Embarking on the journey of starting a restaurant can be an exciting and rewarding endeavor. However, it’s essential to understand that launching a successful restaurant requires careful planning, focus, and financial investment. Our clients often ask us, “How much does it cost to start a restaurant?” That question has no single answer; however, we have outlined the various expenses associated with starting a restaurant to shed light on the key factors that influence the overall investment and critical steps required for developing a focused concept to help minimize expensive mistakes
Market Research
Before spending any money, thorough market research is essential. Analyzing the target market, identifying potential customers, and studying competitors will help you make informed decisions throughout the process. This preliminary step will enable you to fine-tune your concept and estimate the overall cost more accurately.
Pre-Opening Budget Considerations
Location and Lease
Securing the right location for your restaurant is crucial and can take many months to secure. Factors such as visibility, foot traffic, and demographics play a significant role, as well as parking access, immediate competition, or beneficial concepts in the area that will draw your target to your location. Costs can vary depending on the region and size of the space as well as the desirability of the location. Leasing a commercial property usually involves upfront costs like security deposits, leasehold improvements, common charges and in some instances, a percentage of sales. It is critical to evaluate all associated costs against the potential for sales as the occupancy cost will be a fixed feature on your P & L, and typically, we like to see occupancy at 6% to 10% of sales.
Licenses and Permits
Budgeting for the necessary licenses and permits to comply with local regulations is often overlooked. These include health permits, liquor licenses, signage permits, and more. The costs associated with licenses and permits vary by jurisdiction.
Professional Services
In addition to the cost of permits, professional services may be required for legal work, architectural services, construction management, technology installation, and support. You may decide to engage a restaurant consultant to help develop operating standards for your concept or to coach you on developing those standards yourself. This investment in professional advice may seem like a burden on your pre-opening budget, but expert advice can help you open your doors more quickly and profitably.
Equipment and Furnishings
Outfitting your restaurant with the necessary equipment, such as kitchen appliances, refrigeration units, tables, chairs, and décor, can be a significant expense, especially if a remodel or build-out is required. The cost will depend on square footage, equipment required to execute your menu offering at desired sales volumes, service model, bar requirements, and level of finish that fits your brand (i.e., luxury vs. value). Oftentimes an estimated dollar amount per square foot can be used to give a reasonable budget line item for your space.
Kitchen Setup and Utilities
An efficient kitchen layout that meets health and safety standards is crucial. Costs, including plumbing, electrical work, ventilation systems, and fire safety measures, will need to be included in your pre-opening budget, while ongoing utility costs, such as water, electricity, and gas, will need to be factored into your working profit and loss plan. Choosing energy-efficient kitchen equipment may increase your initial outlay, but pay for themselves in utility cost savings over the first several years of business.
Initial Inventory
Our clients often don’t anticipate the cost of purchasing the initial inventory of ingredients, beverages, and supplies before opening. This purchase will need to cover pre-opening parties, grand opening events and staff training. Careful planning and vendor selection can help manage these costs; however, operators can anticipate some waste during the first 30 days while the team gets accustomed to operations, and sales mix information allows for predictive prep planning.
Ongoing Operational Costs
Staffing
Employee wages and benefits are recurring costs that must be accounted for in your budget and will be managed by your GM. Hiring and training a skilled workforce, including chefs, cooks, servers, and support staff, will be the responsibility of your manager ,who will set the tone for your culture and will be responsible for the success of your operations, so it is worth investing in a strong manager either through base salary plus bonus for hitting sales targets or through offering educational advancement. Your restaurant’s labor costs are more than just employee wages. They’re comprised of the total dollar amount spent on labor across your operation, including overtime pay, healthcare, if applicable and payroll taxes. Most restaurants aim to have labor at 28 to 33% of total revenue.
Marketing and Advertising
Promoting your restaurant through various channels, including social media, online listings, and traditional advertising, is essential to attract customers. Allocating a portion of your budget to marketing, often from 3-10% of revenue, depending on your concept and market, can help establish your brand and generate awareness. Third-party platforms like Door Dash have fees that can be off-putting, but their service functions as a marketing tool for your brand, and working with them can be considered a marketing cost.
Cost of Goods (COGS)
Sourcing quality ingredients while managing food waste and inventory control is vital for a profitable restaurant, as is managing the cost of packaging and other disposables used in your operations. Keeping track of these costs and optimizing menu pricing can help maintain profitability. Food cost percentages are an average of the cost of raw materials against revenue, so a 30% food cost means that for every dollar of revenue a restaurant earns, it will have spent between 30 cents to buy the ingredients. This percentage varies widely based on raw ingredients and sales mix as well as whether or not alcohol is served and together with labor will make up your prime costs.
Contingency Fund
We tell our clients to establish a contingency fund to cover unexpected expenses and potential downturns. It acts as a safety net during challenging times, ensuring the continuity of your restaurant’s operations.
Starting a restaurant requires serious financial considerations and understanding the costs involved is key to planning and executing a successful venture. While expenses vary greatly depending on location, concept, and scale, thorough research, realistic budgeting, and efficient management will contribute to your restaurant’s long-term success. We help our clients navigate these decisions to work within their pre-opening budget and establish realistic operating budgets for their concept’s long-term financial and operational viability. If you would like to speak with someone about your start up, we would be happy to discuss your plans during an initial phone conversation at no cost to you or check our resources page for more information on starting your new concept.