How to Open a Restaurant: Everything You Need to Know
- September 16, 2019
- Starting Your Business
- 81 min read
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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
- Why Do You Want to Open a Restaurant?
- Costs to Open and Operate a Restaurant
- How to Choose a Restaurant Concept
- How to Identify Your Restaurant’s Target Market
- How to Choose a Restaurant Name
- Restaurant Names to Avoid
- How to Choose a Restaurant Location
- How to Register Your Restaurant’s Business Name
- Apply for an Employee Identification Number (EIN) For Your Restaurant
- How to Get an EIN for Your Restaurant
- Register Your Retaurant for Federal, State and Local Taxes
- Registering Your Restaurant for Sales Taxes
- Restaurant Income Tax Withholding
- Federal Payroll Taxes for Restaurants
- State and Local Payroll Taxes for Restaurants
- Restaurant Permits and Licenses Needed
- Restaurant Compliance: American Disabilities Act
- How to Create a Business Plan for Your Restaurant
- Understanding Restaurant Accounting and Bookkeeping
- Restaurant POS Systems
- What Staff Will Your Restaurant Require?
- Minimum Wage Laws
- Child Labor Laws
- Marketing Your Restaurant
- Financing for Restaurants
Why Do You Want to Open a Restaurant?
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.
‘A Daily Grind’
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.
Costs to Open and Operate a Restaurant
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:
- Storage containers
- Paper supplies
- Cleaning supplies
- Entertainment systems
- And more
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.
Restaurant Startup Cost Variables
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.”
Restaurant Operating Costs
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:
- Rent: The typical restaurant spends about 6 percent to 10 percent of total sales on rent.
- Labor costs: The industry standard is that most restaurants spend 28 percent to 32 percent of total sales on employee wages, benefits and payroll taxes.
- Food and beverages: Similar to payroll, the industry standard for food and beverage costs, including alcohol, is 28 percent to 35 percent of total sales.
- Other direct operating expenses: These typically include items such as cleaning supplies, dishes and utensils, cookware, paper supplies, laundry services and exterminating. Expect these costs to total around 4 percent of total sales.
- Music and entertainment: This might include live entertainment and royalties to pay for music you pipe into your restaurant. Costs should be negligible at around 1 percent of total sales.
- Marketing/advertising: This covers all promotional costs and usually comes in around 2 percent to 3 percent of total sales.
- Utilities: These are costs for water, electricity, gas and trash removal and usually come to about 3 percent of total sales.
- General & Administrative: G&A expenses include credit card and bank charges, postage, printing and office supplies, professional fees and phone charges. Expect these to cost about 3 percent of total sales.
- Repairs and maintenance: This item covers both the building and the equipment and shouldn’t add up to more than 1 percent of total sales.
- Property taxes: The amount you pay in property taxes depends on where your business is located. Contact your local tax authority to find out how much you’ll have to pay.
- Property insurance: This expense is also highly dependent on your location. Ideally, you won’t pay more than 2 percent to 3 percent of total sales on property insurance.
How to Choose a Restaurant Concept
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.
How to Identify Your Restaurant’s Target Market
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.
Different Restaurant Concepts to Consider
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:
- Fine dining
- Mid-scale dining
- Family style
- Food truck
- Fast food
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).
Food for Thought: Creating the Perfect Restaurant Menu
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:
- Seafood: If your culinary focus is on fresh seafood, then you’ll probably want a midscale or upscale restaurant with a seasonal menu. That will be a big part of your concept: fresh seafood, full service, seasonal menu. The décor and atmosphere should reflect that concept, which usually means some kind of nautical theme and a waitstaff that can speak knowledgably about which seafood is the freshest and how it’s prepared.
- Pizzerias: These come in various shapes and sizes, from small takeout joints to full-service restaurants that also serve pasta dishes, gyros, salads and desserts. But most have similar themes: friendly, relaxed and able to accommodate large parties, with big ovens in plain view and the smell of dough and tomato sauce permeating the space.
- Ethnic restaurants: Perhaps more than any other category, ethnic restaurants tend to have concepts driven almost entirely by the food. Many Mexican restaurants in the United States tend toward generous portions, a lively atmosphere, quick service and lots of Mexican artifacts and décor. Full-service Indian restaurants are often more formal and subdued and feature white tablecloths, attentive service, a wide selection of regional dishes and numerous vegan options.
