Many people dream of opening a restaurant at least once in their lives. Even if you aren’t a chef, the universal love for food has probably inspired the daydream of running your own restaurant to cross your mind. Restaurants seem to have a magical pull on entrepreneurs who like the idea of being their own bosses while also bringing joy and culinary masterpieces to the masses. It doesn’t have to be a traditional sit-down restaurant, either. It could be a catering service, food truck, pizzeria, bar, café or any other business that prepares and serves food and/or beverages. If that magical pull extends to you, begin by educating yourself on how to start a restaurant and turn it into a profitable enterprise. Learn how to turn your dreams into a reality with this ultimate guide to starting a restaurant. Table of Contents
It might seem odd to ask yourself why you want to open a restaurant — probably because you like the business and think you could do well at it, right? — but it’s still worth thinking about before you put a lot of time, energy and money into a new restaurant. Saying you like to cook or serve guests isn’t really a good enough reason to go into the restaurant business, said John Love, co-owner and operator of Red Rocks Café , which has three fine-dining restaurants in the Charlotte, North Carolina-metro area. “Just because you can cook something good doesn't mean you can operate a business,” said Love, who has spent more than three decades in the restaurant industry. “Being a practitioner does not necessarily make you an operator.” Taking some time to evaluate your own feelings and goals can give you the perspective needed to determine if committing to a restaurant business is the right move for you. You don’t want to realize it’s not for you once you’re in the throes of running a busy restaurant.
The biggest mistake aspiring restaurateurs make, Love said, is underestimating the time and effort it takes to run a successful restaurant. “People need to understand that it's a daily grind — it's every day of the week and 365 days a year,” he said. “You have to do it well every day, for very long hours. Unless you are passionate and love the business, it's very hard to do. You have to be very thick skinned.” If you do have the passion, and you’re willing to put yourself through the daily grind, you stand a much better chance of turning a restaurant profit. Before you get to that stage, however, you need to build expertise in every aspect of how to start a restaurant — including the amount of money required. Let’s get started. [caption id="attachment_1766" align="aligncenter" width="1000"] Rawpixel.com/Shutterstock.com[/caption]
Starting a restaurant business is not cheap. In addition to money needed to buy or rent a location, you’ll need money for a list of many other restaurant supplies, including:
That doesn’t even include the money you’ll spend on promoting the restaurant and paying for various permits, licenses, restaurant insurance policies and utility bills.
The amount of capital it takes to open a new restaurant varies from one place to the next, depending on its size, type and location as well as a host of other factors. For example, if you’re opening in a location that already has restaurant equipment and furniture and doesn’t need much renovation work, you’ll probably spend less than if you have to pay for new equipment, furniture and renovations. If you’re buying a restaurant franchise, you’ll have franchise fees in addition to other costs. According to Love, $1.5 million is probably the industry standard for opening a new restaurant, “but that goes up and down depending on the business.”
Once the restaurant is open, you’ll have various operating and recurring costs. Again, these vary according to the type of establishment and where it’s located. But you can get a pretty good idea of these costs based on your projected sales (and yes, you’ll need to come up with sales projections for lenders and investors). Here are common operating and recurring costs and their typical percentage of total sales:
Your restaurant’s concept, or theme, should make an immediate statement about what customers can expect in terms of food, service, ambience and experience. It encompasses everything from your menu design and dining room décor to the restaurant’s tableware, wall colors and food choices. It doesn’t matter if you plan to open a bagel shop, a casual dining restaurant or a pricey, upscale steakhouse: every restaurant should have a well-defined concept that resonates with customers and sticks in their minds long after they’ve paid the bill and moved along.
Although you’re encouraged to be unique and think imaginatively, it doesn’t hurt to familiarize yourself with some of the standard industry rules when it comes to developing a concept. One of the first rules is to think about your core customer base. Are they working class, or do they have a lot of disposable income to spend on dining out? Are they foodies, or are they just looking to grab a quick bite that doesn’t require a lot of thinking or time? If you’re targeting fine dining patrons, for example, your concept should be geared toward elegance, extensive wine lists, prix fixe menus and premium service. But if you want to open a funky little greasy spoon that stays open late, you’ll want to ditch the formality and focus on friendly service, quick turnover and a big menu with dozens of selections. Whatever you do, don’t miss the mark when it comes to matching your concept with your customer base. You don’t want guests being surprised when they expect an upscale steakhouse only to find a midscale, family-style restaurant.
