Starting a new restaurant is a bold decision and isn’t for the faint of heart. The hospitality industry is tough. So tough, in fact, that many restaurants close within their first three years.
The real reason they don’t make it? Poor control over restaurant startup costs.
The good news is that with the right planning and budgeting, you can tee yourself up for long-term success. In this article, we’ll look at the startup costs associated with opening a restaurant and all that you need to take into account.
Establish your must-haves vs. nice-to-haves
If you’re going to succeed in the restaurant business, there’s a lot you can learn from other types of businesses when it comes to launching. For example, in tech, there’s a concept called the minimum viable product (MVP). This approach develops a product with the minimum amount of features to satisfy initial users; it is then refined after considering feedback from those first customers.
If you take the MVP approach, you only need to invest in the minimum amount of elements to get your restaurant operational. Decide between your minimum must-haves vs. optional nice-to-haves so you can plan your budget – and stick to it! After opening, use customer and employee feedback to guide future improvements once you have the available finances.
Planning and calculating your restaurant startup costs – before you start spending – is crucial to controlling expenditures. As the saying goes, “Well begun is half done!”
Startup budgeting guidelines
When calculating your restaurant startup costs, it’s important to establish a budget that enables you to purchase all your basic necessities. Be sure to set aside enough money to cover unforeseen operational expenses such as breakage of glassware or equipment. You will likely require additional funds to cover daily expenses until your business starts to become profitable.
Here are the most important restaurant startup costs that a budding restaurateur needs to include when budgeting.
When leasing a restaurant space, the rule of thumb is to budget 5–10% of your projected sales towards rent and utilities. However, your restaurant’s location will have a big impact on the cost of your lease.
For example, if you’re located in a suburban area or small town, you can expect the cost to be closer to the lower end of the spectrum at around 5–8%. On the other hand, if your restaurant is located in an expensive area like downtown New York City, you can pay upwards of 13% of your restaurant revenue.
Ask about negotiating a percentage deal. With a percentage deal, you and the landlord agree upon a specific level of sales to establish the baseline rent.
In this scenario, you only need to pay, at most, your baseline rent if your restaurant sales are at or below your projected sales level for that month. If your restaurant makes more than the agreed upon sales, you pay an increased percentage of rent.
If you decide to go this route, be sure to carefully consider what you are comfortable agreeing to because if you have a great month, so does your landlord!
It may not be top of mind, but insurance is critical when it comes to budgeting your restaurant startup costs. Several types of insurance are mandatory for restaurants, so you must budget for appropriate coverage to protect your business, against damages, lawsuits and claims.
To help you determine which types of insurance fit your restaurant needs, consider the most common and critical types:
a. General Liability Insurance
Protects your restaurant in the event that someone is injured on your property
Expect average annual premiums to be $500—$6,000 with no deductible
b. Property Insurance
Covers furniture, buildings, kitchen equipment, and other property you own within the business
Expect average annual premiums to be $1,000—$2,500 with a $1,000 deductible
Certain insurance providers offer business-owner policies, which combine general liability and property insurance. Learn the insurance requirements for your state and investigate the various offerings before making your decision.
c. Liquor Liability Insurance
Protects your business if an intoxicated customer commits a crime, damages property, or injures someone
Expect average annual premiums to be $400—$3,000 with no deductible
d. Workers’ Compensation
Protects your staff from the cost of work-related accidents, illnesses, and lost wages
Expect average annual premiums to be $2.25 per $100 of payroll with no deductible
e. Business Interruption Insurance
Protects your business against closure due to weather-related events, vandalism, and equipment damage
Expect average annual premiums to be $750—$10,000 with a $1,000 deductible
f. Food Contamination Insurance
Helps you recoup expenses associated with contaminated or spoiled food in the event of a power outage
Expect average annual premiums to be around $1,800 with no deductible
Search for insurance companies that specialize in the restaurant industry where coverage is mandatory and specific. When you’re assessing insurance companies, make sure they have experience with insuring restaurants like yours. It’s good practice to ask for referrals from other restaurants to ask about their policies.
Determine your equipment needs before you start budgeting. Equipment requirements will be determined by your restaurant concept. In general, kitchen equipment, smallwares, and furniture costs typically range between $100,000—$300,000. Large pieces of equipment such as refrigerators, ovens, freezers, and fryers can cost about $100,000. Smallwares include tableware, glassware, utensils, and smaller restaurant equipment.
Costs usually add up to about $80,000.
To lessen your restaurant startup costs, consider buying some of your equipment used instead of new. Be sure to do your research about the seller, their restaurant, and the condition and age of the equipment before making a final buying decision.
4. Construction & Renovations
Construction and renovations will vary greatly depending on the condition of your space and how closely it matches your restaurant concept. Converting a space that was originally designed for another purpose will require significantly more investment than working with a pre-existing restaurant space.
