Starting a restaurant is an exciting type of business that many individuals dream of. While the concept of serving delicious food may sound perfect for your skills and interests, it’s important to recognize that launching a successful restaurant requires more than having great culinary skills.

There are countless details to consider and financial concerns, but our guide will help you through the process by providing an overview of the business, steps to get started, and answers to common questions.

Business Overview

At its core, the restaurant business involves creating a space where diners can enjoy a delicious meal and have a memorable dining experience. There is a huge variety of concepts in the restaurant industry, and restaurants specialize in everything from fast food and quick service to organic dishes to full-service and fine dining. Some facilities are designed to offer a relaxing sit-down experience, while others are more casual and may offer limited seating with no waitress or waiter service.

Industry Summary

The restaurant industry is highly competitive, with 749,000 restaurants in the US. In 2022, restaurants generated $898 billion in sales, and in 2023, are expected to generate close to $1 trillion in revenue. This means that while there’s plenty of opportunity for aspiring restaurateurs, there’s also fierce competition.

While the industry has high failure rates, the growth potential makes restaurants an attractive small business opportunity. Most restaurants are small operations, with fewer than 50 employees, that are open year-round and generate $500k to $1M in annual sales. To succeed in the restaurant industry, you need to offer something unique that sets you apart from the competition, whether it’s your menu, your atmosphere, or your prices. Aside from this, good management, excellent customer service, marketing, and financial stability are all must-haves for starting a successful restaurant.

Steps To Start A Restaurant

Step 1: Research the Market

If you’re considering starting a restaurant, one of the first steps to take is assessing the market to determine if there is an opportunity for another establishment. Conducting this research can help you gauge the potential success of your business and uncover any gaps or niches you can fill.

To better understand the potential target market for your restaurant, analyze the demographics of your area, such as age, income levels, and cultural diversity. For instance, a fast-casual restaurant may market to busy professionals, families, and travelers on the go who are looking for a decent, affordable meal. A fine dining establishment will have a very different market, focusing on diners who want to take their time and savor a meal and who are looking for the very finest quality food. Likewise, menu options such as steak, vegetarian, or focusing on ethnic foods will determine the ideal market for your restaurant. When determining a restaurant’s target market, think about the brand that you’re establishing, the menu selections, the price point, and the atmosphere.

Next, research the existing restaurants in your area and look at their strengths, weaknesses, and unique selling points. By understanding what customers already have access to, you can identify gaps or potential opportunities where your concept can differentiate itself. For instance, if there are already several Italian restaurants, consider specializing in a different cuisine or offering unique menu items not readily available.

Step 2: Write a Business Plan

Writing a business plan for a restaurant is the next step after you’ve gauged the potential for your new restaurant. The restaurant industry is one of the most competitive sectors in the business world, and with numerous establishments opening every day, it can be challenging to stand out from the crowd. Many entrepreneurs think that they can wing it, but the reality is that a business plan is an essential part of launching a successful restaurant.

A business plan is essentially a detailed action plan that outlines the steps you need to take to launch your restaurant. It includes everything from deciding on your restaurant concept and identifying your target market to choosing a location and hiring staff. This roadmap helps keep your startup process organized and on track, making it easier to execute tasks efficiently and effectively.

Without a clear plan, you may find yourself overwhelmed by the many responsibilities of starting a restaurant. But with a well thought out plan, you can break down the process into manageable steps and ensure that nothing falls through the cracks.

A business plan also helps with financial planning by outlining startup costs, projected revenue, and expenses. By forecasting revenue, expenses, and expected profitability, you can evaluate whether your business has the potential to generate enough income to cover costs and make a profit. This assessment is essential for both yourself and potential investors or lenders.

Related: How to write a restaurant business plan

Step 3: Secure Funding

Once you’ve determined that there’s a market for your restaurant and have completed your business plan, the next step is to figure out how to fund your new venture. Given the high failure rate of restaurants, funding a new restaurant can be very difficult. Here’s the common types of funding to consider:

Self-funding: The first source of funding to consider is your personal savings. If personal savings aren’t enough to cover the startup costs, external funding sources may be necessary.

Bank loans: Banks are a traditional source of funding for restaurants. When applying for a bank loan, lenders typically require a borrower to invest at least 15% of their personal funds towards the total cost of the project, have a good credit score, and have sufficient collateral. If the bank considers the loan too risky, they may choose to use a Small Business Administration (SBA) loan guarantee to help secure the loan. This can make it easier for you to get approval and favorable loan terms.

Friends and family: Friends and family can also be a source of funding. They may be willing to invest in your restaurant because they believe in your vision and want to support you. However, borrowing from friends and family can strain relationships, especially if the business doesn’t do well. To avoid misunderstandings and protect relationships, it’s crucial to put all agreements in writing, clearly defining the terms of the loan or investment.

Microloans: If your funding needs are relatively low or you’re unable to secure credit through a bank, microloans could be an option. These are small loans, usually less than $50,000, offered by local economic development organizations. Some microloan providers also offer business training and mentoring programs, which can be invaluable for new restaurant owners.

Investors: Investors can be another source of funding for a restaurant startup. This type of funding typically involves selling a percentage of ownership in the business to the investor. Investors may bring not only capital but also expertise and industry connections to the table.

Related: Finding the money to start a business

Step 4: Register the Business

Starting a restaurant can be exciting, but it’s important to do it right from the start. Here are some suggestions for properly registering your restaurant business and making it legal.