The modern restaurant industry is not nearly as compartmentalized as it used to be. For example, it’s not unusual to find an award-winning chef trotting out high-end food in a downscale corner pub. Even so, most restaurants and prepared food businesses will fall into one of the following categories:
Within those concepts are subcategories that might include a certain type of ethnic food (Peruvian, Ethiopian, Thai, Italian, etc.), culinary focus (vegan, farm to table) or customer experience (sports bar, live music). [caption id="attachment_1768" align="aligncenter" width="1000"] Elena Eryomenko/Shutterstock.com[/caption]
Since the biggest influence on a restaurant’s concept is the food, you’ll want to put a lot of thought into your menu creation. You don’t necessarily have to restrict yourself to a certain category of food, but most restaurants have a culinary specialty that separates them from the competition. This decision is easier for some restaurants than others. For example, if you grew up learning your grandmother’s Vietnamese recipes, started your career in a Vietnamese restaurant and now want to open one of your own, then the food concept is relatively straightforward. You’ll specialize in Vietnamese food and decide on the menu, decor, service and location later. But if you have experience with lots of different foods and can’t decide which you like best or think will sell best, it might not be so easy to settle on one. In this case, think about which foods inspire you and that you have expertise in. Your passion and knowledge can serve as useful guides in developing a concept. It’s also important to be aware of the differences between cuisine types and how those differences might influence your concept. Here are a few examples:
Once you’ve decided on a culinary focus, here are some other things to consider that can help you arrive at the right concept:
It’s easy to underestimate the importance of naming your restaurant when your head is filled up with a thousand other tasks. But the name could have a big impact on the number and type of customers you attract. Keep in mind that the business name and restaurant name aren’t necessarily the same thing, though it doesn’t hurt to make them similar. The former is the legal name that will be used to handle business transactions such as vendor payments and license applications (see related section). while the latter is the brand or trade name that will go on your signs, menus, ads, etc. For example, if your name is Mary Lee, you might use a business name like M. Lee Restaurants Inc. or Lee Restaurant Group LLC. Your restaurant name, on the other hand, might be something catchier like Lee’s Street Eats.
The restaurant name you ultimately decide on should reflect your concept, menu, dining experience and brand. If you intend to open an upscale French restaurant, for example, you don’t want to name it Ed’s Diner. By the same token, if you plan on opening a fast-casual burrito joint, you don’t want to name it The Chef’s Table. The Restaurant Group (TRG), a Miami-based consultant that serves the restaurant and hospitality industries, wrote on a website blog that the ideal restaurant name is unique, easy to spell and easy to remember: “The most important factor to consider is the impression the name will have on customers.” Specific cuisines or even buildings often find their way into restaurant names, TRG noted. “Restaurant names usually reflect a theme (as Chinese restaurants typically do with titles that include Jade Palace, Tasty China and Han Dynasty) or a location. The French Laundry — nestled in Napa Valley — is named for the French steam laundry that operated in the same building during the 19 th century." Some restaurant names include something personal to the owner, whether it’s their own names, names of important people in their lives or names of places they’ve visited or things they’ve experienced. Other names are simply inspired by the restaurant’s location. An example is New York’s famous Second Avenue Deli, which originally opened on the corner of 10 th Street and Second Avenue in Manhattan. If you get stuck and can’t come up with a name that strikes a chord, consider using an online name generator or just asking friends, family and professional acquaintances for suggestions.
