All the dreams of starting a restaurant, such as a gorgeous interior, inviting ambiance, unique menu, and dream team, come with a heavy price tag.
Having a rough estimate of your total costs and earning potential helps you balance your dreams with reality. This article will discuss different areas where you need to spend to start building your dream restaurant.
The areas discussed in this article will remain more or less constant for every restaurant type. The amount, however, will be highly variable.
Before you start planning your funding, you should get quotes for each of these areas: real-estate brokers, lawyers, permits, accountants, launch/marketing agencies, designers and architects, contractors, and chefs.
These are your go-to professionals. They will help you understand your precise costs and help you draft your budget. You can use this article as your reference point or as your checklist; we have elaborated on each expense area to help you understand what kind of cost to expect in these categories.
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Opening a Restaurant Is Expensive
Before we start talking numbers, it is crucial to understand the difference between restaurant startup costs and operating expenses. These startup costs will be one-time payments. Your equipment, furniture, and buildout expenses come under the pre-opening costs.
An expense is something recurring. Your fixed, variable, and mixed expenses include rent, inventory, salary, and utilities. In this article, we will cover both costs and expenses so you can estimate your total cost when planning to start a restaurant.
How Much to Open a Restaurant?
Average restaurant openings costs vary from a few thousand to a few million dollars. This depends a lot on the type of restaurant and the state of your restaurant location. Don’t fret, this article covers all those intricate details below.
The median cost to open a restaurant is $275,000 or $3,046 per seat. If owning the building is added into the amount, the median cost is $425,000 or $3,734 per seat. Based on my experience, these can vary widely depending on restaurant type, location and sales ramp up.
Unless you are a cloud kitchen, you will need a decent amount of space for your kitchen, guests, storage, and operations. You can have your restaurant space either by leasing or buying.
In the case of leasing, you will pay a refundable deposit (generally, this is 1–2 month’s rent) and your rent each month. In the case of buying, you will have to make a down payment and scheduled loan payments with interest.
Next, whether you are buying or leasing, you will also have construction costs. You could build from scratch, purchase an existing restaurant, customize, or convert a business space into your restaurant space. Each option requires a different financial investment, so you should add this to your lease/buy price.
The cost of both leasing/buying and your construction depends on your location and concept. Cities like LA, Austin, and New York have high rents and property prices, whereas you can expect lower prices in comparable neighborhoods in other B and C cities.
Smaller concepts like cafes will not cost as much upfront for, but larger concepts like fine dining with an outdoor patio will have substantial space costs. The condition of the commercial space you take over also determines your space cost, so this is another factor you need to consider when you are space hunting.
Tip: Unless you are a very established brand that will pull people even when you are located in a more remote or off-beat location, you must not compromise on your location. It determines not only your costs but also foot traffic, ability to charge, and ultimately your revenue potential.
Renovations and Interior
Whether you take over an existing restaurant or build your own, you need to renovate it and add your touch to it. Not just your decor; it also includes things like electrical fittings, restrooms, layout, fire alarm installation, and kitchen setup.
Your venue and concept determine how much you will need to spend. In order of most expensive to least expensive, common concepts include:
- Full-service restaurant
- Quick-service/single-concept restaurant
- Takeaway (Ghost Kitchen)
A tricky category to estimate since there are a lot of small things that add up. Wall paint, lights, upholstery, paintings—there are many intricate elements, and even though they seem small, they have a high impact on building your restaurant concept.
This cost category can be as expensive as you want and your business demands. But it is easy to get carried away. Consult a professional to help you draft a suitable budget and plan the interior.
Do not be tempted by beautiful chandeliers and vintage paintings; variations of these will do just fine. Sticking to the budget is more critical when you are just starting. Invest in the essentials at the beginning. Focus on the customer-facing areas initially; you can keep decorating the other areas once the revenue starts flowing in.
Tip: Include a contingency fund in your renovation budget. There can be many unexpected costs in this regard. For instance, a leak in the toilets alone could make you pay for plumbing, destroyed wall paint, and other associated losses.
Kitchen Appliances and Restaurant Equipment
Your restaurant will need kitchen equipment and appliances. It is exciting to invest in many new gadgets, but one of the best ways to go about this is to check your budget and then list which things you absolutely need for your staff to do their jobs effectively.
Some broad categories you will need to spend on including the following:
Kitchen: ovens, freezer, dishwasher, induction, fire stoves
Bar: shakers, mixers, ice-cube machines
Work Stations: steam tables, cold food stations, prepping tables
Cooking: pots, cutting boards, knives, strainers, cookers, pans
Service: trays, tray stands, cutlery, fondue sets, dessert servers
Tip: There are several financing companies that can help you set up your kitchen. You do not need to compromise on equipment quality; your staff should have a seamless process to serve your guests. The financing companies will help you budget and prioritize with upfront payments and long-term commitments. You will then have to set aside a monthly amount to service the lease or loan.
To operate without glitches, less chaos, and more efficiency, you need technology. You will need both hardware and software to run your restaurant processes.
Hardware: payment terminals, printers, computer/iPads
Software: point of sale systems, kitchen display system, employee scheduling, delivery system, loyalty programs, reservation tools, and accounting
A well-planned stack will help you run smoothly and optimize your business. These technologies will come either at a fixed lifetime price (primarily for hardware) or monthly subscriptions (for software). There is a vast number of options available for technology to suit every kind of budget.
