stop by your restaurant from time to time to ensure that your kitchen is up to code. Food service licenses cost between $100 and $1,000.

If you plan to serve alcoholic beverages at your restaurant, you’ll need a liquor license. These licenses can take up to six months to be approved, so don’t wait until the last minute to apply for one. A liquor license can cost between $12,000 and $400,000 with a beer and wine license costing as little as $3,000.

Any employee who works with food in your restaurant will need a food handler’s permit, which ensures that they know how to safely handle and store food. In the United States, a food handler’s permit costs between $100 and $500 and can be obtained online in most municipalities. In Canada, the cost and process vary by province.

Other permits and licenses that you might need to open your restaurant include a business license, certificate of occupancy, sign permit, building health permit, live entertainment license, music license, resale permit, dumpster placement permit, seller’s permit and valet parking permit.

Administrative charges

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.

6. Marketing

Build it and they will come, right? Unfortunately, it’s not that simple. Your brand new restaurant will need marketing help to draw customers on opening day and beyond. 

Not setting a budget for marketing and PR is an oversight that many new restaurateurs make. You’ll need someone who can create your restaurant’s website, design your logo, manage its social media presence, respond to customer reviews and work with influencers.

Marketing on a budget 

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 avenues; 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.

 

Restaurant fixed expenses

Your restaurant’s fixed costs are easier to work into your budget since they rarely change. Here are the fixed costs to budget for:

  1. Rent and building fees
  2. License fees
  3. Insurance coverage
  4. Ongoing marketing

1. Rent and building fees

While how much you pay per month for your commercial space varies greatly depending on where you’re located and how much square footage you have, the monthly rent and building fees you agree to pay when you sign your commercial lease are unlikely to change. 

Before signing a lease, have both an attorney and accountant look it over to find any potential red flags and see whether or not it fits into your set monthly budget. 

2. License fees 

While most licenses and permits have an initial cost, you may need to renew some of them annually. When you’re deciding which licenses and permits you need, factor in the initial costs and the fixed renewal fees as well. 

3. Insurance Coverage

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.

4. Ongoing marketing

Along with the marketing costs to get your brand up and running, you may want to put a fixed amount aside each month towards ongoing marketing.

Social media ads, influencer marketing, events, PR outreach, you name it. However, you decide to market your business, create a monthly marketing budget and stick to it. 

Also, consider amazing customer service as a part of your marketing. Nielson reported that 77% of customers are likely to visit a restaurant that they were recommended by friends and family. If you take care of your customers each and every service, they’re far more likely to keep coming back, write positive reviews online and recommend your restaurant to their entourage.

The best thing you can do to market your restaurant is to focus on customer satisfaction and retention. 

 

Restaurant variable expenses

Your variable costs are more difficult to project since they fluctuate according to their output. Here are the three main variable costs to account for: 

  1. Cost of goods sold
  2. Utility costs
  3. Payment processing fees 

1. Cost of goods sold

The cost of goods sold (COGS) refers to the cost of the ingredients and materials used to make a dish. Depending on what kind of food a restaurant serves, COGS can vary greatly. If you’re selling Ahi tuna steak, your COGS will certainly be more expensive than if you’re selling cheeseburgers. 

For a restaurant to be profitable, its gross profits should hover around 70%, meaning that for every $100 a guest spends, $70 is gross profit. 

How much you charge for each restaurant item should take this into account; the higher the COGS, the higher the menu item’s price should be. 

When pricing menu items, also take into account your fixed monthly costs. You need to make enough money each month to cover both variable and fixed costs (like labor and rent) and still have net profit leftover. To do that, you need to have menu pricing and restaurant profit margins down to a science. 

If you need help pricing your menu items to account for your expenses (or figuring out what all your expenses are in the first place), consider hiring a seasoned restaurant consultant with experience in the field. This is one area that directly impacts your bottom line long-term; it’s worthwhile to get it right from the get-go. 

2. Utility costs

Don’t let your utility costs take you by surprise. Before signing your commercial lease, ask if utilities like electricity and water are included in your costs. If not, find out what previous tenants paid and use that as a benchmark. 

As a general rule of thumb, restaurant utilities cost around $3.75 per square foot annually. The bigger your commercial space, the more you will pay on gas and electricity. 