Nearly as important as choosing the right restaurant name is making sure you don’t choose the wrong one. Here are a few things to keep in mind when deciding on a restaurant name:
From a purely business standpoint, there may be no more important decision than finding the right location for your restaurant. About the only exception is a catering business that goes to its customers rather than the other way around. Even food trucks need to park at the right places to draw enough business. You want to find a location that meets a wide range of criteria. First off, it should be zoned for restaurants. Second, you need a location where there’s commercial space for lease or sale. Once those boxes have been checked, answer the following questions before settling on a location:
One of the first things an aspiring restaurateur should do, Love said, is find out how many people live in the surrounding area. “You should draw a circle around your building with a three-mile radius and if there are not a half-million people in that circle, then you better really know what you're doing,” he said. “Let's say there's only 250,000 in the radius. In that case, you have to look at other factors like demographics and how many other restaurants there are. You really need density, traffic, accessibility and visibility to give yourself the best chance of success.” Related: The Best States to Start a Business
It’s also important to look at the mix of nearby restaurants. In the case of Love’s business, he wants to ensure that the immediate area doesn’t have a restaurant with more than a 50 percent overlap on his own restaurant’s menu items. Restaurants that open in a retail development can keep that from happening by getting a clause in the lease that prevents the developer or leasing agent from renting space to a competing restaurant. “You don't want to locate in a shopping center where the (leasing agent) is just trying to fill up space by putting two or three or four of the same type of restaurant there,” Love said. “It’s important to have that component in your lease so you don't cannibalize each other. But if it's a different type of restaurant with different food, that's good because it brings in more people.”
As mentioned earlier, the business name of your restaurant company shouldn’t be confused with the actual restaurant name. While you’ll want to choose something catchy for your restaurant name, you don’t necessarily need to think too much about your business name because most of the public probably won’t even know what it is. The important thing is to choose a business name that has not already been trademarked. You can check on this by visiting the United States Patent and Trademark Office (USPTO) database , which includes all registered and pending trademarks. Once you find the database, do a quick search for your proposed business name to see if it has already been trademarked. If so, you’ll need to come up with a name that hasn’t been trademarked. Keep in mind that trademarking a business name is not the same thing as copyrighting one. Here are the differences:
The name you ultimately decide to trademark can serve dual purposes by protecting both your business name and your brand. For example, McDonald’s Corp. is the legal business name of the fast-food giant, but the brand is simply known as McDonald’s. By registering the name as McDonald’s Corp., the brand name “McDonald’s” is protected as well.
Whatever you do, try to make your business name stand out from the crowd. Washington, D.C.-based Gerben Law Firm, which specializes in trademark registration, points out on its website that choosing a generic name can lead to problems down the road: “If you decide to open a delicatessen, for example, and choose a name including the word ‘NYC Deli or ‘Philly Sandwiches,’ the USPTO may grant you a trademark, but it will be considered very weak. A weak mark is more vulnerable to challenge or cancellation, and should be avoided.” Once you’ve settled on the name, here are the steps you need to take to register it:
One thing you’ll need to do before opening your restaurant is apply for an Employer Identification Number , or EIN. An EIN basically serves as your restaurant’s tax identification number. It’s a nine-digit number that comes in the form of 12-3456789 and might also be called a Tax ID or Federal Tax ID. An EIN is needed for a number of reasons. You’ll use it when filing paperwork with tax agencies, lenders, insurers, creditors and other organizations you conduct business with. You’ll also use it when applying for food and alcohol licenses and operating agreements, and when purchasing items wholesale. [caption id="attachment_1772" align="aligncenter" width="1000"] Jacob Lund/Shutterstock.com[/caption]
There are a few ways to get an EIN — including through the mail and by fax — but the quickest and easiest way is to do it online at the IRS website. The IRS recommends applying for one early enough so you’ll have it when you need to file a return or make a deposit. Applying online means you get it immediately. Here’s some of the information you’ll need to provide:
The IRS recommends taking the following steps:
Like any small business, a restaurant will have a lot of tax forms to fill out on a monthly and yearly basis. To do this, you’ll need to register the business with the proper tax authorities. This not only means registering your business with the IRS for income and employment tax purposes. In most states, it also means registering to file for sales taxes and/or meal taxes at the state and municipal levels. [caption id="attachment_1774" align="aligncenter" width="1000"] 279photo Studio/Shutterstock.com[/caption]
