The restaurant industry is filled with a lot of people that want to get into it but don’t know where to start. The competition is robust already, so you need to consider your options carefully before starting your own restaurant. A restaurant must follow certain processes and procedures, in addition to adherence to legal requirements, in order to ensure longevity and smooth operations. Though restaurants operate within an incredibly competitive environment, approximately 60% of them fail within the first year in the United States.
An Overview of Opening a Restaurant
Starting a restaurant or any new business can be challenging no matter where your experience or your background lies, so prepare yourself accordingly. In addition, regardless of how much you read or research, there will always be certain things that can be learned only by experiencing it for yourself. Therefore, below are the steps to get a restaurant started in The United States.
1. Select a Niche
Many restaurants in the world offer many different foods, so it takes a variety of skills to keep the restaurants running smoothly. As you consider the world around you, what activities, dining options, or amenities feel lacking to you? Which market needs to be filled for food? Which businesses would thrive best if they opened pizza shops, food carts, or cafes?
2. Prepare a Restaurant Business Plan
Establishing a restaurant requires a solid business plan, similar to starting any new enterprise. Unfamiliar business owners may run into difficulties here since business plans must be written correctly to work. There are several sections to restaurant business plans. These sections provide information about everything from management to finances. Essentially, it is supposed to give you more details of your business and show potential investors how your business will operate. Providing the restaurant application with a restaurant business plan is the first step to securing business loans.
Below are the principles that must be included in the business plan.
❏ Executive Summary
In the business plan, the first section is usually the most complicated, but it’s better to write it at the end to make sure you cover everything you have already accomplished. Furthermore, it provides a summary of your Restaurant concept.
❏ Names of the stakeholders
A list of the owners, chefs, partners, and key team members of the restaurant.
❏ Menu and concept
In this section, you must describe your restaurant’s theme and menu in detail.
❏ Structure of Management and Ownership
Make sure you have a clear idea of the ownership and management structure. It’s helpful to visualize.
❏ Need for employees and staffing
Often we underestimate the staffing requirements. The more you write about how many employees you need, the more realistic view you will have of the number of people you need in order to run your business.
❏ Competitor analysis and marketing
In order to gain a solid understanding of your target market, it is crucial to research this demographic and its competition.
❏ Strategies for Advertising and Marketing
The marketing analysis you finished in the previous step can help you decide on the right marketing strategies.
❏ Summary of the Financial results
A successful restaurant application relies heavily on this section when it comes to securing funding.
3. Choose the name of the Restaurant
Customers will have their first impression of your establishment and your brand based on the name of your restaurant. The quality of your kitchen equipment will not rank a retailer’s name, but it will influence how well it consistently performs. Due to this, you ought to choose a restaurant name that is memorable and catchy. So when approaching the naming process for your restaurant, there are a few factors to keep in mind. Name your restaurant in a way that describes it, and remember that not all restaurants have the same names.
4. The Restaurant's legal structure
If your restaurant plans to have a name that is unique, file your DBA(doing business as) with your state’s regulatory agency, since this will protect your name idea from being taken by another business. Once you have determined your DBA, then you will need to choose the type of business entity on which your restaurant will operate. This structure will affect your processes for filing state and federal taxes, the roles of various members of your team and the liability exposure you may have if a third party files against your business.
Seeking legal advice
It is a good idea to consult an attorney before deciding what type of business structure to use because of its long-term impact on your business. The following are the most prevalent entity types for restauranteurs:
➔ A sole proprietorship
The most simple form of business structure is a sole proprietorship. It gives you sole ownership of the company as well as responsibilities for any liabilities that is attached to it. The sole proprietorship might be an ideal structure for a food truck, pop-up, or any very small business with very few fixed assets and no employees. You don’t need to take any formal legal action to sign up for a sole proprietorship.
➔ Creating a partnership
Two or more people manage a single business under this structure. It is possible to select from a general partnership, limited partnership, and joint venture as partnerships structures. Entrepreneurs recommend a partnership over a corporation because the latter offers less liability protection than the former. It is important to choose a business partner that you can work well with long term. You should also make sure that the deal is written from the sow, outlining the responsibilities of both parties.
