Table of Contents, How to Open a Restaurant in the US
- Initial Concept
- Restaurant Consultants
- Building Your Restaurant
- Setting Up Your Business
In an effort to provide our readers with the best content possible, we’ve created a comprehensive guide to opening a restaurant. We’ve tapped into our network of professionals and have interviewed top experts in the field. From successful chefs, restaurateurs, restaurant consultants, lease brokers, bankers, and multiple industry experts, we’ve compiled their advice to help guide you through opening the restaurant of your dreams.
So, let’s get started! Strap yourself in, there’s a lot of information to go over.
Disclaimer: you are reading the American version. If you’re from Canada, please click here for the Canadian version (there are differences pertaining to legal entities, and sources like lease brokers, financing options, etc)
If you have an idea for your restaurant concept, then great! That’s really the first step. If you do not, here are a few things you can do to draw out inspiration:
Travelling is really the most fun option to find great concept ideas. Take Famoso for example, Famoso is a Neapolitan style pizzeria conceived in 2005 from a European trip by Justin Lussier and his wife. They fell in love with this style of pizza when travelling in Naples and thought it would be a great concept to bring back to North America. Since their launch in 2005, Famoso has grown to over 20 corporate and franchise locations across Canada, solidifying their hunch.
Another great example is The Manufactory founded by Elisabeth Pruiett and Chad Robertson in 2002. Elisabeth and Chad took examples from their trips to create a bakery with old fashioned methods. With locations in San Francisco and LA, Chad and Elisabeth are living their dreams.
If you lack the creativity to develop a concept but excel in analytical operations, franchising might be the better route for you!
Franchises are proven systems but the hardest part of starting one is choosing the right brand that fits you. If you’re looking for inspiration, you can get a lot of ideas by visiting international franchise shows. Click here for a well rounded list.
Buying a Franchise
Why and when should someone buy a franchise? What are the costs and benefits? If it’s your first foray into the restaurant world and you are unsure of what to do or where to start, buying a franchise concept could really help you gain confidence and experience.
Carl’s Jr. is a great franchise option in the US. The company helps you through the buying process. Requirements to own a Carl’s Jr. include a million dollar net worth and liquid assets of $300,000. They also have options to be a multi-unit development if you own 3 or more restaurants.
If you are looking to purchase a franchise that has already been established check out Businesses For Sale. Similar to Craigslist, the site has listings for people trying to sell established franchise locations.
Costs - Startup
It costs around $2,000,000 to open Carl's Jr. depending on site selection (i.e: taking over an existing establishment with little to no renovations or developing a completely new site).
Costs can be broken down as follows:
Initial Franchise Fee: $15,000 - $35,000
Design, Construction, Architecture and Engineering Plans: $10,000
Site Improvements: $400,000
Soft Costs: $120,000
Opening Costs: $20,000
Additional Potential Costs: $250,000
*Pricing sourced from Franchise Direct
There is also a royalty fee of 4% and a marketing fee of 7% on revenues. The term of franchise agreement lasts an average of 20 years.
Benefits of franchising
When venturing down a new business, sometimes hand holding is a necessary step. Especially in an industry that has a notorious failure rate. If you are nervous about getting started, companies like Franchise Marketing System (FMS) can help you through the process of opening your first franchise business. They make sure buyers understand the work involved to make a location successful. Franchising is more than just signing on the dotted line.
Case Study: Zoup!
Zoup! is a perfect example of a franchise option that requires little to no prior experience. Colleen Hopkin’s from Westlake, Ohio traded in her insurance career for business ownership. Colleen fell in love with the Zoup! Brand and felt a connection, she explains that this connection and her lack of experience helped her understand the training and the Zoup! Brand better. Zoup! has strong training programs in place that allowed Colleen to take in-person training at head office, then work in local store to understand how a current operation runs. Before the grand opening, Colleen was joined by two corporate trainers that helped her through the busy opening weeks. While there is a lot of work involved in opening a franchise, most options have procedures in place to help you through the process.
Location is one of the most important decisions when setting up your franchise (or any restaurant for that matter). It is important to think of things like parking, visibility, the size you need and the right neighborhood for your concept. Here are 10 tips to choosing a location from The Balance Small Business. A franchise expert will be able to gauge these factors for you and help you choose the right location.
