How to Start a Restaurant? (Step by Step Guide)
Starting a restaurant is an important venture that requires careful planning, strategic decision-making, and extensive knowledge of this sector.
To help you in this endeavor, we partnered with our team of seasoned entrepreneurs, drawing on their decade-long experience, to deliver this comprehensive guide to starting a restaurant.
After thoroughly examining the legally binding state rules and regulations, Venture Smarter has compiled a review that serves as an invaluable resource to prospective restaurant owners.
Quick Summary
- To start a restaurant effectively, choose a niche, draft a business plan, secure funding, form a legal entity, register for taxes, and obtain the necessary licenses and permits.
- A comprehensive business plan and funding strategy are critical to the restaurant's initial setup and long-term success.
- Nearly 60% of new restaurants fail within the first year, underscoring the importance of thorough planning and market research.
- Selecting the right niche and location is crucial for a restaurant's success. I always emphasize to my clients that it should align with the owner's passion and market demand.
10 Steps to Start a Restaurant
The restaurant industry in the U.S. is enormous, with nearly 750,000 registered restaurants as of 2023, according to the National Restaurant Association [1].
To start your own restaurant, you must first understand the industry dynamics and choose a niche that suits you. Doing so will dictate the foundation of your business since it is the baseline for running a successful restaurant.
While the niche and business plan are the first steps to success in the restaurant industry, others follow. Let's look at all of them below.
1. Choose a Niche
Choosing an idea that inspires your entrepreneurial spirit and brainstorming are the first steps in opening a successful restaurant.
Do you want to create a farm-to-table pop-up restaurant, quick-service restaurant, or a vegan food truck? Maybe serving solely warm breakfast comfort food is your only goal.
When picking a restaurant concept, consider the service you want to offer, menu items, your target audience, and your unique brand.
2. Draft your Business Plan
Writing a restaurant business plan requires addressing questions about your target market, the sustainability of your plan, and potential challenges you might not have anticipated.
When done correctly, this method will assist you in clarifying the subsequent processes required for launching your restaurant, providing you with the best chance of success.
The following questions should be addressed as part of the business planning process for your new restaurant:
- What sort of eatery do you wish to operate? This is your "elevator pitch," which you should practice giving to friends, family, clients, lenders, investors, and everyone else.
- Who is your restaurant for? Your target market is the population that your restaurant is intended to serve.
- Who are your competitors? Knowing your market's competitors and how their restaurants compare to and contrast with yours can be useful.
- What city will your restaurant be in? It won't work out to have a pricey steakhouse in the center of a low-income community.
- How can people locate your restaurant? Will you use social media, paid advertising, word-of-mouth marketing, or other strategies to promote your company? We recommend using well-known review applications like Resy, OpenTable, and Yelp to make it easy for guests to find, rate, and reserve a table at your restaurant online.
- What resources will your restaurant require? Spend time immediately making a comprehensive inventory of all the one-time and ongoing restaurant costs your company will incur.
- How will your restaurant make money? A restaurant's ability to bring in money, pay its bills, and eventually turn a profit depends on its business plan.
- How soon will your restaurant start to make money? Using a revenue prediction, estimate how long it will take to break even, recover your initial investment, and operate a profitable business.
- What don't you want to give in on? What principles matter most to you personally and professionally? What are your business stand-points? In the future, this will support you in making important business decisions.
- What is your plan for staffing? You should begin your search for upstanding, skilled, and trustworthy individuals with your head chef, friends, and family. However, even after hiring the ideal crew, you'll still need to train them.
3. Obtain Restaurant Funding
Although entrepreneurs can finance their companies in several ways, Venture Smarter finds obtaining a business loan to be the most popular option.
The growth of the alternative lending sector has led to a variety of loan products tailored to small business owners, featuring different prices, payment plans, and application processes.
The following are some potential funding options for your initial operating costs:
- Your personal assets.
- Friends and family members who are willing to invest in your venture.
- Business or partners (one or more people who will take on ownership with you).
- A small business loan from a bank or credit union.
- Local, state, and federal government programs—the Small Business Administration and Small Business Development Centers are useful resources for small business owners.
4. Form a Legal Entity
Register your "doing business as" (DBA) name with the appropriate state office if you intend to use a distinctive name for your restaurant. Doing so will prevent another company from using your proposed name.
Once you've determined your DBA, you must choose a business entity type for your restaurant.
The business structure you select will dictate how you submit your state and federal business taxes, the responsibilities of different team members, and how you can be held liable if someone brings a lawsuit against your company.
Forming a legal business entity, such as a corporation or LLC shields you from being held personally liable if your restaurant is sued.
You can engage a top LLC formation service at a modest additional fee or start an LLC yourself while incurring minimal state LLC costs.
5. Register for Taxes
Before starting any business, you must register for several federal and state taxes. But first, one must apply for an EIN to register for taxes.