➔ A C-Corporation
Restaurants usually fall into this high-liability category, and attorneys most often advise a C-Corp structure. C-Corp structures are generally used by larger organizations, as well as by companies in the particular high-risk industries that require a little additional protection.
Besides that, C-corporations impose much more difficult reporting requirements than sole proprietorships. You should discuss this with an attorney, but you should also be aware that it may end up being quite complex.
➔ As a S-Corporation
The difference between an S-Corporation and a regular C-Corporation is that the tax burden is split between its owners, rather than the company as a whole in a regular C-corporation. S-Corps offer a middle ground between a corporation and a partnership. It won’t have the burden of filing complicated dividends.
➔ LLC – Limited Liability Company
Limited liability companies have gained popularity in recent years because of their liability protections of corporations with the tax advantages and flexibility of sole proprietorships or partnerships. Entrepreneurs choosing LLC structures can choose between an LLC with a sole officer, an LLC with partners, or a limited-liability corporation.
5. The Restaurant's tax identification number(TIN)
In short, this number is also known as your employer identification number, which the IRS uses to track you for tax purposes. The business identifier is identical to a social security number. You need this number to accommodate long-term employees (think cooks, servers, cooks, dishwashers, and so on) and especially if your company is registered as a partnership or corporation. The IRS website has an application form for obtaining an employer identification number.
6. Tax registration for your Restaurant
You will be required to pay income and employment taxes along with federal business taxes for your business in most states and territories in the U.S. Additional fiscal requirements exist in some states, such as workers’ compensation and unemployment insurance mandated by the state. Essentially, business tax obligations and requirements vary widely across states, so you should consult the tax information specific to where you live.
Below are the four taxes that are necessary for your Restaurants.
➔ The Income Tax
Taxes collected from all businesses must be reported on income taxes filed and payments based on the amount received.
In order to find the proper tax form for your business, you need to understand whether it is a sole proprietorship, corporation, S-corporation, or a limited liability company.
➔ Self-Employment Tax
Individuals and small businesses pay self-employment taxes for social security and Medicare, which are similar to payroll taxes that are taken from wages.
➔ Estimated Tax
In addition to self-employed income taxes, all other taxes are deemed pay as you go taxes. To make payments on these taxes, you will need to submit quarterly documents estimating what you owe in these categories.
➔ Employment Taxes
As a restaurant owner, you may be expected to employ employees who will have additional tax obligations, such as social security, Medicare, income taxes, and unemployment tax.
7. Restaurant License and Insurance
If you want to open a new restaurant, you will need to get several permits and licenses from federal, state, and local governments. In order to avoid missing steps, it is important to seek the assistance of a lawyer when applying for permits and licenses for restaurants. The following licenses are among the most important:
❏ License for a business
All restaurants in the US are required to have a business license. You’ll need a business license in some states, but the types of license, the cost, and how often you need to renew depends on your state.
❏ License for foodservice
To ensure compliance, obtaining food and health codes licenses is a major element of remaining compliant. A license from either of these organizations demonstrates you’re properly handling, storing, and serving food. An inspection will be required to prove that your new restaurant complies with food safety regulations in order to acquire a food service license.
❏ License for Music
You would need a Music License if you intend to open a restaurant where music would be played to prevent copyright violations because of the music. The United States imposes a $50,000 fine on music producers for playing copyright music on their music without a license. This includes live performances, music from CDs, and music accessed via streaming services.
The Restaurant Insurance
You still need some additional safety measures in place even with all of the necessary permits and licenses. For specific insurance requirements for restaurants, you will need to look into them. There are different requirements depending on how you are funded and where you live, however it is important to consider these at the very least:
- A general insurance policy
- Liability for auto insurance
- Insurance for workers compensation
- Insurance for the unemployed
- Insurance for life
- Fire insurance policy
- Resulting in loss of business
- Contamination of food
8. Establishing Accounting Documents
Managing a restaurant involves a mountain of paperwork. It is necessary to keep accurate records in order to apply for financing, prepare tax returns, and to figure out your revenue, expenses, and profitability internally.
