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"Starting a Restaurant Business": A Guide to Begin

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Opening a restaurant might be the first thing that comes to mind when thinking of a business idea. No wonder, even with the tight competition, a restaurant has always been, and always will be, a thriving business.

The restaurant business has a seemingly low entry barrier. With almost everyone has eaten in a restaurant before, everyone thinks they understand the ins and out of a restaurant business. Hire a chef, do some interior, and voila, the business is rolling.

However, the truth is that the failure rate of a restaurant is also high because there's a lot of details people overlook.

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Below are some notable starting points to help you plan your business better:

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Startup Cost!

Your majority of investments can range as low as below $50,000 to as high as $500,000, depending on location, size, and how expensive you want to spend on decorations and equipment.

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Some notable expenses you need to consider:

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- Real Estate Cost
This will be highly dependent on your location. Also, expect security deposit if you lease a place, typically one month of rent.

If you own your location, there also might be impact fees you need to pay the government, depending on the state you're in. This can range below $20,000 and as high as $150,000

- Interior, Decoration, and Kitchen Improvement
This can also vary a lot, as high as $350,000 for a high-end restaurant. Consult your local architect and interior designer with restaurant building experience for a clearer picture of how much you should prepare.

Kitchen equipment, furniture, and utensils cost might surprise you, so make sure you do enough research with various brands to know your options.

- Permits and Licenses
Consider getting a legal help with this one since it might cause a lot of confusion. There might be different permits depending on whether you sell alcohol, whether you provide live music or DJs, etc.

So make sure you do enough research and planning of what kind of permits you need to apply in your location.

- Franchise or Not?
If you're planning to get a franchise license rather than start-up from scratch, a franchise fee can cost you as high as $500,000, and you might also have another monthly fee or profit sharing.

While having a franchise can save a lot of time, it is also costly, and there's no guarantee of success. So consider your options carefully.

Do enough research on the brand, and if possible, meet someone who took the franchise before to get some heads up and review.

Anatomy of a Healthy Restaurant Cash Flow

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Here are some notable cost elements you need to maintain carefully:

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- Lease
If you lease the place, it should be only as high as 15% of your total projected revenue.

- Cost of Goods Sold (COGS)
A good COGS for foods is 20-30% of your total revenue, and not higher than 25% for beverages. Average COGS of foods and beverages should be below 30% range.

- Labor Cost
If you are planning to open a table-serving restaurant, hiring a chef and Maitre D' might be expensive. You should maintain labor cost below 25% for fast food restaurants and 30-35% for table serving restaurants.

- Marketing Cost
With the tight competition, you'll need to put some marketing effort in it. However, over-spending on marketing will eat up all your profits. Keep marketing budget strictly only as high as 8% for newer restaurants, and steadily reduce to 3-5% when the restaurant stabilizes.

Earning Potential

Earning potential of a restaurant can vary a lot depending on size, types of food served, location, etc.

However, for a median, we will take a fine casual dining restaurant as an example.

Daily revenue for a typical 65 seater restaurant, two turnovers per day, and 19$ average spending per person will get a $2.470 daily revenue average. This translates to $74,100 monthly income or $889,200 annual revenue.

With careful maintenance on costs like discussed in the previous section, this example restaurant will get a 10% annual profit of $89,000