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This type of business serves prepared food and drinks and caters to consumers who don’t want to cook or who want the experience of dining out. Some restaurants specialize in one type of cuisine, like Italian or Mexican, while other restaurants serve general “American” fare, like diners. The market depends entirely on the type of restaurant, restaurant concept, and the average price per menu item.
Who is this business right for?
A restaurant is a fast-paced business and very stressful to run. As such, it's best suited to people with excellent organization skills and entrepreneurs who have a passion for food. Restaurateurs often live a modest and hectic lifestyle. Because of this, it’s not a business for those who are easily stressed out or desire a “hands-off” business.
What happens during a typical day at a restaurant?
The day starts by opening the restaurant and printing up the specials for the day. Restaurant owners also need to check their stock and order any necessary ingredients. Daily cleanliness inspections of the kitchen are a must. After meeting with the chef and prep cooks about the plan for the day, it’s time to inspect the dining room and set up for the first service of the day.
If you serve breakfast, this will usually mean having the dining room open and ready by 6 or 7 am. If you serve a lunch-dinner service, then you can open up at 11 am.
After prepping for each service, the bulk of your day is spent reacting to events as they happen. Customer orders and complaints, peak service, and prep for the second service are all stressful and busy events.
Once service starts, it’s usually non-stop until close.
What is the target market?
Customers are typically individuals and families who are dining out for the day or evening. Some restaurants also cater to larger functions, like business or government organization events, birthdays, and other large-scale catering events.
How does a restaurant make money?
A restaurant makes money by charging customers money to prepare food and drinks for them. Prices are typically fixed on a menu. Customers may also tip waiters and staff for good or exceptional service. For waitstaff, tipping is customary. These tips are sometimes split amongst the workers in the restaurant, or can contribute to the waitstaff’s pay.
What is the growth potential for a restaurant?
Small restaurants can be run as a diner or a small sandwich shop or even a food truck service. Larger restaurants usually operate in a centralized location, with a large kitchen and dining room area.
Scaling is typically a matter of opening up new locations based on demand, staffing, and financial ability.
For example, a small family-owned restaurant may never outgrow its first location. A franchise, like McDonald’s, Applebee's, or Red Robin, will have many chains across the country and, sometimes, across the world.
What are some skills and experiences that will help you build a successful restaurant?
Most successful restaurateurs have experience managing a restaurant or cooking in one. Before opening your own restaurant, consider working for a successful operation, either in a franchise or a family-owned business.
A family-owned business tends to have a different culture than a large corporate or franchised operation so it may help to work in both to experience the difference. In general, family-owned operations tend to view the staff as family. They also tend to view the revenue earned in the business as “family money” and manage their finances accordingly.
A franchise is usually governed by a corporate entity responsible for regulating the operation of the franchise and maintaining a minimum level of quality. Franchise operations also operate on a business model that sets minimum standards for how the business cooks its food, serves it, and controls the menu.
What are the costs involved in opening a restaurant?
The costs to start a restaurant vary, but generally include:
- Building security deposit: $10,000 to $12,000
- First month’s rent: $10,000 to $15,000
- First month utilities: $2,500
- Customized build out for kitchen: up to $350,000
- Tables and furniture: $40,000 to $50,000
- Tableware, utensils, dishes, kitchen, and bar equipment: $50,000 to $80,000
- Initial overhead, including food and prep materials: $8,000 to $15,000
- POS: $1,500 to $20,000
- Insurance: up to $6,000
- Sign: $10,000 to $20,000
- Menu printouts: $1,500
- Business cards: $70 to $300
- Fliers: $5,000 to $10,000
- Grand opening event: $15,000
- PR for grand opening: up to $5,000
Total cost can run $600,000 or more depending on the type of restaurant you want to run. These costs can be much more expensive, or much cheaper depending on a number of factors including, location, necessary equipment, and vendors through which essentials are purchased.
What are the steps to start a restaurant?
Once you're ready to start your restaurant, follow these steps to ensure that your business is legally compliant and avoid wasting time and money as your business grows:
- Plan your business. A clear plan is essential for success as an entrepreneur. A few important topics to consider are your initial costs, your target market, and how long it will take you to break even.
- Form a legal entity. Establishing a legal business entity prevents you from being personally liable if your restaurant is sued.
- Register for taxes. You will need to register for a variety of state and federal taxes before you can open for business.
- Open a business bank account. A dedicated checking account for your restaurant keeps your finances organized and makes your business appear more professional to your customers.
