Couple starting their restaurant business

The Complete Guide to Starting a Restaurant

10+ min read • Feb 25, 2020 • Elizabeth Aldrich

When it comes to starting your own business, restaurants aren’t exactly the easiest choice. Luckily, foodie culture has hit its stride, and restaurant sales have been on the rise for several years now.

It will be a challenge, but as long as you come to the table fully prepared for success, the odds are in your favor. Here’s everything you need to know about starting a restaurant business.

Deciding What Kind of Restaurant to Open

You’ll want to consider many factors when deciding what type of restaurant to start. Pay attention to your target location and what kinds of restaurants find success there, while also avoiding oversaturated markets. Ultimately, you want your restaurant to fill a need.

Your budget is also important to consider. Some types of restaurants require bigger initial investments due to expensive machinery or the space required to execute the idea. Be realistic about what you can afford.

Franchise vs. Independent Restaurant

You might have higher startup costs if you open a franchise, but you also have a better chance at reaching cash flow positive status in a short period.

You’ll have to pay a franchise fee right off the bat, and you also don’t have much control over the size of your business or what you invest in, whereas starting an independent restaurant means you can start small and expand with demand. However, with a franchise, the marketing has already been done, and the demand is often already in place, so it can be easier to increase your cash flow.

However, you’ll be paying an ongoing royalty if you open a franchise. This royalty can cut into your profits. If you manage to build an extremely successful independent restaurant, you get to keep all of the profits.

Another key difference is how much control you have over the business. If you prefer to have someone tell you how to run and grow your operation and you’re okay with sticking to someone else’s plan and vision, you’ll probably prefer a franchise. On the other hand, if you want to build your own vision and have full creative and managerial control, you’ll want an independent restaurant.

Fast Food vs. Casual Dining vs. Fine Dining

You’ll also want to select a type of restaurant, in terms of the kind of food you serve, the price range, and the ambiance. Again, you’ll want to consider the startup costs as well as the demand in your area. 

For example, do you plan to open your restaurant in an area where people enjoy and can afford fine dining? Or is the location of your restaurant more youth-oriented, for example, near a college campus? In that case, you might want to look toward fast food or casual dining.

It’s also possible to combine the concept of fast food—that is, food that is ordered and served quickly—with both casual and fine dining. Fast-casual includes restaurants like Chipotle or your local food truck, where food is fast but of higher quality than McDonald’s or Taco Bell. 

Fast-fine, a newer restaurant concept, is fine dining with slightly more accessible prices and shorter wait times. They’re a little more creative than fast-casual joints, and examples include elevated pizza or gourmet burger joints. Whereas fine dining restaurants can come with hefty startup costs, the cost of starting a fast-fine dining restaurant is far more affordable, so this might be a good option for an entrepreneur who wants to serve fine dining-type foods but doesn’t have half a million dollars to invest.

Choosing a Location

The most important factor when it comes to location is making sure that there’s a market for the type of restaurant you want to open in the place where you want to open it. However, that’s not the only factor.

Central vs. Off-the-Beaten-Path

Typically, building a restaurant in a central, highly trafficked location means more business for you but also far higher rent prices. You may only be able to afford a location that’s a little off-the-beaten-path. This location doesn’t mean you can’t succeed, but it does mean you’ll want to choose wisely. Consider whether this location is in a quieter area that’s easy to get to or a place that’s truly out of the way for most people. Don’t forget that hungry patrons value convenience heavily.

Parking

You might be tempted to snag a prime spot in a downtown area, but if parking is a hassle, that central location could actually hurt you. Consider first whether there’s any space for you to build parking into your restaurant’s design. 

Some restaurant types can get away with little to no parking—for example, food trucks, windows, and restaurants located at or very close to public transportation—but for the most part, no parking is a no-go. Again, this goes back to convenience.

Size

You need to make sure that the size of the lot or building you’re considering is appropriate for the business you want to open. The more involved your food, the bigger your kitchen will need to be. If you’re serving alcohol, you’ll need space for a bar. The equipment you’ll need is very important to keep in mind, as restaurant equipment can eat up more square footage than you’d think.

