How Much Does It Cost to Open a Restaurant?
Get an idea of the true costs of operating a restaurant.
- September 5, 2019
- Small Business Finances
- 7 min read
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To successfully launch a restaurant, you’ll need a lot more than a good idea and a restaurant business plan — you’ll need capital and lots of it. Without adequate capital reserves, even the best restaurant in the world might not survive its first year. In addition to having enough money to buy your food supplies and pay your workers, you’ll need to factor in less obvious costs when calculating the average startup cost for a restaurant. But if you do your research and are prepared for the costs, you’ve won half the battle. Finding good financing options for restaurants, especially during your startup phase, is a major step on the path to long-term success for your restaurant. But first, you need to figure out how much money you’ll need to borrow in order to launch your restaurant.
Let’s get the big numbers out of the way right away. Here is the amount you should budget in the first year to start a new restaurant from scratch:
- $785,000+ for a large, high-end restaurant
- $225,000+ for small, casual restaurant or cafe
These ranges are broad because there’s no such thing as an “average” restaurant. Costs can vary wildly based on a number of factors, ranging from the location of the restaurant to the type of cuisine to the design plans of the restaurateur. For example, a minimalist restaurant with four tables in a low-rent area serving snacks will cost much less than a waterfront restaurant in a big city serving five-star cuisine in oak-paneled booths. However, most restaurants lie somewhere in the middle of these two extremes, so you can adjust your budget figures accordingly as you delve into your own personal research.
Starting a restaurant isn’t as simple as opening your home kitchen and inviting customers in. To adequately prepare and protect your restaurant, you’ll want to hire a host of professionals. On the real estate side, you’ll need a construction contractor to help you build out your restaurant according to your specifications. However, you may need some or all of the following professionals as well, at least temporarily:
- Insurance agents
- Financial advisors
- Sales and marketing professionals
- Real estate agents
- Social media consultants
While many of these professionals may just seem like an extra cost, especially when you are just starting out, these types of advisers are the ones that can help you run a lean, focused, cost-controlled, profitable and legal restaurant. Working without these types of professionals can end up costing you much more in the long run as you correct your own mistakes.
Now that you understand the total cost to open a restaurant, you should understand the breakdown of the individual expenses you should expect to pay. Although actual restaurant costs will vary considerably from venue to venue, the major costs of most restaurants fall within certain percentages of their sales as detailed below, according to Upserve Restaurant Insider. Here’s a look at all of the restaurant costs you should anticipate incurring, along with rough averages and formulas to help you figure out your expected operating costs.
Your food budget may be the single biggest line-item in your checklist of startup restaurant costs. Balancing food costs within a restaurant budget is a delicate operation; higher-quality food can generate loyal customers, but if the cost of food gets too high, a restaurant will go out of business.
For most profitable restaurants, food expenses range between 28 percent and 35 percent of revenue. This typically ranges up or down based on the type of restaurant:
- Casual cafe: 25 percent of revenue (example: $75,000 for $300,000 in revenue)
- Steakhouse or higher-end restaurant: 40 percent of revenue (example: $200,000 for $500,000 in revenue)
Labor costs are right up there with food costs when it comes to the percentage of revenue for a restaurant, at 28 percent to 35 percent. When estimating your labor costs, don’t forget to include the percentage that you will take for yourself as well. On a national basis, the average restaurant owner earns somewhere between $40,000 and $100,000 or more annually. You can expect your take-home amount to be lower in the first few years of operation as your restaurant gets its footing.
- Casual cafe: 33 percent of revenue ($99,000 for $300,000 in revenue, plus $50,000 for owner)
- Quick service: 29 percent of revenue ($87,000 for $300,000 in revenue, plus $50,000 for owner)
Whether you buy or rent a location for your restaurant, the costs are likely to be extensive. As with other costs, these can be extremely variable by geographical location. As many as one in seven restaurants in popular cities cost pay more than $12,000 per month in rent, according to UpServe Restaurant Insider.
- Small restaurant in downscale area: $40,000 annually
- Large restaurant in hot area: $150,000+ annually
As far as costs go, the sky’s the limit when you’re outfitting your restaurant. In addition to decor, renovation or remodeling costs, you’ll have to factor in furniture. This is a cost you may want to control when you’re at the startup phase, knowing you can always upscale as you generate more revenue.
