COVID-19 has devastated the restaurant industry. According to CNN, it has caused 110,000 U.S. restaurants to close permanently in 2020. Despite the impact of COVID-related restrictions, the outlook for restaurants in 2021 is far from gloom and doom. In fact, the National Restaurant Association forecasts that sales at U.S. eating and drinking establishments will increase by 10.2 percent in the year to a total of $548.3 billion.
Much of the increase will be the result of pent-up demand among consumers for a long-awaited return to their favorite restaurants and bars. Preparing for the expected boom in dining out are new restaurateurs who’ve been waiting to convert their vision for a new eatery into reality. One of the first questions that needs to be answered before getting a new restaurant off the ground is how much a restaurant startup costs.
Startup and ongoing financing will be a major component of any new restaurant’s business plan, along with market and sales projections, a description of the organization and management, and the restaurant’s concept, menu, and decor. These are the steps entailed when calculating a restaurant startup’s cost and your options for lining up the necessary funding.
Breaking Down Restaurant Startup Costs: One-Time, Recurring, and Variable
Making sense of all the separate activities that go into starting a restaurant can seem daunting to a new restaurateur. A good way to start is by separating restaurant startup costs into three categories:
- First and last month’s rent and security deposit on the building (or for a food truck operation, the cost of the vehicle and its kitchen) is typically in a range from $3,000 to $30,000 for most restaurants.
- Business licenses and permits generally cost between $100 and $1,000, depending on the location and type of restaurant. These may include a liquor license, health inspection, business license, dumpster fees and permits, and business registration fees.
- Insurance covers general liability, worker’s comp, and renter’s insurance, which combined usually costs between $1,000 and $2,000 per month.
- Improvements and remodeling costs vary greatly depending on the state of the facility and its kitchen. They may include painting, electrical work, handicap accessibility, upgrades to the interior decor and facade, and plumbing upgrades. Total costs of improvements could be as low as $10,000 or as high as $250,000.
- Kitchen equipment and dining room fixtures are also variable and difficult to estimate, ranging from $3,000 to $150,000 for cooking fixtures and kitchen upgrades and from $5,000 to $75,000 for tables, chairs, plates, silverware, and other dining room supplies.
- A modern, cloud-based POS system serves as the heart of your restaurant’s operation and may entail a low upfront cost along with recurring monthly charges based on the features and equipment you choose. Hardware costs are lower for cloud-based POS solutions because their apps run on tablets and smartphones that connect to barcode scanners, receipt and kitchen printers, and cash drawers wirelessly.
- Signage and advertising likewise have both a one-time cost and ongoing expenses, but the restaurant’s initial advertising push and quality exterior signage are key to attracting customers. For most restaurants, these initial costs could be between $3,000 and $10,000.
Recurring and Operational Costs
- Lease payments depend on the size and location of the establishment, among other factors; they usually cost between $1,000 and $10,000 monthly.
- Employee salaries likewise vary widely for different positions. If you plan to take on the general manager duties, the salaries you’ll need to pay include the head chef, each line cook or prep cook, and each server and the host/hostess. In addition, payroll taxes and workers’ compensation costs total from $8,000 and $80,000 per month, depending on the restaurant.
- Food and alcohol costs should be no more than 33 percent of the restaurant’s total sales; these costs can be from $3,000 to more than $100,000 per month, again depending on the restaurant.
- Utilities include gas, electricity, water, sewer, and internet access; they typically range from $500 and $2,500 per month.
- Marketing and advertising canl cost at least $500 per month and may run to thousands of dollars. This includes print and social media, press releases, flyers, and in some cases TV and radio ads.
- To ensure your restaurant startup cost estimates are as accurate as possible, consider such variables as its location (city center or small town), size (seating 10 or 100), staff size (one cook and one server or a complete staff including dishwashers, line cooks, and hosts/hostesses), and style of food (burgers or filet mignon). Calculate a baseline of expenses based on the information above and then raise or lower your estimate based on these variables.
Potential Funding Sources for a Startup Restaurant
With your financial estimates and business plan in place, you’re ready to line up the startup funding for the restaurant. The first consideration is which tax structure you’ll use for the business:
- Sole proprietorships and partnerships are the simplest to start but add to the restaurant owner’s liability.
- Limited liability companies (LLC) reduce the owner’s liability and share other characteristics of corporations but have lower formation costs.
- Corporations offer the best tax benefits for the business but are more costly and involved to establish.
A common source of funding for restaurant startups is a personal installment loan from a bank or other source. Another option is an open-ended line of credit whose borrowing limit the lender may increase if you make consistent, on-time payments.
Finally, a new restaurateur can seek an “angel investor,” which is a person or company providing financing based on your business plan and restaurant concept. The investment is typically made in exchange for an ownership share of the business, so the investor will be seeking a sufficient return on their investment.
Whether you’re starting with a food truck or catering business, or you’re planning a world-class fine dining establishment, you’ll benefit from seeking the advice of experienced partners who can answer your questions and steer you around potential startup pitfalls. By making wise purchasing decisions now you’ll lay the foundation for your restaurant’s success for months and years to come.
Want to learn more about restaurant startup costs?
Get your free Demo