Surprising Restaurant Startup Statistics
First, let’s start with a stat that’ll make you even more excited than a group of famished folks at a Pizza Hut buffet. You’ve probably heard that 60%, 80%, or even 90% of new restaurants fail within the first year. Take heart, culinary friend—that perpetuated statistic is false.
The real closure rate is closer to 17% within the first year. And keep in mind that’s closure, not failure. Those closures could come because the owner got bored, a hardship hit the family, a better opportunity came around… That doesn’t necessarily mean they failed and bowed out of business. And that 17% is about the same, if not better, than that of real estate agents, insurance companies, and brokerages. Not so bad, right?
Some businesses (like freelancers) can get off the ground with as little as $100 to buy a website. Other companies need to invest thousands of dollars to get up and running. Over a decade ago, the average cost to start a business was around $25,000. Today, restaurant owners report a median of $375,000 to open an independent restaurant. Of course, that number fluctuates depending on new construction vs. remodeling and full service vs. limited service—but, still, it’s no small sum.
On the bright side, restaurant industry sales jumped by 3.6% from 2018 to 2019, marking the 10th consecutive year of growth for the industry. Who’s surprised? Everyone loves food!
As you can see, there’s a real chance of making a good living as a restaurant owner. However, it’s not cheap. To avoid becoming a statistic, you need to put on your accounting hat for a bit and crunch some numbers. Lucky for you, you don’t have to go it alone. We’re going to walk you through all of the numbers and factors you need to consider. But before you whip out your handy-dandy calculator, we need to visit the business plan first.
Don’t Start Calculating Until You’ve Created a Business Plan
It’s important that you consult your business plan before you start throwing numbers on paper. Numbers without a plan are like fries without ketchup—not that great. Don’t have a business plan yet? Start here, first.
Your business plan is going to include your goals, financial forecasts, industry trends, and competitive research so that you can make the most precise financial estimates. With an up-to-date business plan, you’ll know exactly where your business stands and what it’s going to take to get where you want to go.
OK, now that you have your business plan in hand, you’re ready to start estimating costs. To calculate your expenses here, we’re going to split your expected costs into 2 categories: up-front startup costs and upkeep startup costs. Let’s start with your upfront expenses.
Up-front Startup Costs for Your Restaurant
Your up-front startup costs are the costs you’ll incur before you even open the doors on the big opening night. Before customers start flooding in, you need a physical space, tables, menus, ovens, employees, and much more. Let’s start with what are typically the most expensive assets of all—the location and property.
1. Location and Property
Location, location, location—one of the most important yet most costly considerations. You could choose the back-alley scene way off Main Street that gets little-to-no foot traffic but costs next to nothing. Or you could pay a premium and secure a hot spot in the heart of pedestrian pathways, but it’ll cost you a pretty penny.
There’s no right answer, but if you’ve ever watched an episode of The Great Food Truck Race, then you know firsthand (more like secondhand) just how critical a role location can play. Fortunately for food truck owners, they can learn from their errors, take their feet off the parking brakes, and relocate in a matter of minutes—the same isn’t possible for a brick-and-mortar restaurant.
Take a look at where you’re planning to open your restaurant to get a feel for the market value. Use a tool like LoopNet, and you’ll be able to see fairly accurate estimates for different properties. With these estimates in mind, you’ll be able to locate a compromising space that matches your budget and ambitions.
Once you’ve found the right neighborhood, it’s time to determine your restaurant building needs. You’ll find very few spaces are turnkey upon purchase. If you’re planning on opening a gelato joint and conveniently found one for sale, then you’ll have less remodeling to do. However, if you’re trying to convert an old hair salon into a rustic, hipster-loving cafe, you’re going to have a complete demolition/renovation project on your hands—and these projects come with a hefty price tag.
Think of the restaurant business you want to build and the real estate space available. Will you be able to accommodate an entire kitchen, serving space, and dining area, or will you need to cut back on kitchen space to provide better customer seating? A simple paint job could cost as little as $4,000, while new windows and flooring renovations could take upward of $50,000. Oh, and don’t forget about the exterior of the restaurant, too. Take these factors into consideration before you zero in on a location and pull the financial trigger.
You’ll also want to think about your up-front branding investments, like logo design, paint jobs, interior and exterior signage, etc. These seemingly minor costs can add up to a huge chunk of change.