Tip: Remember that the more hi-tech or complex technology you get, the more expensive it will be to maintain it, staff it, and run it.
Licenses and Permits
To legally start your business, you need several licenses. The costs and the types of licenses will depend on what you intend to sell and where you are located.
In general, you will need a food service license, liquor license, food safety permit, occupancy permit, building health, entertainment license, music license, and valet parking permit.
Always check with your local regulations and, if possible, some neighboring restaurants about all the legal requirements. It is much more expensive to pay penalties than to acquire these licenses.
You will also need to create and maintain your legal entity (hello lawyers).
Tip: Acquiring licenses is time-consuming. Please put this on your to-do list from the start so you can open it on your planned timeline.
The day you open your restaurant means you are ready to serve. You will need to invest in staff training, recipe development, menu printing, and supplies in advance of launch day.
You might also need to pay some deposits toward utilities, gas, and rent. Additionally, you need all your pre-opening inventory.
Another significant expense is your pre-launch marketing. If you plan to establish a successful brand, you need to think of a budget to advertise and promote it.
If you are opening up a franchise or a new unit to your already established brand, you can anticipate communicating that to your current fanbase. This cost will depend on your concept, competition, reputation, and target audience.
Franchise Fee (Another Possible Cost)
If you are opening up a franchise, you will have an upfront franchise fee, as well. The range can be variable. For instance, for a Subway franchise, you would pay only around $15,000.
McDonald’s could cost you around much more at $45k and Popeye’s over $50k. Some brands could cost much more.
It will take time for your restaurant to have a constant flow of customers and smooth operations. Until then, there will be a cash-burn period.
This is why it is nice to estimate all your expenses at the start and include these costs in your contingency fund.
Typically, your cash-burn period lasts about 5–6 months, so evaluate all of the following expenses monthly and have enough to pay them for at least six months.
Lucky for you, my restaurant financial model walks you through this.
Fixed expenses are easy to include in your budget since they remain constant for a certain period. Some fixed expenses examples include:
When you sign your lease, you will already know the rent you have to pay each month.
Also, remember that there could be additional building fees, maintenance fees, and upkeep fees, depending on your property agreement.
Ensure that you are aware of all of the costs involved when you lease your property to avoid unpleasant surprises.
Most restaurants get licenses and permits for a certain period. After that, the officials recheck your status and renew your license.
When you are just starting, there is a high chance that you will hire some professional services for a couple of quarters, at least.
Based on your contract with them, you will know your expenses for these services each month. We already discussed a list of professionals you could need when you begin.
Including variable expenses in your budget is not very straightforward; however, you will predict your sales and growth when you draft your business plan.
Based on these figures, you should be able to estimate your variable expenses.
Lucky for you, I sell financial models that have variable drivers built in. Explore my restaurant financial models by click here.
Some examples of variable expenses include the following:
Cost of Goods Sold (COGS)/ Inventory
As a restaurant, you will purchase a lot of inventory and inputs to make your food and beverages. When these dishes sell, these become COGS expenses; you definitely need to have the funds to buy pre-opening inventory.
The amount will depend on factors like the kind of dishes you sell, the delivery schedule, and the storage system you have. For instance, selling sushi will require more expensive ingredients than selling cheeseburgers.
Learn more about the difference between purchases and cost of goods sold.
In most cases, utilities like water, gas, and electricity are not included in your lease. Try to find out costs per square foot from neighboring restaurants and estimate yours.
Payment Processing Fees
There will be a high number of transactions when running a restaurant. Figure out all your fees for cards and platforms. This fee depends on your merchant, the number of payment options you provide, and the average receipt price.
Some expenses will have both a fixed component and a variable component. Some examples include:
Every restaurant has some fixed employees and some contractors. Staffing needs depend on your restaurant service and size. For instance, if you are a fast-food joint, you will need more staff in the back than in the front. A full-service restaurant will need a large team in the back of house and the front of house. The restaurant size will determine the number of team members required.
For quick service, usually, there is only one front employee for every 12 tables; for full-service, there is one employee for every 4-5 tables. You will not need your entire team at all times, so that salaries will be either monthly or hourly. Hence, this falls under mixed expenses.
Restaurant Cost to Open Checklist
Now that you have understood all the areas try to find quotes for each. Use this checklist to help you.
- Commercial Space = $ ____
- Renovations and Interior = $ ____
- Kitchen Appliances and Equipment = $ ____
- Technology = $ ____
- Licenses and Permits = $ ____
- Pre-Opening Expenses = $ ____
- Franchise Fee = $ ____
- Rent = $ ____
- Licenses = $ ____
- Professionals’ Fees = $ ____
- COGS = $ ____
- Utilities = $ ____
- Payment Processing Fees = $ ____
- Salaries = $ ____
Must-Have Restaurant Financial Model
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Before We Leave You
Remember always to have realistic expectations and safety nets.
Opening a restaurant can be met with uncountable hurdles. Delays by contractors, mistakes in deliveries, inability to find staff, installations not being ready, and many other problems are possible. They can set you back a couple of weeks or even months.
Furthermore, if you are not careful, all the cash-burn can quickly deplete your budget and capital before the restaurant is fully functioning.
Spend some time (and even money) consulting experts and professionals to estimate your budget. It is worth the money and time investment if you think about the losses you will incur if you do not plan well.