How to Open a Restaurant

In every city and almost every town in the United States, you will find a bounty of restaurant options. People enjoy the experience of dining out and trying different foods. If you are a chef with tasty recipes of your own, opening your own restaurant could be a great opportunity for you to make a name for yourself and make good money.

Starting any kind of business, however, takes a lot of work. The key is to gain the necessary knowledge and move patiently through the business development and launch process. By taking it step by step, as detailed below, you’ll avoid many of the more common pitfalls.

Step 1: Decide if the Business Is Right for You

Starting a restaurant requires time and effort. Before you jump in, you need to fully understand what is involved before you decide if a restaurant is right for you. You will be taking a significant risk, so educating yourself is critical before deciding to develop and launch your business.

Pros and cons

Every business has its advantages and disadvantages, which you would be wise to weigh before moving forward.

Here are some basic pros and cons of starting and running a restaurant.

Restaurant industry trends

The pandemic had a huge impact on the restaurant industry, due to shutdowns and stay-at-home orders. 

Industry size and growth

• Industry size and past growth – The US restaurant industry took in around $800 billion in sales in 2021, according to the National Restaurant Association.((https://restaurant.org/research-and-media/research/industry-statistics/national-statistics/)) Over the five years prior to the pandemic, however, the quick service restaurant industry grew 30% in output. The full-service restaurant industry experienced similar growth and reached $80 billion in 2020.((https://www.statista.com/statistics/252151/economic-output-of-the-us-quick-service-restaurant-franchise-industry/))
• Growth forecast – US restaurant sales are predicted to reach $898 billion in 2022((https://restaurant.org/state-of-the-industry/)) and grow further by 4% yearly to reach $1.2 trillion by 2030.((https://www.gorspa.org/commiq-us-restaurant-industry-current-state-trends-outlook/))
• Number of businesses – There were more than 180,000 quick service franchise restaurants((https://www.statista.com/statistics/217561/number-of-quick-service-restaurant-franchise-establishments-in-the-us/)) and more than 28,000 full service franchise restaurants in the US in 2020.((https://www.statista.com/statistics/217579/number-of-us–full-service-restaurant-franchise-establishments/))
• Number of people employed – The industry employs more than 14 million people.

Trends and challenges

Trends in the restaurant industry include:

• Increasing number of food delivery app users
• Rise of ghost and host kitchens
• High pent-up demand for restaurant services
• Consumer preference for unique restaurant concepts

Challenges in the restaurant industry include:

• Supply chain problems
• High cost of food and labor
• Shortage of food and beverage items
• High level of competition

What kind of people work in restaurants?

• Gender – 54% of restaurant owners in the US are male, while 46% are female.((https://www.zippia.com/restaurant-owner-jobs/demographics/#gender-statistics))
• Average level of education – Half (49%) of restaurant owners hold a bachelor’s degree and 22% hold an associate degree.((https://www.zippia.com/restaurant-owner-jobs/education/))
• Average age – The average age of a restaurant owner is 38 years old.((https://www.zippia.com/restaurant-owner-jobs/demographics/#age-statistics))

How much does it cost to start a restaurant?

Restaurant startup costs range from around $80,000 to open a coffee shop, to more than half a million to open a high-end dining destination. The largest investment is building out the space that you rent or buy. If you rent a smaller space that needs little renovation, you can significantly cut your costs.

You’ll need several key items to open your restaurant, starting with:

• The restaurant space, your largest expense
• Kitchen equipment
• Furniture and tableware
• Bar equipment
• Dishwashing equipment
• Storage equipment
• Point-of-sale (POS) system

How much can you earn from a restaurant?

Your profit will vary depending on:

• Customer numbers
• Expenses and menu prices
• The size of your space

The average profit margin for a restaurant is 3-6%, according to restaurant software firm Restaurant365. Restaurant industry advisory One the Line puts the average monthly revenue for a restaurant in its first year at just over $110,000. This would give you an annual revenue of $1.32 million. At a profit margin of 6%, you will net about $80,000.

As your brand gains recognition and repeat customers, you may see $300,000 in monthly revenue, giving you annual revenue of $3.6 million. If you can maintain your profit margin at  6%, your net profit will be more than $210,000. Not a bad haul!

What barriers to entry are there?

There are several barriers to entry for a restaurant. Your biggest challenges will be:

• Standing out from the competition
• High start-up costs
• Finding a unique and appealing concept

Related Business Ideas

If you’re still not sure whether this business idea is the right choice for you, here are some related business opportunities to help you on your path to entrepreneurial success.

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Step 2: Hone Your Idea

Now that you know what is involved in starting a restaurant, it’s best to hone your idea before entering this highly competitive market.

Why? Identify an opportunity

One good way to stand out from the competition is to research your local market and identify a gap. What type or style of restaurant is missing in your area?

You might also begin to develop a handful of signature dishes, which you could make for family and friends to draw feedback.

This way you could start marketing your menu even before you open.

You could start your marketing by posting photos of your dishes on social media and announcing your menu and planned opening date.

What? Determine your products or services

Make a list of all the dishes that fit into your concept and narrow it down to the best of the best. Determine if you want to offer certain dishes as specials on certain days of the week, or if you want to offer specials periodically. Your menu is crucial to your success, so it’s a good idea to make it as strong as possible right off the bat. Even so, you should be willing to change it if it’s not working.