3. Payment processing fees

How much you pay in payment processing fees varies depending on your payment processing provider and their fees. For each transaction, there are typically three processing fees (usually a percentage of the transaction value). Here’s a quick breakdown: 

  • Interchange fee: Each credit card brand has a percentage-based interchange fee that’s charged to a merchant every time someone uses their credit card as a payment method.
  • Card brand fee: Each transaction is subject to a percentage-based fee paid to the card brand network (Visa, Mastercard, American Express, etc.)
  • Payment processor fee: There are some payment processors who apply either a flat or percentage-based markup fee for routing money from the cardholder (the customer) to the card brand network to the issuing bank and finally, to the merchant. 

Some restaurants avoid paying payment processing fees altogether by being cash-only, however, this can drastically reduce how many customers you serve. A 2017 report from TSYS found that 81% of money spent at restaurants in the United States was charged to a card. 

Rather than avoid dealing with payment processing providers altogether, we suggest comparing providers and finding the one with the most favorable rates for your business. 

 

Restaurant mixed expenses

Mixed expenses have both a fixed and variable component. The biggest mixed cost each restaurant has to deal with is labor.

Labor costs

Depending on whether or not an employee is salaried or working for an hourly wage, the associated labor costs can fluctuate, however, we recommend projecting how many employees you need per service, how much money you need to pay them per week and sticking to that budget. 

What’s important is anticipating how much you spend on labor per month and having several months’ worth of project payroll saved up prior to opening. Remember, your restaurant likely won’t be profitable right away, so put money aside beforehand to assure you can pay (and retain) your staff. 

Not sure how much staff to hire from the outset? Your staffing needs will depend on your service style and the size of your dining room. 

A quick-service restaurant will need more back-of-house (BOH) staff than the front-of-house (FOH) staff. Nestle Professional recommends one FOH employee per shift for every dozen tables and one BOH employee per shift for every dozen customers at this type of venue. 

At full-service restaurants, Nestle recommends one FOH employee for every five to six tables and one BOH employee for every dozen tables. Double up on staff at fine dining establishments, where the focus is on attentive, personalized service.

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.

 

How to raise funds for restaurant startup costs 

While the magnitude of these nine restaurant expenses varies from concept to concept and city to city, one thing is clear: it costs a lot of money to open a restaurant. Do you have enough cash to open the restaurant you’ve been dreaming of?

If not, you’re not alone. Most people don’t have several hundred thousand dollars saved to self-fund a new restaurant, so they have to get creative with fundraising, financing and loans. Here are several ways to raise the funds you need to open your restaurant:

  • Go to friends and family: In any kind of business, most entrepreneurs ask friends and family for funds before seeking formal loans from banks or investors. The upside of approaching friends and family is that you have existing relationships based on trust, so you probably won’t need to pay interest when paying them back. The downside is that money can cause tension when it comes between family and friends.
  • Get a small business loan (SBA): The U.S. Small Business Administration connects aspiring entrepreneurs to lenders who understand the challenges that small business owners face. The SBA “reduces the risk for lenders and makes it easier for them to access capital.”
  • Bring on a business partner: You may have substantial savings, but they may not be enough to fund a restaurant. Consider teaming up with a business partner who has cash and expertise in an area where you fall short. As with any business agreement, draw up the terms of your partnership in a contract to protect yourselves legally.
  • Seek investors: Investors aren’t just for tech companies. Look for local investment firms that have supported restaurants you admire. Don’t approach investors without a rock-solid business plan and pitch deck. When investors see that you have a strong vision, they’ll know you mean business. 
  • Crowdfund: Open your restaurant up to good-willed members of the public through crowdfunding. Create a page on Kickstarter and offer investors incentives for funding your dream. 

Most restaurateurs can’t afford to start a business on their own. Find a fundraising method that works for you.

 

Restaurant startup costs checklist

Opening a restaurant is an exciting venture…and an expensive one. Use this restaurant expenses checklist to plan for and create budgets for each of these key investments.

  • Commercial space – Budget $________
  • Renovations and decor – Budget $________ 
  • Kitchen supplies and equipment – Budget $________
  • Restaurant technology – Budget $________
  • Licenses and permits – Budget $________
  • Marketing – Budget $________
  • Insurance – Budget $________
  • Labor costs – Budget $________
  • Rent and building fees – Budget $________
  • Food costs – Budget $________
  • Utility costs – Budget $________
  • Payment processing fees – Budget $________

If you need more money to open your restaurant, approach friends and family, seek out a small business loan, pitch investors, find a business partner or run a crowdfunding campaign. Need help choosing your restaurant technology? Talk to one of our point of sale experts!

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