Finding a reliable contractor can be difficult and often, this can be on top of searching for plumbers, electricians, etc. Budgets are tight when opening a restaurant and a delay in construction and the building process can leave a heavy dent in your projected budget. When purchasing an established franchise brand like Zoup!, you won’t have the added stress of contractor timelines. You’ll have access to contractors who are proven to be reliable with prior experience building the same concept. This significantly reduces the risk of cost overruns and delays.
Some restaurants fail to make it past the idea phase due to lack of financing. Given the environment of the restaurant industry, most traditional banks or lenders view restaurants as high risk businesses. This is largely in part of high closure rates, competition and skyrocketing food & labor margins.But with franchising, you can leverage off your head office’s connections in finding the right financing options. In case of emergencies, you should have 6 months of operating costs on hand. In addition, with a franchise you’ll have expert advice on hand when you need it.
Franchising is a good idea for first time business owners as, in most cases, the training is thorough. Opening a business is overwhelming enough and restaurant operations don’t follow the standard 9 to 5 business model. As a restaurant owner, you’ll need to learn everything from accounting, hiring, purchasing food and marketing.
With a franchising team behind you, your success is often their success. This warrants a wealth and experience of knowledge from a team that can provide hands-on support and training for you and your employees.
Franchisees can also expect to spend over a month at an existing franchise location. Learning rules, regulations and procedures through a guide is one method of learning, but first hand experiences in a restaurant environment is invaluable. By physically being at a franchise location and being present, franchisees are able to learn the ins and outs of the business.
Food costs are one of the biggest expenses for restaurants but with the purchasing power that comes with a franchise, items can be less expensive. Franchisers buy in bulk and franchisees are able to take advantage of discounted rates on many different types of products.Franchisees usually share a preferred rate with its food supplier. This could mean anywhere from 1-10% off selected food costs!
Hand in hand with a strong training program is consistent support. One of the biggest benefits of purchasing a franchise is aligning yourself with an organization that is invested in your success. With an established franchise brand, most franchisees will have a tools and consistent support.
Cost and benefit summary.
Startup Costs: Whether you go down the franchise or independent owner route, start up costs are unavoidable. The benefit of purchasing a franchise is being able to reduce your risk by having access to other franchisees. You get to talk to other businesses and understand the viability of the concept before investing a single dollar.
Ongoing Costs: This is really subjective and depends on you. Is this your first restaurant or are you a seasoned industry veteran? Are you uncertain of what to do and need more guidance? Do you see a concept that you just want to be a part of?
If you’re set on buying into a concept, check out our article on 5 things to consider before buying a franchise.
Option 1: Get a bank loan
The bank is a good place to start. Though it may be a difficult sell, coming in with a good business plan and knowing your concept well will help get you off to the right start. Here are a few other great tips to prepare for your bank interview.
It is best to pay back the loan as soon as possible making the restaurant yours, however the great thing about a bank loan is the full control over running the business you get to keep. A line of credit from a bank is an option and cost depends on where the loan is from and how the market is doing. Lines of credit can run anywhere from 7% to 30% in cost.
There are two bank options: a medium term loan with set payback structure or a business line of credit. Ask your adviser what the rates for each option are and choose the option that suits you best.
Option 2: Find a Business Partner(s)
The best option and most common in the industry is to find a business partner. Many of the above restaurant examples started with an idea between partners, spouses, friends or co-workers. But be careful when choosing a partner as they must align with your idea or concept, for your partnership to work. Make sure you trust the person and that a fair contract is in place even if they are your friend or spouse. A contract will make sure you both get equal rights to the business and is best practice in any industry. Check out what to put in a partnership agreement.
Option 3: Find an Equity Partner(s)
An equity partner is a silent partner that invests in your idea. Like the partnership above, make sure you are writing a partnership agreement with your equity partner. Outline what the investment is and how payback will be handled. Some of the disadvantages of this avenue are profit sharing. Once your business takes off, it is common to have a share of profits with the equity partner for the future of the business or until you buy their shares out. The biggest advantage is the ability to own the decisions being made in your restaurant (make sure this is in your agreement). Find a partner who has full trust in you and your idea. This is the best way to make this type of partnership work.
