How Much Does It Cost To Open a Restaurant? 2020 Restaurant Startup Costs
Being a restaurant owner is hard work, but it’s rewarding. If you’re considering getting into the industry, there’s one big question you’re probably wondering: How much is this going to cost? Restaurant startup costs can be seriously expensive, which is an obstacle to many would-be restaurant owners.
The most difficult parts of being a restaurant owner are the beginning phases of opening your restaurant. In this stage you have to see what draws in customers, where you can cut expenses, how to improve the customer experience without spending money, and so on. So, how much does it cost to open a restaurant? Let’s look at the most common costs restaurant owners must face.
Restaurant Startup Costs
Simply put, the median cost to open a restaurant is around $375,000. That’s a good estimate to give you an idea of what your price range should be, but by no means is that number set in stone. Some estimates say it costs about $3000 per seat in your restaurant, taking all things into account.
There are many factors that go into starting a restaurant, and we’ve listed some to help you get started. Location is also a major factor, as it will affect all of your prices and especially the cost of leasing a commercial space. Without factoring in location-based changes in cost, let’s look at what you need to open a restaurant.
Restaurant Startup Checklist
The following are the key factors to consider when making your restaurant startup cost breakdown.
- Food & Beverages
- Equipment & Maintenance
- Utilities & Bills
- Paperwork & Licensing
- Hidden Costs & Losses
Food & Beverages
One of the biggest recurring costs on this list is food and beverage. The success of your restaurant is determined largely by the food you sell, and more importantly, how profitable it is to sell that food.
A good rule of thumb to follow when considering your menu items is the rule of thirds. This means simply that the cost of your food’s raw materials should be about one third of the sale price. This is to help run a profitable operation, but it’s not a law set in stone.
Menu items like potatoes (in all forms) and sodas are meant to be served alongside main dishes, and they both see very high profit margins. Cups of soda will only cost a few cents each from a soda machine, but are sold for a couple of dollars. On the other end of the spectrum, selling a steak at a high end restaurant might not be as profitable, but is still an essential menu item. In this case, the rest of the profits are made up by other menu items like wines or side dishes.
Taking that into consideration, your food expenses should take up about 28%-35% of money brought in from sales. When you’re just starting out, contact different food suppliers to test out quality and budgets, and use thorough planning to figure out the food and beverage costs you’ll face at the beginning and when restocking.
In order to keep operations smooth and customers happy, you’ll want to keep your employees happy. Many people treat working at a restaurant as a part time job. Therefor,e people are more likely to quit a restaurant job than most other jobs. Training employees costs money, and loyal employees are more productive. In addition, keeping a loyal rotation of workers makes scheduling easier.
It’s also important not to over-hire employees in the beginning stages of the business. This can create frustration, and add to your overhead expenses.
The final thing to consider is what kind of salary you want to make. As mentioned previously, restaurant owners will take a reduced salary in the early years so that their business will get a good head start. This can help you establish yourself and gain forward momentum as you enter the industry.
That being said, similar to food expenses, labor expenses should take roughly one third of your total sales. Budget for this cost in the beginning, taking into consideration the hours it will take to effectively train an all-new staff.
Rent is another large recurring expense you’ll run into. This cost, like the previous ones, can vary extremely depending on some key factors. The most important factors when considering rent are location, size, and type of business.
Clearly choosing a location in Times Square is going to cost more than one in a small town in Wisconsin. That being said, paying for these high traffic locations could play out for big profit in the long run. It can be equally as smart, however, to fill a hole in a smaller market. Ask yourself if you want to lead a high-risk high-reward big city business, a low-risk reliable small market business, or somewhere in between.
The next factor is size. Before taxes, rent in Manhattan averages at $120 per square foot. That number is reduced to less than half when considering locations in LA. Smaller towns and cities are harder to estimate, but the size of your restaurant should suit your restaurant’s style. If your dream is to open a diner, you’ll want to ensure that you can sit as many customers as possible without making them feel crowded, or wasting space.
Finally, the type of business you want to run will determine what kind of space you want to obtain. If you want to run a small food takeout food operation but lack the resources and money to rent a building, consider managing a food truck. Depending on the location (and weather), food trucks can be an extremely profitable way to go about your business.
Different types of food service businesses will also require a different space in terms of equipment. A full service restaurant will likely need a larger kitchen with room for more kitchen equipment. A coffee shop may only need the space behind the counter and a space for dishes.