How much should you charge for your dishes?

Prices will depend on the style of restaurant you choose and the dishes on offer. You may choose to open a value-based restaurant with lower prices, or a perceived value restaurant with premium prices for higher-end dishes. Perceived value means that customers perceive that they are getting a premium product that is worth paying more for.

Research restaurants in your area to learn more about pricing in your market. Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will depend on the type of restaurant you plan to open. It’s a good idea to try to appeal to as many people as possible.

After you get started, word-of-mouth referrals will be your biggest source of business.

Where? Choose your business premises

Restaurant location is critical, whether you are buying or leasing. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.

When choosing a commercial space, you may want to follow these rules of thumb:

• Central location accessible via public transport
• Ventilated and spacious, with good natural light
• Flexible lease that can be extended as your business grows
• Ready-to-use space with no major renovations or repairs needed

Step 3: Brainstorm a Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words.

You probably want a name that is short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some suggestions for brainstorming your business name:

• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better
• The name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for name suggestions
• Including keywords in the name, such as “restaurant” or “tavern”, boosts SEO
• Choose a name that allows for expansion: “Jim’s Bakery” rather than “Jim’s Cookies”
• Avoid location-based names, as they may hinder future expansion
• Use online tools like the Step by Step business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Step 4: Create a Business Plan

Every business needs a plan, a rough outline that helps guide a startup through the launch process while maintaining focus on key goals. A business plan is also crucial for helping potential partners and investors understand your company and vision:

• Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
• Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
• Product and Services: Describe your catering company’s services in detail.
• Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
• Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
• Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
• Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
• Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
• Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.

Step 5: Register Your Business

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business! 

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to restaurants. 

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state. 

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your restaurant will shape your taxes, personal liability, and business registration requirements, so choose wisely. 

Here are the main options:

• Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
• General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
• Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
• C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
• S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your Articles of Organization, and answer any questions you might have. 

Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN. 

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

The IRS website also offers a tax-payers checklist, and taxes can be filed online.

It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Step 7: Fund your Business

Securing financing is your next step, and it’s a crucial one for a fledgling restaurant. There are plenty of ways to raise capital:

• Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
• SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
• Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
• Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
• Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
• Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
• Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best option, other than friends and family, for funding a restaurant business. You might also try crowdfunding if you have an innovative concept.

Step 8: Apply for Licenses/Permits

Starting a restaurant requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses and permits associated with starting a vending machine business may include doing business as (DBA), health license and permit from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents and other intellectual properties, as well as industry-specific licenses and permits.

A restaurant may need the following, depending on the requirements in your area:

• Foodservice license
• Food handler’s permit
• Building health permit
• Liquor license

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 9: Open a Business Bank Account

Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your restaurant business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked but is vital to your success as a restaurateur. Insurance protects you from unexpected events that can have a devastating impact on your life and business.

Here are some of the different types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business.

Essential software and tools

Being a restaurateur means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, a number of excellent websites and digital tools can help you with many business tasks. 

You may want to use industry-specific software, such as Restaurant 365, lightspeed, and toast, which offer professional guidance on building your menu, optimal floor plans, cost-saving staff scheduling, and much more.

Accounting

• Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
• If you are unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Marketing

Some of your business will come from the casual passerby or online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness. 

Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products: 

• Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area. 
• Instagram: Same benefits as Facebook but with different target audiences.
• Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Reserve Now”. This can sharply increase sales.
• Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.

Kickstart Marketing

Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:

• Competitions and giveaways – Generate interest by offering prizes for customers who complete a certain action, such as 10% off for a group of six diners.
• Signage – Put up eye-catching signage at your store and website. 
• Flyering – Distribute flyers in your neighborhood and at industry events. 
• Sponsor events – You can pay to be a sponsor at events that are relevant to your target market.
• Post a video – Post a video about your restaurant. Use humor and maybe it will go viral!
• Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal. 
• Start a blog – Start a blog and post regularly. Change up your content and share on multiple sites.
• Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
• Influencer marketing – Pay people with large social media followings to promote your restaurant. You can find micro-influencers with smaller followings and lower rates.
• Create infographics – Post infographics and include them in your content.

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google. 

You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

Focus on USPs

Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your restaurant meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire. 

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your restaurant business could be:

• Creative menu with signature items
• Farm-to-table concept
• Vegetarian and vegan-focused menu
• Unique atmosphere, perhaps with a strong theme

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a restaurant, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in restaurants for years and can offer invaluable insight and industry connections. 

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in restaurants. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.

Step 12: Build Your Team

No matter the size of your space, you will need to hire a number of employees for various job roles. Potential restaurant employees include:

• General manager
• Waitstaff, host, bartender
• Kitchen staff, from cooks to dishwashers and busboys
• Marketing lead

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need. 

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent. 

Step 13: Start Making Money!

Restaurant industry performance tends to follow that of the broader economy because dining out is a discretionary expense that declines during economic downturns. Competition in the industry is intense. You can stay ahead of the competition by specializing in certain dishes or introducing a unique concept to create a niche market for yourself. This will jumpstart your word-of-mouth marketing within your niche market. You can continue to add to and refine your menu as you go. 

You’re now ready for your entrepreneurial journey to become a successful restaurant owner. You might want to bookmark this page, just in case.