Factors to Consider When Choosing a Restaurant Concept
Once you’ve decided on a culinary focus, here are some other things to consider that can help you arrive at the right concept:
- Menu: You don’t necessarily have to lock into a set menu at this stage, but it’s a good idea to come up with a few dishes that will serve as staples in your restaurant to help you better define your concept. If your culinary focus will be on Southern food, for instance, then your staples might be fried chicken, shrimp and grits, biscuits and peach cobbler.
- Location: If you already have a specific neighborhood in mind, this could play a big part in your concept. If you’re targeting a retail development in a suburban area dominated by family neighborhoods, you probably don’t want a concept that caters to urban hipsters. Make sure your concept aligns with the immediate surroundings and vibe (see more on choosing a location below).
- Price point: As a general rule, the more you charge for food and beverages, the higher the customer expectation in terms of service, décor and ambience. You might have already decided that you don’t want to feature value items on your menu. In this case, you can pretty much eliminate concepts that cater to families, working-class customers or students. Focus instead on a higher-end concept.
- Clientele: It’s not always easy to predict what kind of restaurant will appeal to consumers in a particular area. To get a better idea, scout other local eateries to find out which ones bring in the most customers.
- Service style: Your menu and prices will have a lot to say about your service style. An inexpensive sandwich shop is tailor-made for a fast-casual or deli concept, while an upscale seafood restaurant works best in fine dining.
- Layout: Unless you’re building a new restaurant from the ground up and have direct say in its size and design, you’ll need to keep an open mind about its layout. Previously occupied spaces don’t always fit exactly what you have in mind in terms of kitchen design, storage space and dining room space. For smaller businesses like takeout joints and bakeries, it’s easier to work around these challenges because you don’t have to worry about a large dining space. For full-service restaurants, you want a building and layout that allow for sufficient space between tables to create a comfortable environment and make it possible for wait staff to do their work efficiently.
How to Choose a Restaurant Name
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.
Choose a Name That Fits
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 19th 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 10th 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.
Restaurant Names to Avoid
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:
- Don’t pick a name that’s difficult to pronounce or remember. You don’t want customers fumbling around trying to recall your restaurant’s name, or not finding it on an internet search because they don’t know how to spell it.
- Don’t pick a name that could create legal headaches because it’s been trademarked by someone else (see related section on trademarks).
- Don’t pick a name that conjures up negative images. It might be fine to name a hot sauce “Fiery Death!” but you don’t want to name your restaurant the same thing just because it specializes in spicy food. Customers will be turned off by the message it conveys.
- Don’t pick a name that’s too similar to another restaurant in your market. If there’s already an established restaurant named Dilworth Gastropub in your neighborhood, you’ll start off on the wrong foot by calling your restaurant Bill’s Gastropub.
How to Choose a Restaurant Location
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:
- Is it close to car and/or foot traffic?
- Is it easily accessible from main roads and transit?
- Does the area have sufficient population density?
- Does it have high visibility?
- Do the demographics in the area line up with your food, concept and price point?
- Is it close to other businesses and restaurants that draw foot traffic while still being far enough away from your main restaurant competition?
- Is the building or space suitable for your layout and concept?
- Can you and your managers get there quickly?
- Does the surrounding area have a large enough labor pool?
- Does it have adequate parking?
- Will vendors and food suppliers be able to access it easily?
- Is it in an area that meets your budget requirements for rent?
- Is the building in good enough condition that you won’t have to worry about spending a lot of money on maintenance, renovation and repairs?
- Does it have room to expand?
- Is it located in a safe area with a low crime rate?
- Are there any nearby developments or zoning requests that could pose problems in terms of traffic, noise and accessibility?
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
Study the Competition
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.”
How to Register Your Restaurant’s Business Name
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:
- Trademarks: A trademark is meant to identify and distinguish a business from other companies. Two kinds of trademarks are available: registered and common law. Registered trademarks are registered with the USPTO and have the ® symbol. Common law trademarks, which carry the ™ symbol, are not registered nationally and are only protected under local statutes. Registered trademarks are mainly designed for franchises or other large-scale businesses, while common law trademarks are mainly designed for businesses with a single location.
- Copyrights: A copyright is intended to protect creative works such as books and films. Business names don’t fall under this category so there’s no need to copyright your business or restaurant name.
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.
Avoid Generic Names
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:
- Conduct a trademark search for your restaurant business name. Gerben Law Firm suggests searching both registered and unregistered marks because “even unregistered marks are entitled to limited protections under United States trademark law.” You can either search the USPTO website yourself or, if you have the budget, hire a trademark attorney who can access tools not available to the general public.
- File your application online at the Trademark Electronic Application System (TEAS) or call the USPTO to request a print copy.