Opening a coffee shop? Food truck? Bar? Casual sit down? Hibachi? Takeout? Depending on your budget and aspirations, these are drastically different businesses to run. Costs for rent will vary.
One final note: depending on the space you rent, you may also have to pay for remodeling or renovations to fit your restaurant needs. If the space you find isn’t to your specifications, consider remodeling costs along with rent.
Equipment and Maintenance
Restaurants need equipment – almost all businesses do to some degree. Depending on the style of your restaurant and the cuisine served, you’ll need different types of equipment at different costs.
A full-service restaurant will need a big kitchen with plenty of refrigerator and freezer space, ovens, stoves, dishwashers, and other kitchen equipment. Commercial kitchen equipment can be expensive, so it may be wise to buy used. If you rent a former restaurant, it may come with some equipment, but you’ll need to make sure it’s in proper working order. Maintenance costs in general should be factored in, whether you buy new or used kitchen equipment.
As we said, different restaurants will need different equipment. A coffee shop may only need a few high end coffee and espresso machines, while a pizza shop may need a large brick oven pizza. Other, less expensive equipment should be considered as well, like pots and pans for cooking, storage containers, and more.
On the front end of the restaurant, you’ll also need items like dishes, cups, cutlery, furniture, and more. When starting out a restaurant, your budget should even consider costs like decor for the restaurant.
There’s a lot of technology out there to make your job as a restaurant owner easier, and more profitable. Point of Sale (POS) system technology is becoming increasingly popular, and with good reason. This is the software that people use to run their computerized registers. They automatically keep track of sales throughout the day, and will even keep track of inventory and sales trends.
In the long term, this technology is essential, but it might be worth holding off in the early stages. If you’re tight on money from the start, cutting software costs that aren’t 100% necessary can be a good way to find some wiggle room in your budget. That being said, restaurant POS systems will see a lot of use in the long term, and will be worth investing in once you’re on your feet. They can save you a lot of time and money.
There are also restaurant reservation systems to consider, table management software, waitlists, and more. Some software can encompass all of these tools – but usually at a high price.
Marketing is another cost that will vary depending on how much you choose to invest in it. If you know you have the budget for it, hiring a team to promote your restaurant can be a reliable, mess-free way to handle that end of things. Our restaurant marketing plan is free here on Restaurant Clicks, but often implementing a full marketing campaign is too time-consuming for restaurant owners.
That being said, if your budget is tight, there are ways to get your name out there without breaking the bank. Make sure your restaurant’s website is easily searchable on Google, and that you can clearly navigate to your restaurant’s menu, location, phone number, and hours of operation.
Once all of these things are all set up, you can start promoting your restaurant digitally. Creating a social media presence, or buying digital ad space are great ways to do this.
Word of mouth recommendations can go a long way as well. People run into thousands of ads on a daily basis, and don’t pay much attention when passing one by. However, people are much more likely to visit a restaurant after getting a recommendation from a friend. This is why customer service is important, because in the long term building a positive reputation for your business will be what helps you draw in more customers. It’s also why you want to make sure you have positive ratings on restaurant review sites.
Utilities & Bills
The price of utilities is often what takes restaurant owners by surprise. It’s important to do your research before signing with what seems to be the most simple option. If you’re moving into a previously owned building, some utility companies will even make you pay the previous owner’s debt before you can begin a new service in that building.
As a restaurant owner, you’re going to be consuming a lot of electricity, water, heating, and even internet and cable. Clearly these are all dependent on the size and traffic of your restaurant, but don’t forget to factor in about $1000-$2500 for an average sized restaurant.
Paperwork & Licensing Costs
Here’s the fun part, licensing and permits! You’d be surprised how many different licenses are necessary to start a restaurant. We’ve compiled a list of the important paperwork you’ll need to consider.
- Business License
- Employer Identification Number (EIN)
- Certificate of Occupancy
- Food Service License
- Food Handlers/Employee Health Permit
- Liquor License*
- Building Health Permit*
- Sign Permit*
- Resale Permit
- Music License
- Dumpster Permit*
- Pool Table Permit*
- Valet Parking Permit*
*optional/varies in requirement by state
Something to consider when opening your business is whether or not you decide to sell alcohol. If your restaurant is suited for it, alcohol is a product that sees high profit margins. Liquor license requirements vary from state to state, so check out your state’s requirements before you consider. Liquor license costs will also vary depending on where you live. They can be as cheap as $300, and as expensive as $10,000. Learn more about obtaining a liquor license in your state well in advance of your restaurant opening.
