Calculating Your Restaurant Startup Costs: Do You Have Enough Saved?

According to figures from the National Restaurant Association, the COVID-19 pandemic cost the U.S. restaurant industry $240 billion in lost sales in 2020. In addition, 110,000 eating and drinking establishments had gone out of business as of December 1, 2020, due to COVID-related restrictions. 

At the end of 2020, there were 2.5 million fewer jobs in U.S. restaurants than before the pandemic, and at one point in the year, an estimated 8 million restaurant workers had been furloughed. For restaurateurs and would-be restaurant owners, these numbers can mean only one thing: now is a great time to start a restaurant.

As counterintuitive as this may seem, it makes sense when you consider the pent-up demand for dining out. A survey by McKinsey found that 30% of consumers plan to spend more on in-person restaurant dining, travel, and out-of-home entertainment once COVID restrictions are relaxed.

Still, some habits consumers adopted during the pandemic will likely continue, such as digital menus and “ghost kitchens” that serve only pickup and delivery meals. In addition, cloud-based POS systems and other technologies will have an even more significant impact on the way restaurants operate in the future, in large part due to rising customer expectations.

All of this complicates the most critical aspect of getting a new eatery off the ground: calculating your restaurant startup costs. These tips will help you keep a close watch on your restaurant startup expenses and ensure that your new business is primed for success.

Restaurant Startup Costs Vary by Type of Establishment

A survey of independent restaurant owners conducted by RestaurantOwner.com found that the average cost of opening an independent restaurant is $375,000, which translates to $113 per square foot or $3,586 per seat. However, startup costs vary considerably depending on whether you’ll be constructing the building, remodeling a non-restaurant building, or remodeling a former restaurant:

New construction: $650,500 ($193 per square foot or $5,813 per seat)Remodeled non-restaurant: $425,500 ($146 per square foot or $5,072 per seat)Remodeled restaurant: $275,500 ($73 per square foot or $2,285 per seat)

The median sales-to-investment ratio also differs by type of building: 2 to 1 for a newly constructed restaurant, 2.1 to 1 for a remodeled non-restaurant, and 4.2 to 1 for a remodeled restaurant.

Will your new establishment be a full-service restaurant or a limited-service facility? Startup costs for the former average $475,500, according to the survey, while starting the latter type of restaurant costs only $225,500 on average. Opening a bar or tavern will set you back an average of $425,500, while getting a takeout, delivery, or catering operation off the ground costs an average of $150,500.

Breaking Down Restaurant Startup Costs by Expense Categories

According to sage.com, the two basic types of restaurant startup costs are one-time costs and recurring or ongoing costs:

One-time costs include such expenses as the security deposit for a leased building as well as the cost of durable goods that may eventually need to be replaced, including cooking equipment and dining room fixtures.Recurring or ongoing costs can be perceived as an investment you make in return for the profits generated by your food and drink sales.

These are the most common one-time costs incurred when starting a restaurant:

Security deposit for lease/down payment for a mortgage: Depending on the type, size, and location of the restaurant, this can be from $2,000 to $12,000 for the lease security deposit and at least 10% of the purchase price for a mortgage.Business licenses and permits: City licensing, liquor licenses, and health and safety compliance permits typically range from $100 to $300 each.Legal fees: Processing business applications, conducting a search of trade names, and researching public records to note ownership changes and past problems associated with the building are some of the legal costs of forming the business.Building improvements: As stated above, the cost of improvements will vary based on the type and condition of the building and the type of restaurant you’re planning, but a restaurant remodel usually costs between $250,000 and $350,000.Kitchen and cooking equipment: A small restaurant may need to spend about $50,000 for stoves, industrial mixers, commercial refrigerators and dishwashers, and other equipment for the kitchen. However, most full-service restaurants will need to purchase between $100,000 and $150,000 worth of kitchen equipment.Dining room fixtures: Tables, tableware, and other furniture for a new restaurant typically costs around $80,000, including decor and utensils.POS system: A modern cloud-based POS system helps a new restaurant get off the ground by reducing up-front hardware and software fees. The systems are able to scale with your business so you only pay for features you need now but can expand the system as your restaurant grows.Signage and opening-day advertising: Even the best cuisine in the world served by the most garrulous host needs marketing to bring in patrons. Staging your restaurant’s grand opening celebration could easily cost $20,000 to $30,000.Accessibility expenses: It’s important to welcome all people to your new business, including those whose disabilities require that they use ramps or other fixtures to dine comfortably. Making your establishment ADA-compliant could cost as much as $30,000 for a brand new facility, but doing so usually costs much less.

Here’s a rundown of a restaurant’s primary recurring or ongoing costs:

Lease or mortgage payments: For most restaurants, this payment will run from $2,000 to $12,000 per month, depending on size, location, and other factors.Employee salaries: Your restaurant manager will likely receive a salary between $28,000 and $55,000, while head chefs generally make $1,300 to $1,800 per week, and other kitchen staff range from $575 to $650 per week. Servers usually earn minimum wage plus tips.Food and beverage costs: This recurring expense varies widely based on the type of cuisine the restaurant serves, its customer volume, and whether the establishment will sell liquor. Utilities: A general estimate for gas, electricity, water, garbage removal, phone, and internet expenses is about $2,500 per month.Marketing/advertising: For some restaurants, marketing and advertising will be limited to neighborhood flyers and advertising on social media. Other eateries will want to take advantage of print and broadcast ads that promote the restaurant’s brand and communicate its unique message to customers.Insurance and permits: You’ll need to insure the building, your stock, and your equipment. You’ll also need liability insurance, and you’ll have to plan for license renewals, all of which can easily reach $10,000 per year.Miscellaneous expenses: There will always be unforeseeable costs that you’ll have to deal with when starting a restaurant. Work several what-if scenarios into your ongoing budget, such as, “What if one of our ovens fails or we need to recruit a new head chef?”

One of the best ways to prevent overspending when opening a new restaurant is by leveraging the experience of restaurant POS pros who can help you set up the system that will tie all your restaurant’s operations together without breaking the bank. Being well prepared will improve your eatery’s chances of having a smooth launch followed by years of happy diners.

In a period of change, talech has a number of POS solutions that can help your restaurant adjust operations smoothly. From reaching new audiences to engaging with your existing customers more often, we give you the tools to adapt quickly and with confidence.