- Pay your application fee, which usually ranges between $300 and $900, according to com.
- Follow up. It typically takes six to eight months for the USPTO to review your application. After that, there’s a 30-day period during which other businesses can contest your proposed name and request arbitration. If you don’t hear back within eight months, follow up with the USPTO to find out if there are any problems with your trademark application.
How to Apply for an Employee Identification Number (EIN) for Your Restaurant
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.
How to Get an EIN for Your Restaurant
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:
- Your company’s name and its organizational structure.
- Your company’s physical and mailing addresses.
- Your or your agent’s name, mailing address and Social Security Number or Individual Taxpayer Identification Number
The IRS recommends taking the following steps:
- Determine Your Eligibility
- You can apply for an EIN online if your principal business is located in America or in American territories.
- The person applying online must have a valid SSN, ITIN or EIN.
- You are limited to one EIN per responsible party per day. This is the individual who owns or controls the entity or exercises effective control over it.
- Familiarize Yourself with the Online Application. This is important because you have to complete the application in a single session. You can’t save it or return to it later. Also, your session will expire if it’s inactive for 15 minutes, meaning you’ll need to start over from scratch.
- Submit the Application. After all your info has been validated you’ll get the EIN immediately upon completion. You can then download, save or print out your EIN confirmation notice.
Register Your Restaurant for Federal, State and Local Taxes
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.
Registering Your Restaurant for Sales Taxes
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:
- New Hampshire
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:
- The goods or services sold qualify as taxable.
- The state where the sale was made is the state where your business has a tax relationship.
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:
- Sole owner’s Social Security number (for sole proprietorships)
- Partnership Social Security numbers or federal employer’s identification numbers for each partner (for partnerships)
- Texas corporation’s file number from the Texas Secretary of State.
- Social Security numbers for each officer or director.
- North American Industrial Classification System (NAICS) code for restaurants.
Restaurant Income Tax Withholding
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.
Federal Payroll Taxes for Restaurants
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:
- Federal Income Taxes: Refer to your employees’ W-4 forms to determine the amount and method of withholding federal income tax. Like most taxes, this amount will vary based on the type and amount of wages.
- Social Security and Medicare Taxes: In addition to withholding taxes for these items, employers must also pay a matching amount. The rate for Social Security is 6.2 percent for both the employer and employee, or a total of 12.4 percent. The Medicare rate is 1.45 percent for both the employer and employee, or a total of 2.9 percent. Again, refer to the W-4 forms to determine the amount and method of withholding.
- Additional Medicare Tax: This additional tax of 0.9 percent applies to employee wages and compensation that exceed a threshold amount based on the employee’s filing status.
- Federal Unemployment (FUTA) Tax: This tax is reported and paid separately from the above taxes. You pay FUTA tax only from your own funds — it is not withheld from employee paychecks. Employees do not pay this tax or have it withheld from their pay.
- Self-Employment Tax: This is a Social Security and Medicare tax for people who work for themselves. It’s similar to the Social Security and Medicare taxes withheld from the pay of most employees.
State and Local Payroll Taxes for Restaurants
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:
- New Hampshire
- South Dakota
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.
Restaurant Permits and Licenses Needed
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:
- Business License: This license isn’t restricted to restaurants — all businesses need one to operate legally. Check with your city’s licensing division to find out how to obtain a business license. You’ll typically fill out an application online and pay a registration fee of about $50 and a filing fee that can range from $25 to $500. You’ll also have to renew the license once a year in most municipalities.
- Liquor License: If your restaurant plans to serve alcohol, you’ll need to obtain a liquor license and/or beer and wine license. Requirements and processes vary by state but are usually governed by the state Alcohol Beverage Control board or similar authority. It’s important to familiarize yourself with all the liquor laws in your state to ensure you don’t have your license revoked. This might happen if you sell to minors or during unauthorized hours. Just be prepared for sticker shock; Noyes noted that full liquor licenses can range from $12,000 to $400,000 — and in some states, like New Mexico, even higher than that — while beer and wine liquor licenses might cost as little as $3,000.
- Foodservice License: This license is issued by the health department in your city or county. It is intended to ensure that your restaurant meets local guidelines on food safety. The typical process involves filling out an online application using your restaurant’s name and location. Fees typically range between $100 and $1,000. Once you have the permit, your restaurant will have to meet strict inspection guidelines to retain the license.
