How Much Does It Cost to Open a Restaurant?

How Much Does It Cost to Open a Restaurant?

Running a successful restaurant certainly has its perks, especially if you’re a foodie who loves playing host. Cultivating an inviting atmosphere and creating delicious new menu items isn’t a bad way to make a living. Of course, there’s much more to owning a restaurant than that. Those who’ve had success know that it requires rolling up your sleeves and putting in a lot of behind-the-scenes work.

Part of that work involves detailed financial planning. Restaurant startup costs typically range anywhere from $175,000 to $750,000, depending on your size, location, menu and more. Planning ahead is crucial for giving your new restaurant a fighting chance at success. There are plenty of surprise expenses that will likely pop up along the way, but many startup costs are relatively predictable.

If you’re in the early stages of opening a restaurant, here’s what you can expect.

Average Restaurant Startup Costs

The type of restaurant you open will play a big role in determining your overall upfront spend. Launching a food truck, for example, will be a very different financial journey than opening a downtown fine-dining restaurant. The same goes for buying a franchise. To put things in perspective, total startup costs for franchising a McDonald’s could range between $1 million to $2.2 million. 

No matter what route you take, you can most likely count on the following restaurant startup costs.

Registering Your Restaurant

Before you start creating menu items, the first step in opening a restaurant is figuring out the best business entity to use. In other words, how will you structure your business? The way you answer dictates how your tax and legal responsibilities will shake out. This includes the way you file federal and state business taxes, as well as your liability should a legal claim come your way.

While a basic sole proprietorship may be ideal for a one-person show operating out of a food truck, it won’t be adequate if you have business partners. Most attorneys point restaurateurs toward C-corps, which are particularly well-suited for businesses associated with high liability. One downside is that they can be costly. You also won’t be able to write off business losses on your personal tax return. The trade-off, however, is that your personal assets are off the table if anyone ever sues your restaurant.

This can all impact your operating costs and bottom line. It’s a lot to digest, which is why it might be wise to consult a business attorney with restaurant industry experience before moving forward.

Permits and Licenses

To open a restaurant, you’ll need all the necessary permits and licenses for your area and type of restaurant. Requirements vary from state to state, so a good place to start is with your specific food service codes and regulations.[1] You’ll also want to check in with your local health department to make sure you aren’t missing anything.

When all is said and done, you’ll need to meet all of these requirements in order to be compliant. Doing so comes with fees, which will shape your startup costs. For instance, food service license fees can range anywhere from $100 to $1,000, depending on your restaurant’s size and classification.[2] Meanwhile, a full liquor license might set you back up to $14,000, depending on your state.

Your Restaurant’s Location

Your location will likely be one of your largest restaurant startup costs. How much you’ll pay for your lease will vary from city to city. A 1,000-square-foot space in Los Angeles can easily cost over $6,000 per month, but you could pay half that in other markets. The general rule is to keep your total monthly spend below 6% to 10% of your projected gross sales.[3]

A number of other factors affect commercial real estate values and, in turn, lease prices. Things like size, visibility, parking, foot traffic, and local crime rates may all come into play. Just remember that these details should also factor into your own decision-making process. A great space may not be so appealing if parking is a nightmare or it’s completely hidden from pedestrians.

No matter what, you’ll want to make sure the space you choose has appropriate accommodations in place to comply with the Americans with Disabilities Act. It’s also smart to clarify if you’ll need any specific zoning, building, or land-use permits to open a restaurant there.

Equipment

You can’t run a restaurant without the right equipment. Costs vary widely here because every space is different and not all restaurants need the same equipment. A grab-and-go sandwich shop probably won’t need all the same gear as a 24-hour diner. With that said, the right equipment could cost you hundreds of thousands. 

Here’s a rough idea of common equipment costs, according to Entrepreneur.com.[4]

  • Production equipment: This includes refrigerators and freezers for your prep kitchen, along with ovens, ranges, prep sinks, microwaves, and other cooking equipment. The average spend here typically ranges from $30,000 to $65,000. This isn’t including actual food costs, which typically make up 25% to 35% of a restaurant’s revenue. 
  • Dishwashing equipment: Everything from a three-stage dishwashing machine to a restaurant-quality garbage disposal fall into this category. With installation, you could spend anywhere from $7,000 to $50,000. 
  • Storage equipment: Budget to spend between $5,000 and $12,000 on walk-in refrigerators and freezers, as well as receiving equipment like shelving.

If you’re hoping to operate a bar, plan to tack on anywhere from $17,000 to $34,000 for the bar itself and its equipment. Other easy-to-overlook restaurant items include flatware, glassware, and cutlery. Furniture, décor, and interior design necessities are part of the equation, too. You’ll also need a POS system that’s geared toward restaurants—hardware can run several hundred to over $1,000, while some providers charge a monthly plan fee as well as processing fees.