Choose your business structure: There are four main types of business structures: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). It’s important to research and decide on the structure that best suits your needs.

• Sole proprietorship: This is the simplest and most common type of structure for small businesses. It offers the advantage of easy startup and the lowest cost, but it does not provide liability protection for the owner.
• General partnership: This structure is similar to a sole proprietorship but involves multiple owners. The partners share the profits and losses, but they are jointly liable for any debts or legal issues.
• Corporation: This structure is more complex and involves creating a separate legal entity for the business. It offers personal liability protection for the owners, but it can be more expensive and involves more paperwork.
• LLC: The Limited Liability Company combines the advantages of a corporation and a sole proprietorship or partnership. It provides personal liability protection for the owners, but it is simpler and less costly to set up than a corporation.

Related: Comparison of business structures

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

Related: Tips and ideas for naming a restaurant

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain restaurant permits and licenses: Operating a restaurant potentially involves a lot of regulations and permits. You will need to research federal, state, and local requirements to determine what permits and licenses you need. This may include:

• Health Department permits: Required for any business that handles food.
• Food service license: Food safety training and certification allows you to prepare and sell food.
• Liquor license: Necessary if you plan to serve alcohol, with varying types depending on whether you serve beer and wine or spirits.
• Building and zoning permits: If you’re building or remodeling your restaurant.
• Fire department permits: Required in some locations, especially if you’re going to have a certain number of people in your establishment.
• Sign permit: If you plan to put up a sign for your restaurant.
• Live entertainment license: If you’ll have live performances.
• Outdoor seating permit: If you’re offering dining outside.

Obtain business licenses and permits: In addition to registering the restaurant, there are a number of general business registrations as well. These could include a business license, seller’s permit, and Employer Identification Number (EIN).

Related: State guides for general business licensing

Step 5: Acquire & Begin Setting Up Operations

After all of the brainstorming and planning, it’s time to turn your restaurant dreams into reality.

The first task in setting up your restaurant operations is acquiring the right location. Next, assess the physical space and plan the layout and design of your restaurant space to optimize workflow, seating capacity, and customer experience. Consider kitchen design, dining area layout, and interior decor to create an inviting atmosphere. Optimize seating arrangements to ensure maximum capacity and efficient table turnover times, and ensure easy bar access to optimize beverage sales. If remodeling or renovation is required, ensure compliance with building codes, health regulations, and safety standards during the construction process.

As the building is coming together, it’s time to start sourcing suppliers. One of the most exciting parts of setting up your restaurant operations is developing your menu. This is where your concept comes to life through the dishes you offer. As you create your menu, lean on your suppliers as they can help you analyze the expenses involved in preparing each recipe, ensuring that you have an accurate understanding of the overall cost of your menu items. Collaborating with suppliers allows you to make informed decisions about pricing, portion sizes, and menu profitability right from the start.

Step 6: Hire Staff

As a restaurant owner preparing to hire employees, there are several responsibilities you should be aware of.

One of the first steps is obtaining an Employer Identification Number (EIN) from the IRS. This is a nine-digit number used for tax reporting purposes and is a requirement for most businesses that have employees.

Before you hire anyone, you must also verify their employment eligibility. In the U.S., this typically involves completing Form I-9, Employment Eligibility Verification, which requires you to examine each employee’s identification documents to confirm they’re legally allowed to work in the country.

State hiring requirements vary widely, so be sure to familiarize yourself with your state’s specific laws and regulations. These could relate to minimum wage laws, overtime rules, meal and rest breaks, anti-discrimination laws, etc. Most states also require businesses to have workers’ compensation insurance, even if they only have one employee. This type of insurance provides benefits to employees who get injured or become ill as a result of their job.

Understanding labor laws is another aspect of being a new employer. Labor laws include wage and hour regulations, anti-discrimination protections, and workplace safety standards.

Related: State guides for hiring your first employee

Step 7: Prepare to Open

Starting a restaurant is a complex process with many moving parts. We’ve gone over the major steps, but there are still several critical tasks to complete before opening your doors. Every business will have different requirements, but here are some of the common things to look at:

Business insurance: Business insurance can cover a range of potential issues, from property damage and theft to liability in case of customer injury. Types of insurance to consider include general liability, property, workers’ compensation, and liquor liability if you serve alcohol.

Related: Types of insurance a restaurant may need

Setting up bookkeeping: Implementing an accounting system to track your daily transactions, manage taxes, and prepare financial statements will help you make informed business decisions and is essential for the long-term financial health of your restaurant.

Opening a business bank account: A separate bank account for your business is important for keeping personal and business finances distinct. It simplifies bookkeeping, makes tax filing easier, and could potentially protect personal assets in case of legal issues.

Purchasing management or point of sale software: Industry-specific software, such as Toast POS, Square for Restaurants, or Upserve, can streamline your operations. These systems can manage everything from sales transactions and inventory to table reservations and customer loyalty programs.

Creating a marketing strategy: A well-crafted marketing strategy is key to letting potential customers know about your new business. This includes creating a unique logo, setting up a user-friendly website, and leveraging social media platforms. Regularly update your platforms with engaging content, details about special offers, events, or new menu items.

Preparing for the grand opening: This involves finalizing every detail from staffing and menu to decor and music. A soft opening, where you invite a select group of people to try out your restaurant before the official opening, can be a great way to gather feedback and make necessary adjustments.