A sales tax is considered a trust tax, according to the website of LumaTax , a Seattle-based provider of sales tax solutions and services. This means that as a business owner, you’re obligated to collect tax from customers on all taxable sales, hold those funds in trust until the end of the tax period and then file and pay them to the applicable authority. Only five states don’t have a sales tax:
Of the 45 states that do have a sale tax, 38 also have local sales taxes. Check with your city’s tax authority to see if your restaurant will also be responsible for local sales taxes. Different states have different rules governing sales taxes. For example, in some states sales of grocery items such as bottled sauces are exempt from sales taxes. Some cities have meal taxes in addition to sales taxes, including Denver and Jacksonville, Fla. Some states have different tax rates for alcohol and bakery sales. Contact your state’s Department of Revenue for more information on which items are subject to sales taxes and which are not. As a general rule, sales typically must meet two basic criteria to be considered taxable, according to LumaTax:
Restaurants meet the second criteria because they have physical locations within the state’s tax jurisdiction. If you decide to open multiple locations in different jurisdictions, you might need to register for taxes in more than one place. While different states and cities have different processes for registering for sales taxes, you can usually do it online by going to the appropriate authority’s website. For example, in Texas, you’ll need to fill out a tax registration application on the website of the comptroller to get a sales and use tax permit. You must be at least 18 years old to apply. You can email or fax the application. It typically takes two to three weeks to get your permit. Here’s some of the information you’ll need to provide in Texas, for 4example:
Unless you plan on opening a food truck or catering business with just yourself handling all the work, you’ll need to hire employees. In this case, you’ll also need to withhold federal income taxes — and, in most states, state income taxes — from employee paychecks.
For federal taxes, visit the IRS website to learn more about how to get started on withholding. Employers are required to withhold federal income taxes and deposit them electronically using the EFTPS online system. The amount you’re required to withhold and deposit (and how often) depends on the total gross Social Security/Medicare liability for the 12-month period ending on the most recent June 30. Here’s what you’re responsible for withholding as a restaurant owner, according to the IRS :
For state and local income taxes, visit the websites of the appropriate tax authority to learn more about withholding. Only nine states don’t withhold income taxes:
In Arizona, for example, you’ll need to register for payroll taxes with the Arizona Department of Revenue to get a Withholding Account Number. You’ll also need to register with the state’s Department of Economic Security to get an Unemployment Compensation Account Number. Some cities and counties also require you to withhold local income taxes, ranging from huge metropolises such as New York City and San Francisco to smaller burgs like Scranton, Pa. and Bessemer, Ala. [caption id="attachment_1776" align="aligncenter" width="1000"] santypan/Shutterstock.com[/caption]
Because of the nature of the business, the restaurant industry is pretty heavily regulated. To prevent foodborne illness, government agencies want to ensure that your food is properly sourced, stored, prepared, served and disposed of. They also want to ensure that your kitchen, dining room, storage areas and restrooms are sanitary; that your refrigeration and freezer units are set at the right temperatures; and that your cooking equipment works properly and doesn’t pose a fire hazard. If you serve alcoholic beverages, you’re expected to know and adhere to all the rules governing the sale of alcohol. If you deliver food, you should know the rules governing delivery. Because of these regulations, you’ll need numerous permits and licenses to operate and, in some cases, display them in your restaurant. The exact permits and licenses required of restaurants vary depending on the type of restaurant and its location. But a few are pretty standard no matter where you plan to set up shop. In an article on the FSR Magazine website , Jesse Noyes, senior director of marketing at restaurant management solutions provider Upserve, listed the following permits and licenses required for most restaurants:
The American Disabilities Act (ADA) provides guidelines for what restaurants should do to comply with laws governing access for people with disabilities. Here are a few of the guidelines you’ll find on the ADA’s foodservice factsheet :
Like any business owner, a restaurant owner should create a business plan to serve as a guideline on how to get the restaurant up and running. A business plan is also required by potential lenders if you need to apply for a loan to purchase or lease a space, buy equipment and fund operations while you work toward the break-even point. The exact details in a business plan vary depending on the type of restaurant. But as a general rule, your business plan should contain the following:
For more details, check out this guide to writing a restaurant business plan .
