If you have an entrepreneurial spirit and a passion for hospitality, opening a restaurant could be your ideal business venture. One of the first questions that probably comes to mind when considering whether you can turn your restaurant business dream into a reality is: how much does it cost to build a restaurant?
Understanding the factors that determine average restaurant startup costs can help you shape a strategic business plan and increase the likelihood of offering your customers delicious dining experiences for many years to come. In this guide, we’ll review some of the essential costs that aspiring independent restaurant owners should include in their budget.
How much does it cost to build a restaurant?
The answer to this question isn’t straightforward and instead varies based on a number of factors, such as the type of restaurant you want to open, where you want to operate, and the square footage of your space.
You may already know that the restaurant industry typically operates on small profit margins. One of the best ways to ensure your restaurant will eventually make money is to thoughtfully map out your startup costs and ongoing expenses. Without a budget, you run the risk of overspending and cutting into your profits.
This groundwork will also serve you well when applying for business funding or financial assistance for your restaurant. Most lenders will want to see your plan before approving you for a business loan.
Let’s take a closer look at some of the one-time costs you’ll need to manage before even opening your doors, as well as the recurring expenses you can expect once you’re up and running. Understanding each aspect of typical restaurant opening costs can help you make smart decisions about your total budget and strategize for success.
When planning your initial budget, there are a number of one-time costs you need to cover before you’ll be ready to serve your first diners.
Licenses and permits
Certain licenses and permits are required for you to legally operate your restaurant. The specific licenses and permits you need vary from province to province (and sometimes city to city) and also depend on the services your restaurant offers.
As a new restaurant owner, you likely need a business license, a food service license, and––if you plan to serve alcoholic beverages––a liquor license as a starting point. Some other paperwork may include food handler’s permits for anyone in your restaurant who works with food, a patio permit, and a live entertainment license.
Some permits can take months to be approved, so it’s best to determine what you need for your restaurant and start the application processes as early as possible. Without the necessary permits in place, your opening could be delayed. If you operate without them, you risk having your restaurant shut down. Many permit and licence fees only need to be paid once, but others have annual fees that should be factored into your recurring business costs.
Opening a new restaurant means making a significant investment in kitchen equipment and appliances. How much it costs to build a restaurant kitchen depends on the square footage of your restaurant and your planned menu.
You’ll likely need to set aside funds for major equipment like ovens, stoves, dishwashers, refrigerators, and freezers––as well as cooking supplies like pots and pans, in addition to bar equipment like cocktail shakers and ice machines. It’s important to plan out your menu and talk with your staff to determine the tools they require to prepare everything you want to serve.
To save on upfront costs, you may want to lease your equipment rather than purchasing it. If you prefer to buy your kitchen equipment, you can also consider acquiring used items that are still in good condition. You can always upgrade to new appliances once your restaurant is open and you have more reliable cash flow. It’s often best to buy the minimum amount of supplies your restaurant kitchen needs to be functional. You can always invest in less essential specialty equipment and appliances down the road.
Renovations and decor
Your restaurant space will likely need to undergo renovations before you’re ready to welcome diners. As you might expect, the cost of renovations varies dramatically based on the square footage of your space and if it’s already built out for use as a restaurant. Transforming a space into a restaurant and kitchen from scratch will cost significantly more than if the space is already designed as a restaurant. You also need to purchase decor to create an ambiance in line with your restaurant concept.
It can be easy to overspend on the hundreds of basic decor items you need to run a restaurant, ranging from tableware to furniture and artwork, all of which are functional but also contribute to your restaurant’s brand identity and aesthetic. Think about the price of an average meal at your restaurant and use it to guide your renovation and decor budget. As with kitchen equipment, it’s often wise to skip some “nice to have” features in the early days of your business and then add them later once you establish some cash flow. Invest in one or two statement pieces and purchase second hand items where possible to minimize costs.
It’s likely that some of the work needed to get your restaurant off the ground will be beyond the scope of your personal expertise. You may want to hire a restaurant consultant to help you create your business plan, as well as professionals like architects, designers, and contractors to help renovate your space.
It’s also often advisable to hire a lawyer to review some of the paperwork involved in forming your business and licensing your restaurant, including the lease you sign to rent your space.
Properly budgeting to build a restaurant also means considering the ongoing costs you need to cover in order to run your restaurant through its first month and beyond.
Your future restaurant location is one of the most significant choices you make for your business. In most cases, spending a little more to secure the right location will give you a better return on your investment in the long run. Your target market and restaurant concept can help guide you to select the best location for your business.
Whether you pay a monthly lease on a commercial rental or a mortgage payment on a building you own, how much your space costs per month will depend on where your restaurant is located and how much square footage you have. A site with plenty of foot traffic is a priority for many restaurant business owners who want their new venue to be easy for diners to find.