- Food Handler’s Permit: This is similar to the foodservice license in that it is meant to ensure your restaurant meets safety and sanitation guidelines. The difference is that a food handler’s permit deals with regulations governing food sanitation, storage, protection and preparation. In some cases, your employees will need to complete a state food handler’s class. Costs range from about $100 to $500. Again, you’ll have to pass periodic inspections to retain the permit.
- Sign Permit: Some cities require that any signage you display outside the restaurant meets certain guidelines regarding size and location. This will require a permit as well. Costs vary from one municipality to the next but usually cost around $20 to $50.
Restaurant Compliance: American Disabilities Act
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:
- The dining area should include accessible seating for wheelchair and scooter users located throughout the seating areas. For accessible seats, the table-top surface should be no higher than 34 inches above the floor, with clear space below the table at least 27 inches high.
- Ask the owner’s permission before moving a mobility device such as crutches, walkers, wheelchairs or scooters to an area safely out of the way of other customers and servers.
- The tops of self-service tables or counters should be no higher than 36 inches above the floor. In some case, items that need to be seen and reached can be placed as high as 48 inches above the floor but might need to be lower if they’re farther from the front edge of the table or if room to approach is limited.
- Service animals can accompany people with disabilities in all areas where the public can go.
How to Create a Business Plan for Your Restaurant
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:
- Executive Summary: The executive summary provides a snapshot of your restaurant, including its concept, mission and growth plans. Keep this section short and to point so the reader will know right away that you’re an expert on how to open a restaurant.
- Company Overview: Use this section to detail the background of your business as well as your own restaurant experience, management team and ownership structure. You can also provide more specifics on the restaurant’s mission, concept, culinary specialty, target market, layout, location and customer experience
- Industry Analysis: The industry analysis is important because it’s a chance to wow lenders and investors with your market expertise. Use it to provide in-depth data on the size of the restaurant industry in your area, its growth projections, your city’s demographic makeup (with a focus on median income and population), the area’s annual restaurant sales and the current regulatory environment.
- Competitor Analysis: This section is similar to the industry analysis, only the focus will be on the number of restaurants in your city and desired neighborhood, their specialties, their customer bases and their financial performances.
- Marketing Plan: The marketing plan outlines your strategy to attract and build a customer base. Explain how you intend to use advertising, social media, public relations, loyalty programs and promotions to spread the word. If your business will use direct sales in addition to marketing, as is the case with many caterers, outline the type of sales operation you plan to set up (e.g., with your own sales team or a third party).
- Business Operation: Here’s where you’ll detail the day-to-day operation of your restaurant. Provide info on its operating hours, food preparation, ordering process, service style, vendors, equipment, delivery hours, sales tracking, inventory management and staff requirements. Also, provide details on how you plan to comply with regulatory items such as safety regulations, health department permits and child labor laws.
- Financial Analysis: This is another section where you get a chance to impress lenders and investors with your expertise. Use the financial analysis to describe how you plan to spend their money and eventually repay it. Provide details on cost projections for payroll, food, supplies, marketing, insurance, permits/licenses and other items. Also, provide revenue estimates on all sources of income, including food and beverage sales, alcohol sales, catering sales, private events and ancillary items such as souvenir cups and T-shirts.
- Funding Request: This is where you’ll outline the capital requirements needed for funding your business. Be specific about what types of loans or investments you’ll need.
For more details, check out this guide to writing a restaurant business plan.
Understanding Restaurant Accounting and Bookkeeping
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.
- Chart of Accounts: The COA refers to the accounting items where money moves in or out of the restaurant. These include basic categories such as assets, liabilities, revenue, expenses and equity as well as subcategories like sales, marketing, supplies and inventory. All the items in the COA will be used to produce the financial statements needed for tax returns as well as short-term loans, lines of credit, equipment financing and other funding sources.
- Cost of Goods Sold: Called COGS for short, this refers to costs that go into making the products you sell, such as food, beverages, beer, wine and cocktails. The easiest way to calculate COGS is to record the value of your beginning inventory for goods every week and then subtract the ending inventory. The result is your cost of goods sold. It’s important to track this as closely as possible to ensure you’re pricing items correctly and meeting your restaurant profit and margin goals.
- Restaurant Labor Cost, Occupancy Expenses and Operating Expenses: Restaurant labor costs are pretty straightforward — they’re the costs that go into paying your staff’s wages and benefits (see related section on staffing). Occupancy costs are those related to your building and include rent or mortgage payments, property taxes, utilities and property insurance. Operating costs cover everything else needed to run your restaurant, such as cookware, dishes, napkins, supplies, repairs and marketing.