Option 4: Borrow from Family or Friends
There are many places that will tell you to stay away from money lent to you by family and friends however when you want your dreams to come true, no avenue should be off limits. Make sure you have a strong contract in place with your borrower. It may seem odd at the time but you are putting your blood, sweat and tears into your dream. Leaving room for the chance of disputing with a friend or family member over it is a headache you don’t need. Set up a clear payback period and make sure you are outlining what happens if payments are missed, with an option to pay back the money early - in case your idea really takes off!
Option 5: Government Grants
The government may be a little more difficult then some of the avenues mentioned above however, they offer grants for Innovation and Technology. This means, if you think your idea may meet one of these options (i.e. a fully robotic restaurant that makes your food through 3D printing) then the grant is the way to go. Check out more information at U.S. Small Business Administration.
Option 6: Use Your Own Savings
Last but not least the best and most difficult option is to use your own savings. Poppy + Rose in Los Angeles opened in 2014, funding the restaurant by starting with a food truck. Diana Lamon opened a Southern Kitchen food truck that allowed her and her partner to test their concept while ensuring they had enough money to self-fund their dreams. While the dream came true for Poppy + Rose, the road was tough and funding their own project meant a lot of hard work with little wiggle room in the budget. Make sure when self-funding, or any funding for that matter, you have a minimum of 6 months of funds to keep the business running.
The value a consultant brings really depends on your experience and how comfortable you are in opening a restaurant. To provide some insight, we’ve contacted Fifteen Group, one of the largest consultants in North America.When it comes to consultants, they can guarantee 2 key factors:
- Cost savings
The type of knowledge that Fifteen Group has accumulated has come through experience. A common thing that they’ve noticed with first time restaurant owners? Underspending.
Most underspending happens when new restaurant owners are trying to cut costs on equipment by purchasing equipment that does not work in their environment. For example: refrigerators. Obviously, fridges are important - they house a large portion of a diner’s experience. But often, Fifteen Group found that underspending new owners tend to buy a cheaper fridge from Costco instead of an industrial fridge from a restaurant wholesale company that specializes in refrigerators for restaurants.
Often times, the cheaper fridge will break down after a couple months and they’ll have to buy the industrial fridge. So underspending in the start will lead to overspending later. Invest the money where it counts and you won’t come across unexpected costs later... so really the problem isn’t overspending; its short term underspending.
Restaurant consultants may eat up a large part of your budget so the decision to use one should depend on your confidence and comfort in the industry.
“One client of ours had done their menu and food cost on their own, and they assessed themselves to have a margin of 33%. When our consultants went in to complete menu engineering, they could tell something was off, and decided to do their own margin assessment. Results came back a few days later at 42%. Indeed, the restaurant had underestimated their food cost and overestimated their profit margin. After consultant intervention, they were able to bring the margin down 12% to a comfortable 30% margin, and the restaurant has enjoyed increased sales and profitability.” - Fifteen Group
For tips on how to save money when opening a restaurant, check out our article here.
Building your restaurant.
Location is one of the most important things to consider when planning to open a restaurant. Look for locations that are densely populated enough to get visual traffic or have a specific strategy on how to promote the location of your restaurant if you are in a less visible area. Check your local city zoning and population metrics to help you determine the district you want to open in. After finding the right community for your concept make sure the building will support your size and building requirements with as little change as possible to keep costs low. Keep in mind the amount of parking you require and how easy your restaurant is to access. Is it on a one way, does it only have one entrance, is it hard to get to from the opposite side of the road? These things can make a big difference in how many people visit your restaurant.
The information in your leasing contract will help ensure your business is set up for future success. Make sure you enroll the help of an attorney before signing a lease as there are a lot of hidden fees and requirements involved in leasing in the restaurant and small business industry.
Saving money on contractors
A contractor can keep a project on budget and on schedule or they can greatly affect the end date and cost you pay. Pick a contractor for their experience and not because they are a friend or family member. You can also negotiate for a discount or fixed price on a project to make sure you know what you are paying and that they have your best interest in mind. Its advisable not to pay for work in advance. Make sure you see the finished product before paying your final amount.
Setting up your restaurant.
There are three main business structures in the US: Sole proprietor, partnership and corporation.
Understanding the differences:
Note that your accountant should be able to help you choose the option that is best for you.
