If you love food and want to start your own small business, you’ve possibly done some research into how to open a restaurant. After all launching a restaurant is one of the most common routes to entrepreneurship in the United States. According to the National Restaurant Association, restaurant workers make up 10% of the United States workforce. What’s more, projected sales in the restaurant industry are projected to reach $863 billion in 2019.
But starting a restaurant means entering a highly competitive space. There are over 1 million restaurant locations in the United States, and 60% of restaurants fail within the first year. So how do you stand out, and build something that will last?
In this guide, we’ll show you how to open a restaurant and avoid the common mistakes that plague most new restaurateurs.
A step-by-step guide to starting a restaurant
Whatever background or level of experience you come from, nothing can totally prepare you for starting your first restaurant, or really starting any business. Even more, no matter how much you read or what research you do, there are certain things about being a restaurateur that you can truly only learn from experience. But the steps below can help you avoid some of the most common pitfalls.
Step 1. Pick a niche
There are a wide variety of eateries out there in the world, and it takes lots of different skills to keep them running smoothly.
As you look around your own little corner of the universe, what cuisine, service, or convenience do you see as missing? What foodie need is still left to be filled? Would your market be best served by opening a pizza shop, starting a food truck, or opening a cafe?
If this isn’t narrowing down your options well enough, consider some of these top trends.
Step 2. Write your business plan
In the same way that recipes give you a roadmap to create an excellent dish, your restaurant business plan is the recipe you’ll follow to make your business a success.
Ultimately, writing a business plan is about thinking through and answering questions about your future restaurant that force you to contemplate the market you serve, the viability of your overall plan, and challenges you might not have otherwise have thought of.
When done right, this process will help you refine define the next steps involved in opening your restaurant, giving you the highest possible shot at success.
Take a look at the 12 biggest questions you should be answering as part of the business planning process for your future restaurant:
- What kind of restaurant do you want to run? This is known as your “elevator pitch,” and it’s something you’ll repeat over and over and over to friends, family, customers, lenders, investors, and just about everyone else.
- Who is your restaurant for? This is called your target market—the group of people whom your restaurant is meant to serve.
- Who are your competitors? It helps to understand who you are competing against in your market and how their restaurants are similar and different than yours.
- Where will your restaurant be located? Having an expensive steak house in the middle of a low-income neighborhood probably won’t work out.
- What is your value proposition? What makes your restaurant different from the competition?
- How will customers find your restaurant? Will you market your business through word-of-mouth, paid advertising, social media, or another method? We recommend leveraging popular review apps like Yelp, OpenTable, and Resy to allow customers to find and review your restaurant or even book a reservation online.
- What resources will your restaurant need? Take the time now to list out all the one-time and recurring expenses you’re likely to incur as part of your cost of doing business—leaving no stone unturned.
- How will your restaurant make money? Your business model determines how your restaurant will generate revenue, cover expenses, and eventually make more money than it spends.
- How long will it take for your restaurant to turn a profit? Use a revenue forecast to determine how long it will take to recuperate your initial investment, break even, and run a profitable business.
- What are you not willing to compromise on? What values are most important to you, both personally and as a business? What are your non-negotiables? This will help you make critical business decisions down the road.
- What is your staffing plan? Your head chef, friends, and family will be the place to start looking for stand-up, smart, reliable people. But even when you find the right staff, you’ll have to train them.
- What’s your endgame? Are you building a restaurant that you hope to eventually sell, or are you working towards a long-term, sustainable business? Knowing where you want to end up, and when, will help to inform many of your business decisions along the way.
Step 3. Choose your restaurant’s name and legal structure
If you plan to use a unique name for your restaurant, go ahead and file your “doing business as” (DBA) name with your state’s agency, as this will keep you from losing your name idea to another business.
Once you have your DBA figured out, you’ll need to select a business entity type for your restaurant. The structure you choose will impact how you file state and federal business taxes, the roles of different team members, and how you can be held liable in the event that someone files a legal claim against your business.
Because of the long-term and potentially weighty impact of your chosen business structure, it’s a good idea to consult a business attorney to help you make this choice. Here are the most common entity types for restauranteurs:
Sole proprietorship
This is the most basic form of business structure, in which you alone own the company and are responsible for any liabilities associated with it.
If you plan to have a food truck, pop-up, or any very small operation and won’t be taking on fixed assets or hiring any employees, a sole proprietorship might be the perfect structure for you. And the best part is you don’t have to take any formal action to form a sole proprietorship.