You also need to consider whether you want a space set up for a restaurant (which is typically the most cost-effective option), to convert a general commercial space into a restaurant, or to invest in a completely new construction. New independent restaurant owners working with a limited budget may want to begin by launching a pop-up, a food truck, or a ghost kitchen (a restaurant that operates on a delivery-only model with no onsite dining). These models require minimal space and staff, making them an economical way to get your restaurant concept rolling before investing in a full-service venture.
While it’s no surprise that you need to pay for gas, electricity, and water to keep the lights on and your kitchen running smoothly, the monthly cost of these utilities can often catch new restaurant business owners off guard. The budget you need to set aside for utilities varies based on the square footage of your space. The bigger your restaurant, the more you should plan to pay each month.
If you’re leasing your restaurant space, it’s important to find out which (if any) utilities are included in your rent. If utilities are not included, see if you can find out what the previous tenants paid to get a rough estimate of what you can expect. It’s worth taking time to brainstorm potential ways to reduce your monthly utility bills in order to save on costs in the long run. For example, it’s possible to install sensors that will turn equipment, like walk-in coolers, off or down when they’re not in use.
Restaurant technology is key to ensuring your front-of-house and back-of-house operations run smoothly. Not only can the right tools save you time by keeping track of orders and inventory, but they can help create a seamless diner experience and give you access to insights about your customers, which can ultimately increase your revenue. A point of sale (POS) system that manages your payment, receipts, inventory and other key data is an essential starting point. Other restaurant technology you may also want to consider includes employee scheduling software, reservation tools and an online ordering system, a website, as well as equipment like payment terminals and iPads for your POS.
Depending on your staffing needs, labour can often be one of the highest costs to manage when building a restaurant. A small takeout restaurant requires significantly less staff than a large, fine dining venue. Outline how much you need to cover the salaries, hourly wages, vacation pay, sick days, and benefits for your team. You may also want to consider how you can best keep your employees happy and retain them over time, which might involve setting aside a larger budget for a generous benefits package and other perks like regular staff parties.
Keep in mind it will take some time for your restaurant to become profitable, so it’s a good idea to calculate how much you anticipate spending on labour and make sure you have enough saved up to carry you through several months. Don’t forget to take your own salary into consideration as well!
Food and beverage
Food and beverage costs can represent a wide range of your budget based on the ingredients your menu requires. It’s important to have a clear idea of what dishes you want to feature on your menu so you don’t stock any extra ingredients you won’t use.
Keep in mind that a larger menu will require you to stock more inventory, which can mean a greater risk of fresh ingredients spoiling if certain items don’t sell well. You may want to keep your menu short and sweet initially, which will allow you to stock a tightly curated selection of ingredients.
Spend some time researching local ingredient suppliers and comparing a few quotes to get the best price. Over time, you want to build relationships with your vendors so you can negotiate to minimize your costs.
It can be difficult to accurately estimate how much food you need when your restaurant first opens, so be sure to allocate funds to allow for some trial and error. Food costs can be volatile, with bad weather and dozens of other factors impacting how much you need to pay from month to month, so build these price fluctuations into your budget.
Restaurant insurance is essential to protect yourself, your employees, and your restaurant business against everyday issues, accidents, and incidents. You may want to opt for general liability insurance, which protects against third-party complaints, such as if a diner slips and falls in your restaurant.
Workers’ compensation insurance can protect you and your employees when work-related accidents occur, while commercial property insurance can protect your restaurant from financial losses caused by damaged property. If you offer takeout, you may also want to consider commercial auto insurance.
Marketing and advertising
Much as you may wish that the right restaurant concept alone will be enough to get customers in the door, you likely need to invest some money in marketing to get your brand out there. It’s important to have a clear sense of your target market and how your audience finds information, so you can put your money towards marketing strategies that offer the best return on investment.
Social media marketing is an approachable starting point for many new restaurant business owners. Consider whether you have the knowledge and time to personally manage your restaurant’s social media presence. Alternatively, you could hire a social media-savvy staff member to do this extra work or outsource your social media management to a freelancer. If you’re building a restaurant in a particularly competitive location, you may want to budget a little more for marketing and hire a marketing firm or public relations agency to do the heavy lifting for you.
The cost of building a restaurant can range from about $100,000 to $3.5 million, according to Restohub. Outlining estimates for the above costs can serve as your restaurant opening calculator, giving you a good idea of where your restaurant might fall within that spectrum. As your restaurant business plan unfolds, make sure you track your expenses carefully to ensure you’re not exceeding your budget.
Opening a restaurant is a challenging, but rewarding business endeavour. With a great concept, careful budget planning, and a little luck, you’ll set yourself up for success.
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.