Additionally, many of these permits are necessary in some states, but not in others. Restaurant licensing can be a confusing process, which is why many restaurateurs work with attorneys to help them through the process. An attorney would be an added cost, but may be worthwhile to navigate all the paperwork. Most of these licenses also have fees that you’ll have to budget for.
Hidden Costs & Losses
In a perfect world, you’ll buy the exact amount of inventory you need every time, not any more or less. However, this is entirely impossible. There are a lot of hidden costs involved with owning a restaurant. Here are a few unexpected expenses that can be easy to forget about.
- Spoiled Food
- Running out of food
- Security Deposit
Optimizing Your Budget
Now that you have some idea as to how you want to run your business and how much it will cost, it’s time to look at some ways you could save money. It can be easier than you think, but it’s important to cut budgets in the right places. Cutting costs by buying lower quality food is never the answer – customers will notice and it will only hurt your business in the long run. Optimize your budget through smart methods, like the following:
Make sure that when your restaurant is busy, a steady flow of customers are being seated. The profit you make as a restaurant owner depends on how many guests you seat, so keeping things moving smoothly is a big part of the process.
When training your waiting staff, make sure they don’t let people linger at tables for too long. That being said, make sure that you give them enough time that they also feel welcome. Pressuring people or making them feel rushed takes away from their customer experience, which will hurt your reputation.
As mentioned previously, word-of-mouth is the best form of advertising you can get, as it’s free and highly effective. This is why it’s so important to take every means to satisfy the customer, within reason. Find a healthy middle ground for your staff to follow so that your customers are satisfied, but still flowing in and out of the establishment.
When opening a restaurant, it’s important not to be stubborn about your vision. To most restaurant owners, their business is like a child they raised. However, it’s important to keep in mind that a great restaurant pleases the customer first, not the owner.
If your business model isn’t working after an extended period of time, it could be time to reinvent. Look at what your restaurant offers that others don’t. If your business clashes with another successful business in the area, look at how you can offer something that they don’t. This can mean anything from price point, to convenience, to health conscious options. Take your surrounding area into consideration.
This doesn’t mean you have to entirely ditch your restaurant’s identity. Switching up what you offer or offering new and better restaurant promotions can lead to a whole new world of opportunity.
A lot of your money is going to end up covering gas, water, and electricity – there’s no getting past it. As a general rule of thumb, if your bills account for more than 5% of your operating costs, something needs to change. There are ways to cut back on these costs, which in the long term can save a lot of money on a monthly basis.
Outdated kitchen equipment can be a major cause of wasted utility bill money. If they’re being used past their breaking point, they can consume extra gas, electricity, or water just to function normally. Make sure all of your old rusty equipment is functioning efficiently, or toss it. Consider the price of new equipment, of course, but a better piece of machinery will be a good investment in the long run.
A huge factor when it comes to saving money on electricity is light management. If your restaurant has big windows, don’t waste money running all of your lights during peak daylight hours. You can get away with turning off some of your lights if it’s bright enough.
Additionally, it can help to invest in smart light bulbs that use less energy. This will consistently lower the cost of your electric bill.
Finally, the last tip in reference to lowering utility bills is to monitor your hot water usage. It can seem insignificant, but especially in the early stages wasting hot water regularly will hurt your budget.
There are plenty of ways to improve your restaurant’s profit margins if you’re creative.
How Much Do Restaurant Owners Make?
With all the costs discussed, how does one make a profit as a restaurant owner? As you enter the industry, you know that established restaurant owners make good money, but exactly how much can someone expect to make early on?
In the beginning years of a new restaurant, an owner is expected to make around $35,000 to $75,000 a year. That being said, high profit restaurant owners can very realistically make a $150,000 salary.
Many restaurant owners will take a pay cut in the early years of their business, and invest that money into improving their restaurant. Doing this poses a high-risk high-reward situation. It’s definitely a smart move to invest money into improving the business you want to make a living out of. However, if you’re particularly unsure about the success of your restaurant, it might make sense to pay yourself first.
Use careful planning when budgeting for your restaurant’s start up costs. Opening a new restaurant is always a costly operation, but with the right business plan and dedication to your business, you can own a thriving restaurant.
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