All restaurant owners should understand the basics of restaurant accounting and restaurant bookkeeping, whether they plan to do the work themselves or farm it out to a professional accounting firm. If you do plan on handling the job yourself, your first step should be buying accounting software from Quickbooks or another company. Software makes the process much easier and more efficient. If you’re going to start a restaurant business, you’re probably already familiar with accounting terms such as balance sheet, income statement (or profit & loss statement) and cash flow statement. Whether you understand them or not is a different matter — and one you’ll want to resolve either by taking classes, studying on your own or consulting with a professional To better understand restaurant accounting, Scott Aber of New York-based accounting firm Aber CPA offered these basic restaurant accounting components in an article on the BookkeepingChef website.
Read: 5 Creative Ways to Finance Your New Business Without Investors [caption id="attachment_1778" align="aligncenter" width="1000"] David Tadevosian/Shutterstock.com[/caption]
Point-of-sale (POS) software systems can play an important role in restaurant accounting and bookkeeping because they streamline the processes of recording and managing sales, payments and inventory. Some systems also manage the payroll process and track customer behaviors. Trying to pin down a specific cost for a POS system is difficult because there are so many variables, including whether you intend to buy or lease: Here are other factors that influence the cost:
A good resource for POS referrals and costs is your local restaurant association.
Most restaurants need to hire staff for a variety of positions (the exceptions are food trucks and catering businesses). Finding, training and keeping the right people at the right pay is one of the most important tasks for a restaurant — and one of the most difficult. “The number one challenge for a full-service restaurant is staffing,” Love said. “You spend a lot of time and money hiring and training people.” One problem is that the restaurant industry is notorious for high employee turnover. That’s because it employees a high proportion of teenagers and students who switch or leave jobs often, much of the work is seasonal and there’s a lot of competition for labor from other restaurants. It’s common for workers to switch employers for better pay and benefits or a more desirable position.
Even in the best of circumstances, it’s hard to find enough people who are willing to work physically demanding jobs, often during nights and weekends, for comparatively low pay. In tight labor markets, it’s even harder because so many restaurants are competing for a limited supply of labor. If you plan on opening a fast-food or fast-casual restaurant you don’t have to worry about hiring employees to wait on tables. For full-service restaurants, you’ll need a full lineup of personnel. Hiring the right people to fill those positions is an ongoing challenge for any restaurant, whether it’s brand new or decades old. Like any business, restaurants that deal with the challenge successfully tend to establish cultures and hiring processes designed to weed out the weaker candidates. “Attitude is most the important aspect of it and appearance is second because we’re in the hospitality business and you need to look presentable,” Love said. "It’s important to check for certain things when you are hiring. Were they on time for the interview? Did they comb their hair? Do they look and dress appealingly? Do they have product knowledge? If they don't know the product, we’re not interested.” His company also conducts background checks on candidates to ensure they have no violent or theft crimes on their record. The size of your restaurant will determine its staffing needs and its salaries. To learn more about typical wages paid to restaurant employees, visit the website of the United States Bureau of Labor Statistics as well as the website of your own state’s labor department. You should also familiarize yourself with federal and state wage and hour laws. Here are some of the positions common to the industry:
All American businesses are required to follow the federal Fair Labor Standards Act (FSLA) laws regarding minimum wage , which is currently $7.25 an hour. Many states have higher minimum wages. For example, the minimum wage in California is $11 an hour. In New York, it’s $11.10 an hour, in Illinois it’s $8.25 and in Florida, it’s $8.46. It’s important to familiarize yourself with minimum wage laws because restaurants typically have numerous minimum-wage employees, particularly part-time cooks, dishwashers, buspeople and hosts. You also need to study up on wage laws governing tipped employees. The federal minimum wage for tipped employees under the FSLA is $2.13 an hour for employees who receive more than $30 per month in tips. But again, some states have higher minimums. In California, the minimum is $11 an hour for restaurants with 25 employees or fewer and $12 for those with 26 or more employees. In Pennsylvania, it’s $2.83 and in Arkansas, it’s $2.63.