Clientele

You’ll need to consider the type of people who frequent the area you want to start your restaurant in, which includes both their taste in food and their purchasing power. You can have the best food in the world, but if the people in your neighborhood can’t afford it, you’ll never be successful. On the other hand, if you’re serving fast food burgers in a neighborhood that’s hyper health-conscious and mostly vegetarian and vegan, you’ll struggle.

Design

The ambiance of your space depends largely on the location you choose. You need to pay attention to detail when browsing potential spaces to rent. If you’re opening a brunch spot or a cafe, natural light is a must, and a patio or outdoor space doesn’t hurt. If fine dining is your thing, you’ll want a space that’s impressive upon first glance, whether for its modern features, its historic charm, or its vaulted ceilings.

Building Code

You probably don’t want a space that’s going to involve lots of renovations before you can even get started. Make sure the space you’re looking at is up to code and safe. Also, assess whether or not it’s accessible to people with disabilities. Not only is this the right thing to do, but there are also a number of accessibility guidelines restaurants legally have to meet in order to be ADA compliant.

Developing a Restaurant Business Plan

Once you’ve nailed down your idea, you’ll need to create a business plan. This step can feel like a lot of work, but it’s necessary. You’ll need to do extensive research regarding your restaurant’s concept and menu, the market for your restaurant, competitors, your management and employee team, marketing, financial projections, location, and more.

Here are the main components of most restaurant business plans.

  1. Introduce your restaurant brand, which includes your logo, colors, and sign
  2. Provide an overview of your restaurant concept
  3. Give a sample menu with prices
  4. Explain your management and employee plan
  5. Lay out your restaurant design
  6. Analyze your industry and target market
  7. Investigate your competitors
  8. Offer an analysis of your location
  9. Write out a marketing plan
  10. Create financial projections

You will rely on this document throughout the creation of your business, and you’re welcome to amend it as time goes on and your goals and projections shift. If you need to raise money from investors for your restaurant or apply for a business loan, your business plan will come in handy. 

Funding for Your Restaurant

There are many options when it comes to finding money to start your restaurant. Whether you want to borrow from a bank, fund the restaurant yourself, or seek out investors, it’s important to explore all of your options before deciding on a funding method.

Bootstrapping

Bootstrapping is a form of funding a startup that doesn’t involve taking money from outside investors and often doesn’t rely on credit, either. It’s a business that aims to self-fund. Usually, the business begins with a small amount of initial “seed money,” which may come from personal savings or a friend or family member. The business must start to rake in revenue pretty quickly, at which point it can switch to funding itself with money from customers, all of which gets re-invested into the business. 

The benefits of bootstrapping include avoiding debt and not having to give up equity or control to investors, all of which can make a business more agile and responsive to trends. On the other hand, you’re limited to whatever you can scrounge up in terms of seed money, which can mean starting out with a very small operation.

Small Business Loans

Getting a small business loan can be a good way to give your business a big boost of capital while also keeping costs down. The best small business loans tend to have reasonable interest rates, making repayment less of a burden. However, you always run the risk of your restaurant’s cash flow tanking and coming up short on your loan payments.

Small business loans can also be harder to qualify for. For example, SBA loans require collateral, and you must have good credit and be in operation for at least 2 years before you can apply. Traditional bank loans often have even more stringent requirements.

Equipment Financing

One of the most significant upfront expenses for restaurant owners tends to be kitchen equipment, from pizza ovens to industrial refrigerators and POS systems. Many business owners use equipment financing to pay for these expensive pieces of equipment so they can maintain their restaurant’s cash flow.

Equipment financing loans usually require that you be in business for at least 12 months before applying, have a credit score of at least 650, and have at least $50,000 in annual revenue. The biggest perk of equipment financing is that you don’t need to provide any collateral because the equipment you purchase serves as collateral.

Crowdfunding

Crowdfunding, a type of funding in which you accept many small contributions from lots of different people (think Kickstarter and Indiegogo), is a popular method for funding a startup that’s similar to bootstrapping in that it allows you to maintain control over your business and avoid debt.

However, this form of funding is most popular with startups that sell physical products, as they can offer the product as a reward for contributing. Restaurants don’t typically use crowdfunding, but it’s possible. If you already have a decent following in your community or a crowd of people you know like your idea and would spread the word, crowdfunding might work for you.

