Restaurant startup costs vary depending on a number of factors. Here’s what to expect.
It’s been said that the most expensive business to start is the one that fails. And while restaurants have a relatively high failure rate, it’s usually not lack of experience or willingness to put in long hours that’s to blame. Rather, what kills many restaurant startups is a lack of planning and foresight, especially in the early stages of development.
“One of the biggest reasons for restaurant failure is lack of business knowledge,” says Scott Ebbert, National Accounts Sales Manager, Central Restaurant Products, Indianapolis. “The person may very well be the best chef or cook in the world, but if they can’t manage the business side, they’ll struggle. There are customers to deal with, bills to pay, employees to work with and pay, and much more just as important to the success of a restaurant as food and ambiance.”
Central to solid business know-how is anticipating how much it’s going to cost to get it up and running. Restaurant startup costs can vary widely depending on many factors. Among them:
- Your location
- Restaurant size and type
- Whether you lease or own
- Whether you build from scratch or renovate an existing space
- The decision to buy a franchise or operate independently
The Total Cost to Open a Restaurant
To give you an idea of the range of what it costs to open a restaurant, the Center for Foodservice Education found in a survey of independent restaurants that the median startup cost was $375,500. Diving deeper, the median among the 25% spending the least was $175,500, and the median of the 25% spending the most was $750,500. A lot of the variance was due to size. The lower quartile averaged about 2,000 sq. ft. while the upper quartile had an average of 5,000 sq. ft. with almost three times as many seats.
If you decide to purchase a franchise, many of your estimated costs will be spelled out by the franchise company, but one thing to add to some of the line items below is a monthly franchise fee. Similarly, as you go through the planning process for your restaurant concept, look at not only the obvious costs like construction and kitchen equipment, but the smaller, hidden costs that can add up to a big bite out of your budget, potentially crimping your chances of success.
When opening a restaurant, money starts flowing early. As you begin to put together a business plan, you’ll need to do market research and consult experts who can provide legal, foodservice design, operations, architectural, engineering, accounting and branding advice. These professionals should be people you want on your team and who have agreed to take you on as a client as you move forward. You may even have a chef in mind who can start on menu development and food costing.
At this early stage, you’ll also begin to incur the cost of fees to incorporate and license your business, register the business name with local, state and federal governments for tax purposes, and file any trademark, patent and/or website domain names for the restaurant.
“Smart spending is crucial,” says Ebbert. “When you go into planning and design, have a menu ready with a strong idea of food preparation. Too often people let the designer decide what type of equipment is to be used. There are different levels on equipment in every category. Just because something is the highest price does not mean it is the best for the customer, nor is the lowest price the worse item for the customer. It all depends on the volume, menu and people using it.”
By the time your restaurant business plan is finished and you have secured financing, you’ll probably already have some locations picked out. Now’s the time to lock in purchase or lease agreements, which means a down payment or a security deposit and rent payments.
Additional costs some restaurant operators don’t expect are the deposits many utilities require for a new business.
Construction Phase Costs
Your general contractor will apply for construction permits, and you’ll begin to see large cash outflows for construction materials and subcontractors as the job gets underway.
At the same time, you’ll begin to put down deposits on kitchen equipment, interior furnishings and fixtures. Don’t forget that leasing
“The dining room makes the first impression on the customer,” Ebbert says. “If you want the customer to stick around for that extra drink, dessert or whatever, the dining room needs to be comfortable and give the feeling of welcome. Cheap hard seats and booths with exposed plywood tabletops won’t give customers a warm, fuzzy feeling.”
When construction is well underway, you’ll likely be spending money on exterior improvements such as signage, lighting, landscaping (which may require irrigation), and parking areas.
Getting Ready to Open
As construction nears completion, cash outlays will include initial inventory for food, liquor, cleaning supplies, tableware, smallwares, uniforms, menus and office supplies. You should have a POS system, bookkeeping and/or back-of-the-house accounting and inventory management system.
About a month or so before the pre-opening phase, labor costs (wages, benefits and taxes) for management hires will kick in; you’ll add hourly employees at least two weeks ahead of pre-opening for staff training and help putting away supplies and organizing all areas and stations in the restaurant.
Also, in preparation for pre-opening events or a soft opening, you’ll need to spend on marketing to generate buzz. At the same time, technology like the website should be up, mobile app developed and tested, social media accounts opened with regular postings on your progress.
And you’ll start seeing monthly bills for services such as telephone, cable or satellite hookup for entertainment and Internet, laundry service, janitorial service (front-of-the-house), and more—in addition to utilities.
Capital & Contingency
Finally, experts recommend that restaurant owners set aside a minimum of 10 percent of the construction budget (15 percent is better) as a contingency fund for cost overruns, and from three to six months’ of estimated operating expenses to draw upon until you build traffic and a base of clientele.
“Don’t forget that leasing is your friend,” says Ebbert. “Three to six months of operating cost needs to stay in the bank to cover expenses. A new startup is not going to receive terms from a lot of vendors. With leasing, a lot of the capital can stay in the bank and be used for operating.”
For more information, review the Restaurant Startup Cost Checklist.
Chase joined Central Restaurant Products in February 2016 as a Content Specialist, bringing to the role years of various foodservice experience, including front-of-house service (slingin’ chicken wings and libations with a smile on his face) and back-of-house food prep using heavy-duty commercial cooking equipment to prepare for peak dining hours at his university’s dining hall.
He puts this experience to use writing for Central’s Resource Center, website, and print catalog. ServSafe certified, he enjoys educating on food safety in the commercial setting, researching new dining room and tabletop trends, and sharing innovative solutions to enhance operational efficiencies. He also enjoys (in no specific order) long hikes with his dog, bingeing 90s sitcoms, red wine, and live music.