- Set up business accounting. Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
- Obtain necessary permits and licenses. Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
- Get business insurance. Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.
- Define your brand. Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
- Establish a web presence. A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers. Save 15% when you create a business website with Weebly.
Select your state below for an in-depth guide on completing each of these steps in your home state.
Where can I find a business mentor?
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
What are some insider tips for jump starting a restaurant?
Starting a restaurant is difficult, requires extensive upfront capital, and has a high rate of failure. Because of this, it’s best to start as cheaply as possible. Successful restaurants focus on a niche or an underserved market. Consider starting a small food truck to get a taste for what running a restaurant might be like. The cost for this will likely be much lower than running a full-scale operation.
How to promote & market a restaurant
Restaurants are marketed primarily through word of mouth. However, some restaurants do find running flyers in the local paper helps create a buzz. Consider offering coupons for first-time guests and during the opening week or month of your restaurant.
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How to keep customers coming back
This is a customer service business. Pay extra special attention to service. This is what brings guests back. Likewise, poor service can drive guests away forever and damage your reputation in the community.
Beyond that, you must have some business skill, which can be obtained by taking business courses, or working under a restaurant owner.
How and when to build a team
At minimum, you will need to start the restaurant with a master or head chef, a prep cook, kitchen manager, and wait staff. You’ll also need a front-of-house manager. Most restaurant owners take on this role in the early years of the restaurant.
Read our restaurant hiring guide to learn about the different roles a restaurant typically fills, how much to budget for employee salaries, and how to build your team exactly how you want it.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a restaurant. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
Restaurants may also wish to look into applying for a resale certificate, which allows retailers to purchase raw ingredients intended for use in meals without paying sales tax.
In addition, certain local licensing or regulatory requirements may apply.
If your restaurant intends to sell alcohol, you will need a liquor license in order to lawfully sell alcohol. You can find a list of laws by state here.
Because restaurants are in the business of selling food, you will need licensing from a local health department; all establishments serving food are required to pass a health inspection. Here are some tips for faring well on a health inspections.
For more information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources
Maintain Personal Asset Protection
Don’t think that just forming an LLC, or any other type of business, will save your personal assets in case of a lawsuit or other matter by itself.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing your corporate veil.
Two of the simplest steps that will protect your business, and yourself, are to:
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
In order to play music in a business setting, as many restaurants do, permission must be acquired from the composer or license holder. Typically, it is possible to obtain a “blanket” license allowing a businesses to play music owned by a large catalog of artists and recording studios. Such licenses can be obtained from Performance Rights Organizations, such as ASCAP or BMI.
Labor safety requirements
It is important to comply with all Occupational Safety and Health Administration requirements.
Restaurants need to post safety signage, make the work environment as safe as possible, and report any work-related injuries.
Certificate of Occupancy
A restaurant is generally run out of a large storefront. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a restaurant.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your restaurant will be in compliance and able to obtain a CO.
How much can you charge customers?
Menu prices vary considerably based on the type of restaurant and the fare being served. For example, a high-end restaurant serving seafood may charge between $20 and $50 per plate. A small diner may only charge between $4 and $10 per plate.
Customers pay for menu items a la carte or as a meal or plate. Some restaurants also offer bundled specials which include an appetizer, the entree and a dessert for one fixed price. Meals are paid for after customers finish eating and a tip (or an option for a tip) is usually included on the bill.
What are the ongoing expenses for a restaurant?
A restaurant has numerous ongoing expenses, but the major ones include:
- Rent for the building: $10,000 to $12,000 per month, depending on location
- Utilities, which can include phone, internet, T.V., electricity, water, gas: up to $2,500 per month (sometimes more, depending on location)
- Food and supplies: $10,000 to $15,000 per month, or more depending on the menu
- Labor cost: variable, based on staff needs
How much profit can a restaurant make?
The restaurant business has a high degree of failure, but businesses that make it can also be very successful. Even a modest operation can turn over $1 million or more in revenue in a year. Franchise operations may bring in several million per year based on location and the type of restaurant.
How can you make your business more profitable?
A profitable restaurant is one that usually targets a specific demographic or narrows it cuisine to serve a specific type of market. For example, an authentic Mexican restaurant may be able to charge more for its Mexican fare than a generic restaurant that happens to serve Mexican food. Location also matters. Restaurants in wealthy or well-off communities tend to attract individuals with a higher income.
Restaurants in cities, for example, may be able to charge more than restaurants located in very rural areas in economically depressed areas of the country. Some restaurants expand their profits by starting sideline businesses, like catering or food trucks for special events.