- Prime Cost: This is the cost you get when you add COGS and labor costs. As Aber wrote, prime cost is important in restaurant accounting because it’s “where you have the biggest opportunity to avoid accounting mistakes, cut costs and increase profits.” It’s not as easy to do that with fixed costs like rent, licenses, insurance and property taxes.
- Cost-to-Sales Ratio: This ratio is what you get when you calculate your expense categories as a percentage of total sales. Aber, citing industry sources, noted that most restaurants have a ratio between 26 percent and 36 percent.
Restaurant POS Systems
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:
- What the system will be used for. This can range from basic sales and payment processing to a full suite that might include managing inventory, optimizing staffing levels, analyzing sales and traffic patterns and monitoring customer visits, orders and spend.
- What kind of software and hardware you decide to get. The main choices are legacy POS software installed on an internal back-office server that can be accessed at multiple locations; or cloud-based software that is installed locally and can be accessed when you’re in the building.
- What kind of hardware you’ll need, and how much. Options here include stationary touch-screen monitors, mobile tablets, receipt printers, kitchen printers, credit card readers and cash drawers.
- What kinds of add-ons you’ll require, such as e-mail marketing and online ordering.
- What kind of training and support you’ll require.
A good resource for POS referrals and costs is your local restaurant association.
What Staff Will Your Restaurant Require?
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.
Finding the Right People
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:
- Management: Smaller restaurants with limited hours might only need a couple of shift managers, but large establishments open seven days a week for long hours typically need a general manager and assistant managers to oversee the kitchen, wait staff, bar staff and employee schedules. These are typically full-time positions.
- Chefs: Fine dining restaurants often employ a full-time executive chef and full-time sous chef to oversee the kitchen and menu.
- Cooks: These are the people responsible for preparing the food and making sure it looks presentable. They typically include both prep cooks and line cooks who work part-time and full-time hours. They also clean up when their shifts are done.
- Dishwashers: As the name implies, dishwashers clean dishes, utensils and cooking equipment. These positions can be full-time and part-time.
- Servers: Also known as wait staff, these employees take orders, bring food and beverages to the tables and tend to customer needs. You’ll need to have more servers during peak breakfast, lunch and dinner hours. Servers are also split between full-time and part-time employees. Since servers are tipped employees they can be paid less than the federal minimum wage (see related section below) in many states.
- Host Staff: Some restaurants require hosts to work at the front of the house. Their job is to check reservations, take names if there’s a wait and seat customers. These are usually part-time positions filled by students.
- Buspersons: These employees are primarily responsible for setting up and clearing tables, though they might also fill water glasses, help wait staff run food and clean up with the shift is done. Servers often share tips with bus personnel. In many cases, buspersons are part-time workers who come in during peak hours.
- Bartenders: This position requires making drinks for bar customers and dining room guests. Bartenders also prep the bar, clean it when the shift is over and, in some cases, order supplies. Though bartenders also receive tips, they often get more than the minimum hourly wage because their duties extend beyond just serving customers. These can be full- and part-time positions.
- Delivery drivers: Many restaurants that offer delivery services to homes and businesses hire their own delivery drivers, though in some cases they contract with third parties to do the work. Staff delivery drivers are usually part-time employees doing the job as a side gig.
Minimum Wage Laws
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.
Child Labor Laws
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.
Marketing Your Restaurant
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.
Greet Your Neighbors
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:
- Social media: Set up an account for your restaurant on platforms such as Facebook, Instagram and Twitter and start connecting with friends, family, business associates and as many people as you can think of. Next, have them share your restaurant page to spread the word. Post frequently to engage users and share photos of your food.
- Business platforms: For internet search purposes, you’ll probably want to list your restaurant on review sites such as Yelp and location data platforms like Foursquare. These sites allow potential customers to learn more about your restaurant and its location.
- Traditional media: Unless you have excess money to spend on advertising, you’re probably better off not spending it on traditional newspaper or radio ads. Instead, write up a press release that details your restaurant’s name, location, hours, culinary focus and grand opening. Send it to area newspapers, media sites and city magazines. You might get a mention in the business news section or in the food writer’s column.
- Direct sales: This is mostly used by catering services, though some full-service restaurants might also use a direct sales approach if they rent out banquet rooms for wedding parties, business functions or other special events. You can either handle this in-house or contract the work out to a third party.
How to Use Influencers to Market Your Restaurant
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.”
Financing for Restaurants
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:
- Angel investors
- Venture capital firms
- Credit cards
- Alternative lenders
- Personal savings
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.
Tenant Improvement Allowances
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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