The following three basic accounting documents should be maintained regularly by every restaurant owner:
➔ The Balance Sheet
Essentially, the balance sheet is an overview of the restaurant’s financial situation at a given point in time. You can use it to calculate the net worth of your business by listing the assets, liabilities, and equity at a particular time. Balanced sheets are the foundational tenet of accounting; assets must equal liabilities plus equity.
➔ The Income Statement
Occasionally known as a profit and loss statement, the income statement provides a record of the revenue and expenses incurred by your business during a specific period, which allows you to determine the net profit for the year. The accuracy of your income statement is crucial to measuring profitability.
➔ The Cash Flow Statement
A restaurant’s financial health can be made or broken based on the amount of cash available to cover expenses. As a matter of fact, the cash flow issue is so crucial that and accounting document is dedicated to tracking the cash flow. During a specific period, such as a month or a quarter, the cash flow statement shows the inflow of revenue and outflow of expenses and related factors resulting from all restaurant activities. Paying customers will be your major source of income, while your outflow will come from purchasing ingredients, paying workers, paying rent and other overhead expenses.
Bookkeeping or Accounting Services
It is suggested that you seek the assistance of a certified public accountant if you find these accounting protocols a bit overwhelming. Choose someone who can handle more financial areas where you lack experience. Choose someone whose personality syncs with yours, and who is available for any questions you may have. Knowing your local laws when it comes to the minimum wage, tips, and overtime for your staff will help you avoid problems in the restaurant industry by understanding your local laws.
9. Investment in Your Restaurant's Tools
Handling all the accounting documents above by hand can be overwhelming when there are so many moving parts in a restaurant. In addition, data entry, time sheets, payment processing, payroll processing, and all the other tasks involved in running a restaurant.
Restaurant accounting software solutions make bookkeeping a breeze and provide useful tools such as automatic document generation.
System for Restaurant Point of Sales
Many entrepreneurs overlook the importance of a restaurant POS system when they’re struggling to open their restaurant. Restaurant POS systems are computerized systems that include hardware and software that help you manage and process payments, processing invoices, managing customer orders, tracking tips, and much more. In addition to producing useful reports, most POS systems allow you to manage your business more efficiently.
Below is a collection of POS systems that are appropriate for restaurants of different kinds:
- For New Restaurants, Square for Restaurants is the best Point of Sale system available.
- For quick-service restaurants, Clover POS is the best POS system.
- A small-medium restaurant’s best choice of POS system is Lightspeed Restaurant POS.
- The best POS system for full-service restaurants is TouchBistro POS.
- For Android, the best point of sale system is Toast POS.
- This POS software is the best free POS for restaurants.
10. Funds Obtained to Opened the Restaurant
Your next step is to obtain funding to open your new restaurant. Many of us don’t have enough money to open a restaurant without financial assistance, and people usually don’t have the capital on hand to do so. Your chances of achieving restaurant ownership will depend on securing external funding.
Investing in the next year
Begin by calculating the startup expenses as well as the ongoing costs of running the restaurant. Build a budget with this information to gauge how much it will cost you to run your restaurant for the next year. Once you have a good idea of the total costs for your restaurant, you can compare the amount of capital you have to determine the amount of funding you will need. Be sure to include licenses, equipment, building repairs, and employee salaries in your budget.
You can finance your new restaurant in the following ways :
Typical Commercial Loan
An individual acquires these types of loan directly through the bank. Generally, a traditional commercial loan will provide you with lower interest rates and more capital. Collateral is required, and a credit score will probably be the determining factor.
Line of Credit for Businesses
Getting approved for a credit card would be similar to getting authorized for a maximum credit amount. The interest accrues as you use the money, even though the lending standards are generally higher than with other types of loans, and lenders may not be able to lend you as much money as they can with other loans.