2. Food Sourcing
If you’re in Kansas trying to import North Carolina flounder, Florida oranges, and Mexican avocados, you’re going to need to incorporate those sourcing costs into your estimates. Restaurants run on razor-thin margins—every penny counts, and it’s your job to find (rather, create) those pennies.
It’s hard to predict how much food you’re going to need, especially when you’re just starting. As time goes on, you’ll learn the typical demands of your customers and be able to adjust the supply you maintain. However, starting out, you’re going to want to err on the side of too much rather than not enough. That approach likely means you’ll waste some food from time to time, but that’s a lot better than turning away customers (especially when it comes to building your reputation—first impressions matter!).
When estimating how much food you’ll need and how much it’ll cost, try working backward. Look at your menu first and determine what ingredients you’ll need for each dish. Then, figure out the price of that amount of ingredients in that single dish. Once you know how much it costs to produce that meal, don’t stop there—the cost of your meal also needs to take into account overhead: rent, employee wages, marketing, profit, and much more. On average, restaurants markup their ingredients by 300%, but some can markup prices by as much as 636%.
Before the doors open on night one, you’ll want to make sure you have sufficient inventory for your chefs to work their magic. You’ll need all the fresh ingredients, spices, staples, drinks, and more to make your menu come to life. You’ll want to find vendors that provide high-quality, reliable stock, but you’ll need to make sure it’s competitively priced. Remember, you’re running on super-thin margins, so look for every opportunity you can to make a dime.
3. Equipment and Supplies
Now that you have the location and the food, you’re going to need the equipment to get cooking and serving. There’s a lot to consider:
- Tables and chairs: Whether you’re splurging on chic restaurant tolix chairs or going homely with long wooden benches, you’ll need to budget accordingly.
- Commercial cooking equipment: Your typical kitchen oven isn’t going to do the trick when you’re cooking for a room of 75–150 people. You’re going to need commercial-grade ovens, stovetops, blenders, deep fryers, and much more.
- Specialty cooking equipment: Don’t forget to incorporate the cost of specialty equipment. For example, if you need a stone oven to make your signature pizza, you’re looking at a $10,000–$20,000 investment, at minimum.
- Plates, cutlery, and cooking utensils: You’ll need to supply everything from the napkin your customer uses to the spatula your chef wields to flip pancakes.
4. Dream Team Hiring and Training
Now it’s time to assemble the dream team. This step is where you get to make the hard decisions between compensation and retention. While the 90% restaurant failure rate is far from the truth, the 73% restaurant employee turnover rate is scary-real. On average, it costs close to $3,500 to find, hire, onboard, and train a new restaurant hire. When that employee walks out the door 2 months after starting, that’s a lot of sunk cost.
Several line items go into calculating your total labor costs:
- Hourly wages and salaries
- Sick days
- Discounts and/or free meals
When you look at your total labor costs, your eyes may get a little big—don’t panic! Know up front that labor will be one of your most substantial expenses. You may be tempted to cut staff, reduce wages, and slash benefits, but this could have a huge negative impact on customer service and staff capabilities.
Wages and salaries will vary depending on your business, its customers, and your geographic location, but here are some general numbers to give you a ballpark figure:
In the end, it’s entirely up to you, but it could be more beneficial in the long run to provide quality work and compensation rather than burn through part-time students like marshmallows at a campfire. McDonald’s, for example, doesn’t provide the highest wages, but they do offer paid vacation and sick days. In-N-Out Burger offers some of the best pay in the business, but they also have a reputation for working their employees to the bone. Based on your seasonal demands and unique business, you’ll need to figure out the compensation models that work best for your restaurant.
Don’t stress yourself about nailing it from the get-go. Learn what works and what doesn’t, and then iterate over time. Experiment with your employees and measure the impact. Does offering a raise every 3 months reduce turnover? No? What about if you provide healthcare? See what works best for your employees and your unique restaurant.
5. Marketing and Public Relations
Regardless if you’ve secured a prime location in the heart of the city or if your to-die-for burrito is absolutely irresistible, you’re going to need a healthy marketing budget to gain momentum. Don’t make the mistake of thinking social media and word of mouth will suffice—there’s only so much a few tweets and your best friends’ network can do.
Signage, ads, PR services, and digital marketing could cost you thousands of dollars even before the grand opening. You don’t want to get talked into an expensive, lengthy contract with a marketing agency before you’ve seen the ROI (return on investment), but you also don’t want the opening night to be a penny-pinching ghost town. You’ll need to find the delicate balance and decide how much you’re willing to invest in marketing your restaurant.
Do some market research and see what similar businesses and competitors did for their initial marketing efforts. What do you feel like went right? What went wrong? A basic analysis like this will help you decide where (and where not) to invest your valuable capital.
6. Professional Services
As a small business owner, you’re likely tempted to go it alone and wear all the hats: owner, floor manager, baker, waiter, accountant, lawyer, and more. Don’t get stuck in this trap—learn early on to delegate, delegate, delegate. Starting day one, consider who you can pay to help and if they’ll be worth it:
- Real estate agents: It may pay dividends in the long run to hire a professional to help you find the best location for the best price. Unless you really know what you’re doing (and then we might question why you’re opening a restaurant and not a real estate agency), consider hiring some professional help.
- Attorneys: There are permits to be had, licenses to be acquired, and regulations to be followed. Instead of sifting through mountains of paperwork and legal jargon, think about paying for some help.
- Accountants: From your taxes to your bookkeeping to your business strategy, accountants can help with it all. Don’t wait until tax season to finally get some financial help.
- Construction contractors: We all want to be Chip and Joanna Gaines, but this desire could lead your restaurant construction to drag on like your unfinished garage project. Let the pros do it right from the start.
- Marketers: The physical and digital marketing landscapes are tricky beasts to navigate. If you don’t have any marketing experience, consider hiring a freelancer or an agency to lend you a hand.
Pay attention as each professional performs their trade. Ask questions and nail down answers. Over time, you may learn enough about marketing to start doing it yourself, or you may decide you can handle a few simple bookkeeping tasks—just don’t try to do everything yourself. As the restaurant owner, you’ll have a multitude of tasks that only you can do, so don’t get bogged down doing someone else’s job.
7. Licensing and Paperwork
This is probably the least fun part—sorry! To avoid the government kicking down your doors like a CDC zombie outbreak, you’ll need to obtain all the necessary licenses and permits. Liquor license, building health permit, music license, resale permit—there’s a lot of paperwork!
Toast provides a handy-dandy checklist of all the licenses and permits you’ll need. Here’s a quick list for reference:
- Business License
- Employer Identification Number (EIN)
- Certificate of Occupancy
- Food Service License
- Sign Permit
- Music License
- Resale Permit
- Building Health Permit
- Employee Health Permit
- Seller’s Permit
- Liquor License
- Valet Parking Permit
- Dumpster Placement Permit
- Live Entertainment License
- Pool Table License
Depending on your state, you may have other required licenses and permits, too. Total, these licenses can cost over $1,000, and some you’ll have to renew annually. A $10 permit here and a $100 license there isn’t a huge deal, but these numbers can add up.
8. Technology Stack
Lastly, you’ll need to consider the cost of the technology you use. This stack is everything from your POS (Point of Sale) system to your bookkeeping program to your task-management software. Almost all tech solutions have a range of prices with limited software being cheap and more robust, feature-filled solutions being more expensive.
Build your tech stack to match your needs and your budget. Some software will require an annual subscription, while others (like some payment processors) will take a percentage of every transaction. When first starting, look for cheap (or free) software that meets your immediate needs. Yes, down the road, you may need to choose another solution that’ll scale with your business, but there’s no point buying a minivan right after you’ve had your first child.
- Sunrise is a free bookkeeping tool that’ll help you keep track of all your payments and transactions.
- Asana is a free task and project management tool that can help you and your team stay organized.
- Slack is a free team communication software that can help get you and your team off the group chats and into a messaging system that seamlessly works.
- G Suite gives you free cloud storage, calendars, video chat software (Hangouts), email, and more.
- SendGrid provides free email marketing services where you can send 40,000 emails for your first 30 days, and then you can send 100 emails per day forever.
Pinch pennies wherever you can in your tech stack—it’ll make a big difference on your bottom line.
Upkeep Expenses for Your Restaurant
Once the doors are open, you’ll also need to plan for how you’re going to keep them open. Some of your up-front startup costs will suffice, but you’ll need additional cash on hand to handle the upkeep.
1. Food, Beverages, and Ingredients
This continuous expense is one that you’ll need to keep a close eye on. You’ll need to watch inflation, supplier cost fluctuations, and demand to make sure you’re adequately stocked and correctly pricing your menu.
Money out, food in, meals out, money in—that’s the cash cycle for your restaurant. If you’re worried about breaking the cycle, make sure you get a business line of credit to help you cover any cash flow hiccups along the way—sometimes, you’ll need a little additional money in to help you get the meals out.
2. Ongoing Hiring and Training
Unless you magically solve the restaurant turnover problem, you’re going to need to account for ongoing hiring and training. With most restaurant employees lasting less than a year, you’ll be continually hiring and training new employees—it’s a never-ending process. Plus, you’ll need to keep current employees’ skills and discipline fresh, as well.
Investing money into training your staff can also help you avoid costly mistakes. A trained staff may be more expensive, but they’ll also work more efficiently and improve the customer experience.
3. Building and Equipment Maintenance
No matter how new or nice your equipment is, it’ll eventually break—it always does. Instead of waiting for your equipment to die so you can replace it, invest money to regularly clean and maintain your existing machines and devices. If disaster strikes and your necessary equipment kicks the bucket without much notice, look into getting equipment financing to help cover the immediate fixes.
Make sure to include building and upkeep costs in your monthly and annual budgets. An unexpected burnt-out oven can put a real dent in your financial forecasts—plan ahead!
4. Permits and Licensing Renewal
Remember all those fun permits and licenses we talked about before? Unfortunately, you’re going to need to renew most of these licenses at one point or another—and some you’ll need to renew annually. While it’ll only cost you a few hundred dollars here or there, keep these expenses in mind when doing your budgeting.
Marketing is far from a one-and-done deal. After your grand opening and as time goes on, you’ll secure (or hopefully you’ll secure) a favorite place in the hearts of a select few. You can count on these people to be your regulars. Not only will these individuals feed themselves on the regular at your restaurant, but they’ll also advocate for you and occasionally bring in some new business.
But unless you’re being featured as a top restaurant in town—or you have a gigantic fluorescent sign that everyone in a highly foot-trafficked location can see—you’re going to need to further market your restaurant. Digital ads, social media, email marketing, review sites, local news coverage—anything will help! Try new ideas, drop old ones, and continue experimenting to see what works best. But whatever you do, never stop marketing your business…ever.
6. Utility Costs
You can expect to spend around 5% of your total costs on utilities, and while that might seem tiny, it’s an expense you have to plan on month after month. Depending on the size of your restaurant, you could be paying anywhere from $5,000 to $20,000 annually. Here are the utilities you’ll need to budget for:
- Natural gas
These are the major ongoing expenses you can expect, but your unique restaurant will likely have unique expenses. Don’t forget to budget for those, too.
Start Turning Your Estimates Into Actual Numbers
So far, we’ve discussed all the expenses you can expect and have shared a few estimates of what those costs will be. Now it’s time for you to get your hands dirty and turn those projections into actual numbers.
Take each line item above, and do your very best to attach a real number to it. For your location and real estate, start looking at your A, B, and C options where you’d like to open a restaurant and start getting some prices. Start researching the type of food you’ll provide, what ingredients will be included, and how much it’ll cost to source those ingredients. Do some market research to find competitive salaries for restaurant workers in your area, and then decide how many employees you’ll have, how much you’ll pay them, and how often they’ll work.
No, you won’t find an exact figure for every startup expense, but this exercise should get you a lot closer to dialing in the total costs you can expect. And when you see that final number, don’t panic! Starting a restaurant is hard, and it costs money, but if you’re successful, you’ll start to see the ROI slowly but surely. On average, most restaurants only make a 6.2% profit margin, but it’s still a profit, and that profit will eventually lead to a sustainable business and paycheck.
Nail Your Financial Forecasts Costs to Nail Your Restaurant’s Start Up
Remember, cash flow (or lack of it) is one of the biggest reasons startups fail. That’s why getting your financial forecasts as close to perfect as possible is so important. Nail this element of your planning, and you’ll be paving the way to smooth(er) sailing.
However, regardless of how perfect you get your estimates, there’s always going to be surprises—that’s just part of being a small business owner. Plates will break, employees will quit, storms will close the town, Sharknado may just ruin everything, and all sorts of major and minor disasters will eventually hit. It’s a matter of when, not if—that’s why it’s so important to start setting up a financial cushion in advance.
Get a business line of credit, start putting away financial savings on day one, and always budget conservatively. These best practices will set you up for financial success, even if a zombie outbreak occurs shortly after you open your doors.
Building your restaurant empire is a numbers game, and you’re now equipped with the know-how you need to win. So, what are you waiting for? Take this guide and start putting pen to paper or finger to keyboard and make your restaurant-owning dream a reality.