Finding an Angel Investor

Businesses that are just getting started sometimes struggle to find funding. Many banks require you to be in business for a couple of years before applying to a business loan, and many investors want to see proof of your viability before investing.

That’s where angel investors come in. These investors fund startups in the beginning stages of growth, even if they’re risky ventures, because they believe in the idea and the people executing that idea enough to take on that risk. 

There are both pros and cons to angel investors. While the money they offer doesn’t need to be paid back if your restaurant goes under, accepting that money means giving up a portion of your ownership over the restaurant. Because their money is on the line, angel investors may push you to grow faster than you’re comfortable with.

Licenses and Permits for Opening a Restaurant

The restaurant business is one of the most highly regulated industries, and as such, you’ll need to secure a number of different licenses and permits before you can open your doors. The exact requirements vary by state, and it’s best to get a lawyer involved to make sure you have everything squared away.

Some of the more common licensing requirements include:

  • Business license: These are issued at the state level.
  • Food handler’s permit: All employees should obtain this.
  • Liquor license: This is only for restaurants serving alcohol.
  • Music license: This gives you permission to play copyrighted music in your establishment.

The US Small Business Administration is a great resource for more information on applying for business licenses.

Hiring Management and Employees for Your Restaurant

This step is crucial to the success of your restaurant. One could even argue that your team can single-handedly make or break your startup. Avoid common hiring mistakes small business owners make, like hiring someone in a rush, overlooking the option of hiring contract workers, and refusing to accept support and delegate throughout the hiring process. 

You want to recruit people who are talented and committed, and one of the best ways to do that is by offering generous pay and benefits. Unfortunately, most startups don’t have the capital to give potential employees highly competitive compensation packages. 

Don’t skimp when it comes to compensation, even if you’re worried you can’t afford it. You also can’t afford to hire people who don’t do a good job. Try to match the going rate for the positions you’re hiring and offer some kind of benefits package. Figuring out how to identify potential rather than proven success can also help you find people who will contribute to your restaurant but without costing you as much as someone with years of experience.

You can also try offering a few non-monetary perks to attract talented employees despite not being able to provide the most competitive compensation package in your industry. For example, you can entice prospective employees with things like a clear track for upward mobility, employee incentive programs (such as a retreat), and profit-sharing. You can even get creative here: talk to other local businesses in your area to see if they’d be interested in offering discounts to your employees in exchange for discounts at your restaurant for their employees.

When it comes to finding the right talent, you’re going to have to reach further than Craigslist. Post the job on other job boards, such as LinkedIn, Indeed, and Glassdoor, and advertise on social media and in your restaurant. If you already have a few employees, offer them an incentive for recruiting people who end up getting hired.

Launching and Marketing Your Restaurant

Once everything is in place and you’re finally ready to launch your restaurant, it’s time to publicize and spread the word! You’ll probably want to host a big event for the day or weekend your restaurant opens its doors to bring in new customers, but you should start marketing your restaurant and that launch date long before.

Digital marketing is huge, and you should have an online presence that includes a website and at least a couple of social media channels. Facebook and Instagram are two of the most popular social media platforms for restaurants. Consider offering a taste test to local food writers, bloggers, and influencers so they can spread the word. Also, contest marketing is highly effective and a great way to gain new followers. It can be wise to contract a digital marketing specialist to help you with this project.

While social media is important for publicizing your restaurant, on-the-ground marketing within your community is critical. Hang flyers around the neighborhood and inside other local businesses, and ask your friends to tell everyone they know.

Spreading the word only goes so far. You have to offer an incentive for people to come and try something new. Host a launch party that’s packed with freebies, like samples, a live DJ, a giveaway, and more. Team up with local artists or artisans to host a pop-up in your restaurant. The more you collaborate, the further your network will spread.

You can also consider implementing a customer loyalty program so that all of these new people feel compelled to come back to your restaurant. Most casual dining spots go with punch cards, whereas more upscale establishments might consider starting a points system of some sort.

Opening a restaurant is an enormous task. However, with proper planning and preparation, it’s possible to make all of your culinary dreams come true.

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Elizabeth Aldrich

Elizabeth is a freelance writer covering personal finance, business, and travel. Her writing has appeared in The Motley Fool, Business Insider, Yahoo! Finance, LendingTree, Student Loan Hero, FOX Business, and more.