If you’ll be operating under your own name, you can just jump right into business. And if you have a clever idea for a business name, your “doing business as” filing (from above) will be all you need.
Partnership
This structure defines a single business in which there are two or more individuals are owners.
There are a few different partnership structures you can choose from, including a general partnership, limited partnership, or a joint venture.
Most experienced entrepreneurs don’t recommend partnerships as a business structure because they don’t offer much protection from liability.
If you do go with a partnership, make sure you choose a business partner is someone you can work well with for the long haul, and put clear terms and expectations in writing from the beginning detailing the roles and responsibilities of each party.
C-Corporation
A C-corporation is a more complex business structure usually reserved for larger companies, or those in particularly high-liability industries looking for a little extra insulation.
Most attorneys tend to put restaurants in this high-liability category, so a C-corporation structure is most likely to be recommended. That said, keep in mind that establishing a C-corporation requires having a board of directors as well as officers, and has more complicated tax filing requirements.
So consult your attorney, but also be prepared that the process might be a bit complex.
S-Corporation
Structured very similarly to a regular C-corporation, S-Corporations stand out because they’re taxed at the individual business owner level, rather than being taxed corporately.
If you think you may need the structure of a corporation but don’t want to mess with complicated dividend filings, an S-Corp might be a great middle ground for you.
Limited Liability Company (LLC)
Offering the liability protections of a corporation along with the flexibility and tax simplicity of a sole proprietorship or partnership, the limited liability company (LLC) is a “best of both worlds” business structure that has grown significantly in popularity over recent years.
Entrepreneurs who opt for an LLC structure can choose between a single-officer LLC, a partnership LLC, or a limited-liability corporation.
Step 4. Get a tax identification number for your restaurant
Also known as your employer identification number (EIN for short), this number helps the IRS keep track of your business for tax purposes.
Think of it like a social security number for your business.
If you plan to retain employees (think wait staff, hosts and hostesses, cooking staff and even dishwashers)—and especially if your business is established as a corporation or partnership—you’ll need this number to keep things on the up and up.
To obtain an employer identification number, apply online at the IRS website.
Step 5. Register your restaurant for state and local taxes
In addition to federal business taxes, most U.S. states and territories will require you to pay income and employment taxes for your business. Certain states have additional fiscal requirements, like state-mandated workers’ compensation and unemployment insurance.
Registration, requirements, and filing procedures vary widely from state to state, so check out the business tax information specific to where you live.
Step 6. Secure permits, licenses, and insurance for your restaurant
The FDA updates the Food Code every four years, but the details of what is required, strongly encouraged, and just optional will vary from state to state, and even between counties.
You could read the 600+ pages published by the FDA, but we would recommend starting by finding your state’s food service code regulation department. Here you’ll find some of the highlights you should expect to encounter to get up to code in your area. This resource is useful, but not comprehensive, so be sure to check in with your local health department to make sure all of your bases are covered.
It’s a good idea to keep a master calendar with reminders for all of your renewal and payment due dates.
Food licenses
The most important part of remaining complaint is acquiring food and health code licenses. These licenses certify that you are safely handling, storing, and serving food. And don’t think that having a food cart or even a booth at a festival gets you out of this: they thought of those, too.
Included in this, but with its own special set of permits and rules will be serving alcohol. This covers not only safely serving alcohol but also includes training for dealing with customers that have perhaps overindulged. Read our complete guide for getting a liquor license in every state.
Health department permits
The health department has a lot to say about what is safe for the places you want to store, prepare, and serve your food. Your establishment will need to be inspected for operational safety, as well as edible safety.
Think maximum occupancy, fire hazards, ventilation, food surface types, sink placement, restroom regulations, and so on.
Restaurant insurance
Even with all the necessary licenses and permits, you still need to have some extra safety nets in place. You’ll need to look into the specific business insurance requirements for restaurants.
Requirements vary depending on where you live and how you’re funded, but at the very least, you’ll want to consider these:
- Property insurance
- General insurance
- Liquor liability
- Auto liability
- Workers compensation insurance
- Unemployment insurance
- Life insurance
- Fire insurance
- Loss of business
- Food contamination
Americans with Disabilities Act compliance
In 1992, the Department of Justice passed the Americans with Disabilities Act so that consumers and employees with disabilities could avoid discrimination from places of public accommodation.
The complete details of the ADA are pretty detailed, but you can use this U.S. Small Business Administration guide to understand what is expected.
When you get past all the angles, measurements, and legalese, it boils down to having accommodations in place so that people with disabilities can safely park, travel into your restaurant, order food, and eat at a table.