- Costs for a small, simple, existing restaurant: $5,000
- Costs for a large, new restaurant: $100,000+
This is a bit of a catch-all category encompassing the costs that will keep your restaurant running on a daily basis. Restaurant equipment leasing costs might fall into this category, along with daily costs such as cleaning services, laundry, parking services or maintenance.
- Small restaurant: $10,000 annually
- Large restaurant: $100,000 annually
The explosion of social media marketing has made an Instagram and Facebook presence a necessity for restaurants that want to reach new and loyal customers. To keep costs lower, you can focus your advertising locally at first and with a little research, you could take a DIY-approach to marketing. If you want to turn over your marketing to an outside agency that will work to promote your restaurant broadly, your costs will go up correspondingly.
- Local: $1,000 annually
- Outsourced: $30,000+ annually
No matter how innovative your restaurant concept is or how much financing you have, you won’t be allowed to operate unless you’ve got all your permits and licenses in order, including your federal Employer Identification Number, or EIN. Here are just a few of the potential components of your restaurant license costs, but you’ll likely have to pay for additional licenses and permits. Check with your local government and control boards to see what other permits may be necessary, such as a food handler’s permit or a sign permit.
- Business license cost: $75-$7,000; potentially annual costs
- Food service license cost: $100-$1,000; may be ongoing
- Liquor license: $300-$14,000 annually; varies by state and type of liquor license
This category encompasses everything from POS technology to online ordering programs, employee scheduling systems, inventory management software and more. Although these can be scaled up at any time, improving efficiency in your business could translate into higher long-term profits.
- Small restaurant technology costs: $3,000 annually
- Average restaurant technology costs: $6,500 annually
- Large restaurant technology costs: $10,000 or more annually
This is a cost that surprises many new business owners. It may seem unfair, but as your restaurant is a commercial enterprise, if you want to play music there, you’ll have to pay licensing fees.
- Licensing fees: approx. $2 per day
- Fast-casual restaurant music costs: $500 annually
- Large restaurant with live music costs: $2,500+ annually
- Penalties for playing unlicensed music: at least $750 per day, up to $30,000 per day
Organizational costs encompass a variety of professional services, from accounting and payroll to insurance coverage. Consultants might be one-time costs or ongoing expenses, or more likely a combination of both. If you’re franchising your restaurant, your franchise fee — which could run into the hundreds of thousands of dollars— could be lumped into this category as well.
Average restaurant cost: $2,000 to $20,000+ annually (much more for a franchise)
Whether you have customers or not, you’re going to have to pay to keep the lights on and to keep the temperature in your kitchen and food storage areas at appropriate levels. On average, restaurant utilities cost about $3.75 per square foot.
- Small restaurant utility cost: $5,000 annually
- Average restaurant utility cost: $12,500 annually
- Large restaurant utility cost: $20,000+ annually
Now that you know how much it costs to start a restaurant, you’re going to need financing. A restaurant without capital is like a car engine without oil — sooner or later, things are going to grind to a screeching halt.
The problem with financing a new restaurant is that options are often limited. Venture capitalists or other angel investors are unlikely to commit a large sum of money to an untested concept, and even the most likely source of financing for a new business, the Small Business Administration, usually only finances companies with at least two or three years of operating history.
Your best option as a new restaurant is likely to be a restaurant loan from an alternative lending option like Seek Capital, which specializes in helping new or startup businesses find a financing option. You might even be able to obtain initial approval online in a matter of hours.
When computing your startup restaurant costs, remember that these figures are just an initial guideline. It always pays to have extra capital reserves to cover any restaurant contingency, such as an unexpected equipment cost or a seasonal lull in your business.
However, when you obtain capital for your new business, be sure to deploy it prudently, and keep this list of costs in mind so that you don’t encounter any surprises when making your budget. If you can approach your new business armed with both knowledge and capital, you’ll greatly improve your odds for success.
More From Seek
- 4 Habits to Get Your Business Approved for More Financing
- Why Traditional Funding Might Not Be Right for Your Startup
- Can’t Get a Business Bank Loan? Here Are 3 Alternatives
- 5 Steps to Take After Being Rejected for a Small Business Loan
Business Loan Resources
Photo credit: djile/Shutterstock.com
Best Startup Loans of 2020 - Get Between $5,000 and $500,000
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