Examining the True Costs of Opening a New Restaurant

Opening a restaurant is a costly endeavor to say the least. With so much volatility in the market and no guarantees that your establishment will take off with your intended audience, it can feel like an uphill battle before you even start the initial planning process for a new restaurant. Are you simply revitalizing a previous restaurant that’s already built out with a full kitchen, gas, and electrical capabilities? Or are you transforming a new space to suit your needs, requiring architects, designers, general contractors, electricians, and plumbers? What’s the restaurant market like in your city, and how expensive are the professionals you’ll need to bring onboard to get started?

Despite these variables, with enough planning and strategic analysis of your intended market, you and your business partners will be set up for a (hopefully) long and lucrative adventure into the restaurant and nightlife business. Here’s how to examine the true costs of opening a new restaurant:

Finding the Right Location

There’s no true cost to point toward during this initial phase, unless you and your business partners have already hired a general manager on salary to get the ball rolling and be the point person during the search. But due to the importance of this step and factoring in major property hurdles like adequate parking, size of the restaurant, and the reality of the market in your desired neighborhood, there shouldn’t be a rush to get the doors open if there simply isn’t a property that’s suitable for your needs.

Budgeting for a New Restaurant

According to a recent survey of new restaurant owners, the average cost to open a new establishment, without factoring in the purchase of commercial real estate outright, is about $500,000 – and that’s factoring in a 33% cost overrun compared to their expected budget. However, Building Journal suggests the national average cost for a 5,000 square foot restaurant with basic to mid-level finishes at about $160 per square foot, equating to $480,000 -more expensive markets like New York average about $216 per square foot.

Of course, front of house and back of house will have different costs per square foot, but restaurant owners should expect to spend between 30-40% more per square foot on front of house improvements than back of house upgrades.

Permitting

As you’re likely well aware, starting any business that’s open to the public is going to involve a lot of government departments. From the fire department, utility providers, building inspectors, public health department, and more, you’ll want to involve all of the necessary stakeholders at an early stage to avoid unforeseen, and mandatory, upgrades before receiving your approved permit.

Before you even sign a lease agreement, you should check the building’s Certificate of Occupancy to ensure the space is suitable for your intentions. For instance, if your property isn’t permitted for food and beverage, or especially a liquor license, you should avoid the property. Changing these rules is incredibly time consuming and expensive – sometimes impossible – depending on your general location and city of operation.

Design and General Construction

Depending on your intended audience, how you market to them, and competitive analysis in your neighborhood, you may prefer to work very closely with the general contractor, architect, and restaurant designer to ensure your establishment turns heads and keeps a memorable ambiance. However, some restaurants – particularly those with existing build outs – won’t require a significant investment in design and build out.

The average cost of kitchen and bar equipment, minus cost of food and drinks, sits around $115,000, while the cost of construction per dining room seat is about $2,100.

Equipment

If you’re lucky, your ideal property will already have some of the essential equipment hooked up and ready to go. Big budget items like burners, fryers, hoods, coolers, freezers, and dishwashing machines can rack up a serious bill – about $75,000 for a back of house space averaging 1,000 square feet.

Of course, picking up used equipment from any source can be dicey, so prospective restaurant owners are encouraged to bring on a technician to inspect each item to ensure it’s up to par for what you need. After all, skimping on a grill and having it break down midway through your first week of operation won’t do you any favors.

Rent and Labor

This is arguably the largest and most crucial monthly cost in a restaurant owner’s budget. The number of variables that come into securing a commercial real estate space for a restaurant can be mind boggling, but there are plenty of resources to help guide you through the restaurant lease agreement process. Just as you wouldn’t over-extend yourself with an apartment or house you can’t afford, you shouldn’t go well beyond your budget for the “perfect” or otherwise ideal facility.

Bringing in a commercial real estate tenant broker can be a big benefit during this process. Since they’re paid as a percentage of the final lease agreement, they won’t require an upfront or continuing cost while they work on your behalf. Capable of research, setting appointments, and negotiating on your behalf, a commercial real estate broker should be an essential part of your property search and lease agreement process.

As far the costs of labor, they appear to be a fixed cost on paper, but can vary  in nature. Because a restaurant needs a bare minimum number of employees in order to function, that number should be fairly consistent. On the other hand, the more customers you bring in, the more staff you’ll need to keep them satisfied and serviced. Your management team should be prepared to send home idle workers when volume is low.

At the outset, however, restaurant owners should strongly consider labor contingency clauses pre-opening to ensure your qualified staff is retained if the restaurant experiences an unforeseen delay. Otherwise, the longer you keep the doors closed, the greater chance they’ll seek opportunities elsewhere.

Sales and Marketing

Without specialized experience in sales and marketing, small businesses and startups can easily overspend on marketing and promotion. Hiring expensive firms could potentially move the needle and word of mouth on your new eatery, but this isn’t a wise spend – especially considering the possibility of an unforeseen repair cost.

With tight budgets, reliance on word of mouth, and dependance on return customers to drive initial foot traffic, consider lower-cost marketing efforts at the outset. Try relying on high-quality visuals, industry-only or limited pre-opening nights, or event-driven marketing via social media to get customers in the door early and often.

Whether you choose to open a small boutique, a large, sprawling eatery, or a franchise expansion, you’ll realize a large upfront investment. Without the proper research, market analysis, and preparation for cost overruns, you and your business partners may be on the hook for more than you signed up for, but well-equipped prospective restaurant owners will always have the edge when to comes to making their business a success.

John is the Regional Director of OfficeSpace.com where he heads broker relations and sales. Prior to being Regional Director, he was the Operations Director for the company’s property database. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

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