Insurance

When starting this kind of business, restaurant insurance is critical. Some types of coverage may even be required, depending on your state. Each type of coverage provides different levels of protection. Here’s a rundown of common kinds of insurance to consider.

  • General liability insurance
  • Commercial property insurance
  • Business interruption insurance
  • Equipment insurance
  • Commercial auto insurance
  • Liquor liability insurance
  • Fire insurance
  • Workers compensation insurance
  • Unemployment insurance

Premiums vary significantly based on the type of coverage you need, your amount of coverage, annual revenue, location, and so on. On average, annual premiums can range from just $30 for equipment breakdown insurance to over $2,000 for employment practices liability insurance.

Insurance is one of those things you pay for hoping you never use—but if you do ever need to file a claim, you’ll be happy to have it. And depending on your state, unemployment and workers compensation insurance may be required.

Marketing Your Restaurant

No matter your business, marketing is an essential part of building a loyal customer following that comes back again and again. Marketing your restaurant requires an upfront investment, but the return on that investment will likely be well worth it.

Focus some of your attention online by establishing a professional website and considering Google Ads. This can help put your restaurant at the top of search results. You can also think of your online presence as an opportunity to build a relationship with the public. Don’t be afraid to leverage social media and engage with your reviewers on Yelp and Google.

Other avenues to explore include customer loyalty programs, offering coupons and discounts, partnering with other businesses, and getting involved in community events. With regard to the cost, an initial spend of 6% to 7% of your gross revenue is a good benchmark for your marketing budget, according to the Small Business Administration.[5] This is assuming a net profit margin of 10% to 12%.

Employee Wages

From back-of-the-house staff like line cooks and chefs to front-end workers like hostesses and waitstaff—running a restaurant takes a village. You may also be thinking about bringing a team of managers on board to take some of the responsibilities off your shoulders. Accounting for these wages should make up a detailed part of your business plan. This will help you budget better for startup costs.

The question then becomes how to figure out compensation. A solid rule of thumb is to devote 40% to 80% of your revenue to paying your employees. This is after factoring in things like taxes, overtime, and other benefits or reimbursements. And remember that as a restaurant owner, you’ll be responsible for withholding, reporting, and paying payroll taxes on behalf of your employees. Investing in payroll software can make these tasks a little easier—but will also come with its own cost.

How to Get Financing to Open a Restaurant

Opening a restaurant usually requires a good amount of startup capital, but new restaurateurs have multiple options for funding their business. Covering your restaurant startup costs will likely require a combination of resources.

Equipment financing is one option. It’s appealing to restaurant owners because you don’t have to prove that you’ve been in business for a certain amount of time to get approved (which is how some other small business loans work). Instead, the restaurant equipment you’re financing serves as collateral for the loan.  

If you have exceptional credit and are okay with putting it on the line to open a new restaurant, you could also consider a personal loan for business. Just know that if things don’t go according to plan, you could jeopardize your personal financial health. Another option to explore might be business credit cards. You can usually access funds quickly and may be able to snag a low- or no-interest introductory rate. Of course, this is another form of debt, so proceed with caution—especially if you can’t pay off the balance before that promotional period ends. 

The Bottom Line

Restaurant startup costs can cover a wide range, and every new restaurant is unique when it comes to how much capital they need to get up and running. Equipment, licenses and permits, rent, and employee wages represent a large chunk of opening expenses. The same goes for locking down the right insurance coverage and marketing your new business. The good news is that the right financing options can help bring you one step closer to opening your doors. And if you need more guidance, our guide on how to calculate startup costs can help.

Article Sources:

  1. FDA.gov. “State Retail and Food Service Codes and Regulations by State.”
  2. Upserve. “Learn How to Get Your Business, Food Service, and Liquor Licenses.”
  3. Restaurant Real Estate Advisors. “Rent for Restaurant—How to Determine the Right Rent for a Restaurant.”
  4. Entrepreneur.com. “The Equipment You Must Have for Your New Restaurant.”
  5. SBA.gov. “How to Set a Marketing Budget That Fits Your Business Goals and Provides a High Return on Investment.”

Marianne Hayes

Marianne Hayes is a small business owner and longtime freelance writer who’s been covering personal finance for nearly a decade. She specializes in small business news, budgeting, saving, and wealth management. Marianne has written for Forbes, CNBC, LendingTree, Experian, Mint, LearnVest, The Daily Beast, HuffPost, and more. When she isn’t writing about small business and finance, she’s teaching creative writing workshops and curling up with a good book. She lives in Florida with her husband, three daughters, and miniature dachshund. Marianne has a degree in journalism and creative writing from the University of Central Florida.

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