The Fair Labor Standards Act (FLSA) establishes regulations on the employment of younger restaurant workers. Under the FLSA, 14- and 15- year-olds can be employed in restaurants and quick-service establishments outside school hours, in various jobs, for limited periods of time and under specified conditions. Among the jobs they’re allowed to work are cashiers, servers, buspeople, cooks, dishwashers and cleaning staff. They can’t work more than three hours on a school day; more than eight hours a non-school day; more than 18 hours a week when school is in session; or more than 40 hours a week when school is not in session. For more information visit the U.S. Department of Labor website. [caption id="attachment_1780" align="aligncenter" width="1000"] Yulia/Grigoryeva/Shutterstock.com[/caption]
Ultimately, the things that will sell your restaurant to customers are its food, service and atmosphere. But before you get to that point, you’ll need to spread the word. You don’t have to spend a lot of money on marketing and advertising, but you do need to spend it wisely to get the best results. One good place to start is to hire a website designer. Having an attractive and effective website helps ensure potential customers have a place to go to find your location, when you’re open, how to contact you and how to take reservations. It’s also a good place to detail the restaurant’s concept and menu and feature photos of the space and food. Use the website as a marketing tool to advertise special promotions and events and give users a chance to join your email list.
Another good initial marketing step is to launch a direct mail campaign that provides details on your restaurant’s address, food and hours. “Right out the gate you need some type of direct mailing for zip codes around the area were you’re located,” Love said. “You’re basically saying, ‘We want to introduce ourselves, we’re in the neighborhood now.’ You should also have a big sign outside your location that says ‘Coming Soon.’” Other marketing vehicles include:
Not everyone agrees on the value of social media influencers, but there’s no doubt the biggest ones have a lot of clout when it comes to reaching people. Influencers are especially useful for new restaurants because of their ability to connect with a wide customer base. Yogin Patel, founder of YPSocial, a California-based influencer marketing agency, wrote on the Medium.com website that you should search for influencers on YouTube and Instgram by putting in search terms like [your city] + food or [your city’s] favorite restaurant. After you’ve identified the best influencers in your market, craft a proposition to them. “If you’re on a shoestring budget, sometimes it’s as simple as letting them know you love their content and would love to gift them a free dinner [in return for exposure],” Patel wrote. If you have money to spend on a large influencer with more than 150,000 followers, put together a contract that details when the influencer should post about your restaurant, Patel wrote: “You want to list the length of time that they must keep your link or your social platform’s handle on their bio/description, the proper FTC disclosures, when the payment will be made, your brand’s guidelines, reasons for cancellations, etc.”
A number of options are available if you require restaurant financing to get your business up and running. The one you ultimately end up with depends on a few factors, including your financial needs and credit history. Banks might seem an obvious source of small business loans for restaurants, but the truth is many banks are wary of lending to new restaurants with no track record of success. SBA loans are also a common source of restaurant financing, but you’ll probably need a credit score of 680 or higher to qualify. Other sources of financing include:
Because Angel investors and VC firms are willing to take on more risk, they tend to allow more wiggle room when it comes to business credit scores. Credit-card debt might help you buy supplies such as cookware and furniture, but it’s not an ideal option because credit limits aren’t that high and interest-rates can be prohibitive. Crowdfunding involves raising capital through a series of small contributions from a lot of different backers. You can offer two types of crowdfunding as a business: reward-based, where you might offer free meals in exchange for contributions; and equity-based, where you offer a share of your business to those who contribute.
Another option for restaurants is to work a deal with the landlord to provide restaurant financing in exchange for higher rent. This is called a Tenant Improvement Allowance, or TIA. It’s often used to finance renovations and improvements but can also be applied to other expenses. “It’s a way to get the landlord to capitalize a restaurant,” Love said. You should also explore alternative funding procurement options like those offered by Seek Business Capital, which can even provide restaurant financing options for brand new restaurants . More From Seek
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