Restaurant Startup Costs: The Real Cost of Opening a Restaurant

Restaurant Startup Costs: The Real Cost of Opening 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. 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. 

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

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.

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.

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.

 

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. 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. 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.

1. 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.

 

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 $________
  • Licenses and permits – 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. 

Best of luck in your entrepreneurial endeavors!