A loan for a small business
Small business loans are available directly from banks, but many also partner with the U.S. Small Business Administration (SBA). SBA guidelines prevent both lenders and entrepreneurs from losing out, so you can receive a small business loan even with borderline credit. The collateral is necessary, and the loan may need a considerable amount of time to be approved.
11. Design Your Menu
Getting your menu in shape is the next creative step after analysing the opening of your restaurant. You should choose carefully which menu items to feature, but remember that food lovers enjoy a good culinary experience. Depending on the menu you plan to serve, you will be able to determine the kinds of equipment required, the type of staff you need, and the type of customers to attract.
The supplies you will require will depend on whether you envision a dessert menu with delicate pastries. You will need professional dough mixers, proofers, and chefs who know how to handle pizza dough if pizza is your jam. A perfect menu will generally have something for everyone. It is more beneficial to have a mix of dishes that are basic and this can be ordered by anyone, and also dishes that are popular among your competitors, and then dishes that are unique to your concept and restaurant.
12. Location for your Restaurant
It is now time to decide the location for your Restaurant after deciding the menu. The following factors are among the most crucial to consider when choosing a location for a new restaurant:
A visible and accessible environment
Locate your display in an area with good visibility that receives considerable foot and vehicle traffic. Make sure parking is available and there is easy access for cars and pedestrians.
The Labor Costs
You will need to pay a higher wage in areas with higher living costs if you want to attract good employees.
Competition in the local area
By examining the competing restaurants in your area, you can learn a lot. To succeed in your concept, you need to pick a location where previous restaurants have succeeded, but not in a neighborhood where there are too many restaurants that directly compete with yours.
13. Restaurant dining room design
After deciding the location now comes choosing a space that can be purchased. If you plan on expanding or changing your business when you are just starting out, this would give you more flexibility. Your new restaurant layout consists of two main components: the front-of-house space and the back-of-house space. The unique needs of each area are specific. If you need assistance, be sure to consult an industry professional to help you design a layout suited to your specific requirements.
The following are factors to consider when designing your dining room layout:
- Numbers of seats available
- Furniture for the Dining Room
- Aesthetics and décor are important
- Cleaning and dishwashing services should be available
- Storage facilities for dry and cold climates
- Preparation of Food and Meal Cooking
- Customer service must be provided
14. Promoting your restaurants
The last step is to promote your restaurant. A range of great ideas are available to help market your restaurant to your favourite customers. Following are a few tips to get you started:
- Social media marketing offers you the opportunity to share photos of your dishes and answer customer inquiries, all while communicating the benefits of your brand.
- Make sure your business is presented as a credible and trustworthy one by making a professional looking website.
- Make your business visible on popular review websites.
- Promos like discount coupons for first-time customers or a customer referral program might be enticing to prospects.
Your restaurant should have an exciting grand opening that draws media attention to the place.
Frequently Asked Questions - FAQs
Starting a restaurant requires an average investment of $275,000 or $3,046 for 1,000 seats for a leased building. If you would like to own the building, you would need to invest $425,000—or $3,734 per seat. During the restaurant startup process, there will be many expenses that you will need to take into account.
Restaurants often fail to progress because of inexperience, even though there are no inherent barriers in this industry.
- A poor understanding of business
- Lack of management
Restaurant failures are mostly explained by an insufficient financial plan among first-time proprietors.
Yes, the restaurant business is profitable, but it has low profit margins. A restaurant’s profitability is determined by several variables, including the type and size of the restaurant, as well as its economics. A new restaurant usually has to operate for two years before starting to make any kind of profit.
You can open an over-the-counter take out restaurant in 3–4 weeks, assuming you have all the permits in order. The time frame involved with opening a luxury sit down restaurant is 2–6 months.
Salaries for restaurant owners can be found in the range of $24,000-$155,000. This is a significant range. Restaurant location, size, menu offerings, and amenities are all considered when projecting salaries.