Sole Proprietor means you will be operating the business personally. All income or losses from the business will be filed as your income on your personal tax return (also pertains to partnerships, ask your accountant or lawyer if a partnership is right for you).
- If you incur losses in your initial years, you can use other income you earned against these losses
- You do not have the ability to defer any income earned in the business. All income earned will be taxed personally when you file your tax return.
Corporation means you are setting up a legal entity which will be taxed separately. All income earned will be taxed under the corporation, and losses will remain in the corporation.
- Income earned will be taxed at small business rate, which is lower than the personal tax rate. You can defer taxes on income left in the company for growth
- If you incur losses, those losses will be siloed in your corporation, i.e. you will not be able to use your personal income against these losses
- It’ll cost you roughly $1,200 to incorporate your business with a lawyer
- It’ll cost you more to maintain your company as you will have to pay to file annual reports and corporate tax returns
Note that a corporation is its own separate legal entity for liability purposes. You can have adequate operation insurance where this won’t be an issue, however it’s worth pointing out.
As a general rule of thumb, if you plan on making more than what you spend, you should take advantage of the lower corporate tax rate. This is very general, and it’s recommended that you talk to your accountant if you are unsure of what to do.
Other licenses and permits.
Liquor laws are per State and controlled by The Alcohol Beverage Control (ABC). Rules can also be set by the city. Please contact your lawyer if you are unsure of the licenses required to operate your business. Understand what liquor license you need and visit your state's government website to submit your application.
Finding the right accountant.
Not all Certified Public Accountant (CPA) are equal. There are so many different areas in accounting (audit, management accounting, consulting, large business tax, small business tax, etc.) it really depends on the accountants background and experience.
National firms can cost more than boutique firms.
National firms have the capacity to service larger companies. If you needed an audit and had multiple locations spread across USA, a small boutique firm would not have the resources to service your needs. Another advantage of a larger firm is the shared knowledge within the organization. A larger firm means a larger client base, and more competent accountants to service such clients. Somebody knows what they are doing, and the odds of you getting knowledgeable service is good.
What if you wanted great, knowledgeable service and do not want to pay large firm fees?
You can get the best of both worlds with a boutique firms. Here are some tips to know if the accountant you are talking to is a dud or an all-star.
The right experience matters.
First off, make sure the accountant you are talking with has been designated for at least 4 years. If the accountant you are talking to just got designated and is now a partner in his or her own one man firm - RUN. Getting your Certified Public Accountant (CPA) title is really an entry level milestone, and in the accounting world, you’re still very junior (aka you can work on my file but please have someone experienced review your work).
The right type of experience matters just as much. Someone that got designated at a non profit organization, or answering the phone at Internal Revenue Agency (IRS), won’t have the right experience to help you with structuring your small business. Make sure your accountant has worked in an accounting firm, in a tax advisory position, for several years (at least 4/5 would be ideal), before making the jump to starting his/her own firm.
Your All-Star accountant would have been a tax manager (not audit or anything else) at a CPA firm for at least five years, and ideally has gone through further tax training. It’s not always a necessity - however, it’s a good thing to use to filter out capabilities.
Finding the right bookkeeper.
Just like finding the right accountant, the right bookkeeper is equally important. The right bookkeeper will not only transact entries, they will also provide expertise on financial analysis, accounting and payroll software advice, etc.
You will be working with your bookkeeper more frequently than your accountant, so the right fit is very important. Find someone who is well versed in different types of software as this will greatly impact how efficient your books are being managed.
Though we may be biased, every bookkeeper should have an arsenal of great tools that will help them be better at their job. Here's our ideal bookkeeper tech stack:
- Cloud based accounting system (Xero / Quickbooks)
- Auto pulling bank transactions to accounting system
- Time attendance system that is connected to payroll
- Ability for you to see how your business is doing easily
It'll also be a bonus if he/she has a good restaurant clientele base. This means she's trusts and well versed in the complexity of hourly employee payroll!
This document is provided by Push Technologies Inc. ("Push Operations") for information purposes only. This is not an official or legal document and should not be taken as legal advice. Push Operations does not guarantee or warrant the accuracy or completeness of the information provided. For the most accurate and up-to-date information, please check with the proper governing authority.