Restaurant renos average around $280,000. Costs are typically $300—$500 per square foot for the kitchen and $150—$300 per square foot for the dining room.
For uncomplicated renovations, buy the raw materials yourself and hire a contractor to install them. Also, at the beginning, it’s ok if the space doesn’t look exactly as you had envisioned. Spend your limited budget on areas that will have the most impact on your bottom line.
5. Food & Beverage
The ideal food and beverage cost ratio is between 25%—40% of your projected sales. Your restaurant concept will impact this cost ratio. For example, an upscale restaurant serving steak carpaccio and caviar might have a cost ratio of 40% while a small pizzeria might have a cost ratio as low as 20%.
Forecast food and beverage inventory based on your restaurant concept and expect a trial-and-error period during your first month. You may overestimate your quantities and produce more waste, or underestimate needs and end up running out of stock. Either way, you’ll have a better idea of your cost ratio for the next month.
The ideal labor ratio for a restaurant is 25%—35% of gross sales, but your restaurant concept will significantly impact your labor ratio. A full service, sit-down restaurant can expect a labor ratio of 30%—35%, while for quick service restaurants, it’s reasonable to budget between 25%—30% of gross sales. Management salaries typically account for 10% of the restaurant startup labor ratio.
The restaurant industry tends to experience a high staff turnover, so keeping employees happy and loyal is important. Find ways to motivate them by offering gift cards or awards for the staff member who achieves the most sales of the week or promotes new menu items.
Restaurant tech is a major trend in the industry – advancing operations for everything from ordering to tracking most loyal customers to on-demand delivery.
Web-based point of sale (POS) systems for restaurants cost anywhere from $50—$200 per month. Hardware bundles for web-based systems cost between $450—$1,500.Traditional locally-installed POS systems range between $2,000—$4,000.
Ask if all associated installation, licensing, maintenance, and ongoing service and support fees are included in the pricing of whatever POS system you choose. Check on after-sale training and product warranties to ensure proper use and operation.
8. Marketing & Advertising
Marketing and advertising are significant contributors to your restaurant’s success, especially at the very beginning. There’s no one-size-fits-all approach so leverage the appropriate channels in your community: social media, flyers, community partners, local business associations, Facebook advertising.
A marketing budget typically ranges between 25—35% of your gross annual revenue. For a startup, your revenue is going to fluctuate significantly so you’ll want to reassess on a quarterly basis.
It’s easy for the marketing budget to get off track, especially when using digital channels like Google Search and Adwords. If you have a lot of competition, consider budgeting closer to 35% of your gross revenue on marketing. If there’s not much competition, 25% of your budget may be enough.
Being able to accurately forecast earnings and expenses is key to successfully running your business, and it assures lenders you have a handle on your all-important numbers. Free resource:
Download our Financial Forecast Calculator and follow the three steps below to forecast your revenues.
- Use the Revenue Worksheet to calculate your total revenue.
- Calculate your Controllable Costs to determine your gross profit and operational profit.
- Use totals from Steps 1 & 2 to complete a Financial Forecast and determine your anticipated income.
3 areas where new owners often overspend
As you evaluate the critical components that need to be budgeted into your restaurant startup costs, it’s important to be aware of the areas where you can easily go overboard. Here are some of the most common ways that restaurant startups typically overspend, and how to keep control of your budget.
The easiest way to overspend is when purchasing kitchen equipment. Be careful to stay within your budget, no matter how appealing it may be to go over. Shop for good second-hand options or search for sales.
Restaurant equipment financing is an option. Do your research to find an experienced, reputable financing company that specializes in restaurant startups. They can work with you to set a payment plan that won’t break the budget. This way, you’ll know your restaurant startup monthly expenses, and be able to plan accordingly.
Technology is necessary for all successful restaurant startups nowadays. Your restaurant concept will determine which types of technology you need. Invest in what you need to manage operations and keep current with industry standards.
The two types of technology that are absolutely necessary are bookkeeping and point-of-sale (POS) systems. Prioritize the most important items for your establishment, such as tableside payment or inventory management. Invest in what you need to manage operations and keep current with industry standards.
Marketing and Advertising
It’s incredibly easy for a restaurant startup to overspend on marketing and advertising, especially if this isn’t an area of strength. Carefully consider if you require external help with your promotional activities in the very beginning. A lot of promotional activities can be handled in-house to save on costs.
It’s easy to leverage the internet by signing up for social media sites, pushing low-cost digital ads on social media sites and blogs, and promoting your business through blog posts and forums. You can also hand out flyers at local businesses and community centers.
Opening a restaurant is an expensive undertaking. It’s hard to overstate how important it is that you are well aware of the restaurant startup costs associated with all of the big, small, and unpredicted items that will have to be paid for.
Keep your costs as low as possible from the get-go before you open, and re-evaluate your budget on a regular basis to make sure you’re staying on track. With a careful approach and eyes on your numbers, success is within reach as a new restaurateur.