This number, also called your employer identification number (EIN) , aids the IRS in keeping track of your company for tax-related purposes.
You'll need this number to keep things running if you intend to retain employees (think wait staff, hosts and hostesses, cooking staff, and even dishwashers), especially if the business is set up as a corporation or partnership.
Visit the IRS website and submit an online application for an employer identification number.
"Every business planning to employ staff, even if it's only one employee, should apply for an Employer Identification Number (EIN) through the IRS website."
- Delina Yasmeh, J.D./Tax LL.M, Expert in Mergers & Acquisitions
State income tax (SIT) and state unemployment insurance tax (SUI) are two examples of taxes that must be deducted from employee paychecks [2].
In some states, SUI is also deducted from the worker's pay in addition to the usual requirement that the employer pay SUI [3].
By state, SUI rates differ. Additionally, SIT and federal income tax must be withheld from employees' paychecks [4].
6. Register Permits, Licenses, and Insurance
You must pay income and employment taxes for your business in most US states and territories in addition to federal business taxes.
Among the several licenses and permits a restaurant owner might need are the following:
- General Business License: Gives authorization for running the business at its location.
- Sales Tax License (Seller's Permit): The proprietor of the business must acquire a sales tax license in states or municipalities where food purchased from restaurants is subject to sales tax. Sales tax is applied to the customer's bill and is computed as a percentage of the item's price (for instance, in Pennsylvania, the tax is 6%). A restaurant must declare the sales tax it has gathered regularly and pay the appropriate state or local tax authorities.
- Food service license: This typically entails an inspection by county or city health department personnel to ensure the restaurant complies with rules regarding handling, storing, and preparing food. For the restaurant to obtain a food service license, employees might need to finish a food safety program and obtain a food handler permit.
- Food Handler Permit: A permit that formally authorizes an employee to have completed a food safety course approved by the state.
- Liquor License: This license or permit is needed for restaurants and bars to serve beer, wine, or liquor. The regulations set forth by state and local government entities affect the prices and types (classes) of liquor licenses offered.
- Music License: Restaurants must adhere to copyright laws before playing music in their establishments. Music license fees will undoubtedly apply to a restaurant that plays music from streaming subscription services, CDs, bands, and other sources.
Some states have extra financial responsibilities, such as compulsory unemployment insurance and workers' compensation.
Venture Smarter recommends checking out your official secretary of state's website to find out the business tax information unique to your state to learn more about registration, requirements, and filing requirements.
7. Set Up Accounting Documents
There is a ton of paperwork involved in running a restaurant.
Accounting records are required for tax preparation, business funding applications, internal income, business expenses, and profitability tracking.
A qualified accountant will help you provide all financial reporting documents, such as income statements.
8. Hire Qualified Staff
It's crucial to be aware of all the regulations employers must follow when you search for capable, trustworthy employees for your restaurant.
An HR consultant may assist in ensuring that you carry out the hiring process appropriately and adhere to regulations once you have hired employees and placed them on the payroll.
9. Invest in the Right Tools
Managing the accounting records by hand can quickly become daunting, especially with all the moving components required in a functioning restaurant.
Drawing from my experience as a business advisor, I've found that a crucial aspect of running a business is managing logistics, including employee scheduling, timesheets, payment processing, and payroll.
These elements are vital for smooth operation and financial management.
Fortunately, I have come across excellent restaurant accounting software solutions and other practical tools. These can help you remove the guesswork from your bookkeeping and automatically produce these accounting reports. A restaurant POS system can help with those issues.
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10. Market Your Restaurant
There are different ways to reach your prospective customers while marketing your business.
To get you started, Venture Smarter recommends these strategies:
- Share pictures of your food on social media, respond to client questions, and promote your brand's advantages.
- Create a professional website to demonstrate that your company is reputable and authentic.
- Get your company listed on review platforms, including OpenTable, Resy, and Yelp.
- Offer incentives like first-time buyer discounts or a customer referral scheme.
- Have a big opening that generates buzz about your restaurant and draws in the media.
FAQs
How Do I Plan a Small Restaurant?
You plan to open a small restaurant by choosing a concept and writing a business plan. A business plan contains a business description, summary, restaurant design, employees, and location.
How Long Does It Take to Open a Restaurant?
It takes months or more to open a restaurant. The period considers the time you'll spend setting up your business as a legal entity and obtaining funding, tax, license, permits, and insurance requirements.
How Much Does It Cost to Open a Restaurant?
It costs around $175,500 to open a small restaurant, $375,500 for a medium-sized one, and $750,500 for a large restaurant. Still, these figures vary depending on rental space, licensing costs, and food costs, among others.
References:
- https://restaurant.org/research-and-media/research/industry-statistics/national-statistics/
- https://oui.doleta.gov/unemploy/uitaxtopic.asp
- https://ballotpedia.org/State_unemployment_tax#
- https://www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes
