How To Open a Restaurant in Ten Steps

One of your first choices will be whether to franchise, buy an existing restaurant, or start your eatery from scratch. When making this decision, consider the level of support you may need, as well as how much creative control you want. Each option has benefits and drawbacks.

Franchising

Under franchise agreements, you can own various franchise or chain restaurants. These include full-service, fast casual, and fast food establishments, like:

• Taco Bell and McDonald's
• Panera Brand and Five Guys
• Applebee's and Olive Garden
• Many other chain restaurants

For franchises, the franchisor has already done most of the legal work for you. However, you are responsible for other legal requirements, including:

• Local zoning ordinances
• Labor laws and state employment laws
• State taxation
• Employment taxation
• Food safety regulations
• Building safety and code
• Other local and state regulations

As the franchisee, you run your business independently while benefiting from the franchisor's brand recognition and support. However, you have less control over how you wish to run your business.

Taking Over an Existing Business

Depending on where you want to start your business, there may be existing restaurant businesses for sale. If you want to buy a restaurant already in business, there are several areas you will need to consider.

First, familiarize yourself with the restaurant. Eat there several times at different times and days of the week. Take note of the:

• Staff
• Building condition
• Quality of food

Next, tell the owner you have an interest in buying their restaurant. Ask to review key pieces of business, including:

• A certified audit of financial records
• Employee records (high employee turnover is a red flag, even when comparing restaurants to other industries)
• Service contracts, including all supplier contracts, leases, union contracts, clothing suppliers, and cleaning contracts
• Food, beverage, and health licenses should all be up to date

All these areas should be in the contract for the restaurant sale. Ask for clarification on anything that isn't clear.

You will also want a solid understanding of the business's value. This includes stock, equipment, and goodwill such as customer loyalty, brand image, market position, and profit potential.

If everything checks out, hire legal help to review the contracts and negotiate the rest of the purchase.

Starting a New Restaurant

Unlike buying a franchise or taking over an existing restaurant, starting a brand-new restaurant offers you the freedom to bring your vision to life. Starting from scratch will have higher startup costs and a greater time investment. You also won't have a built-in customer base.

You will have to work harder to build a loyal customer base in a competitive market. While this option involves the most financial risk, it allows you more creativity and flexibility with how you operate your restaurant.

You'll need to pick a unique business name for your restaurant. Your name should be memorable yet simple. Imagine how your name sounds and how it will look on your sign, branding, and menu.

Next, visit your state's Secretary of State website to see if the name is already in use by another business. If your selected name is available, register it with your state.

You will also want to secure the internet domain name for your business.

Registering your business name and buying the domain name doesn't make it your intellectual property. You still need to protect your business name with a trademark.

You can trademark your restaurant's name at both state and federal levels. This process can take a significant amount of time. Figure around eight months for a federal trademark. You can apply for federal trademark rights through the United States Patent and Trademark Office (USPTO).

You can also register your trademark on the state level. Find your state's trademark information here.

Your first significant decision on the legal side of opening a restaurant will be to decide what type of business structure to form:

• Limited Liability Company (LLC)
• Corporation
• Sole Proprietorship
• Partnership

Most small businesses, including restaurants, start as a Limited Liability Corporation (LLC). The flexible structure and tax advantages that LLCs offer often work well for a restaurant business model.

Often, franchises are corporations. If you are a franchisee, you will not choose a structure unless you create a holding company.

If your restaurant is a small food truck with no employees beyond your family, you could consider a sole proprietorship.

Forming a partnership is a good idea if you're going into the restaurant business with a partner or partners.

Keep in mind that LLCs and corporation structures offer personal liability protection. which means your personal assets are safe from your restaurant's debts and obligations. If a customer sues your restaurant for a slip-and-fall accident, their claim is limited to your business assets, not your personal ones.

Sole proprietorships and partnerships do not offer protection from personal liability.

Choose a commercial space with steady vehicle and foot traffic. This will help with your restaurant's visibility to the public. Consider where your target market is, customer and supplier access, competition, and neighborhood sustainability.

Several other factors can vary by location:

• Local licensing
• Health regulations
• Rent
• Unionization

Thoroughly research these before you decide on a home for your restaurant.

A commercial lease is an enforceable contract, so pay close attention to the contract clauses. Make sure you understand all terms and clauses before signing.

Restaurants have several licensing requirements. These requirements can vary depending on where your restaurant operates and what it serves and provides. You may be responsible for:

• A state and local business license
• A liquor license if you are selling alcohol and a separate license for carry-out alcohol
• A separate license to deliver food, depending on your jurisdiction
• A food service license
• A music license if you play recorded or streamed music
• A separate live music license from the city, if applicable
• Ongoing fire inspections so you can obtain a certificate of occupancy

Depending on the jurisdiction, you might also need a sales tax license, a sign permit, a valet parking permit from the city, a dumpster permit, and a pool table license.

You must be diligent with your restaurant's taxation and employment paperwork.

If hiring staff, you must obtain a federal Employer Identification Number (EIN). Sole proprietors can use their Social Security numbers instead of an EIN. Get your EIN at no cost by applying through the Internal Revenue Service (IRS) website. This is an instant process.

Depending on your restaurant's concept, you may need to hire:

• Front-of-house staff like servers and hosts
• Back-of-house staff like cooks and dishwashers
• Head chef and sous chef
• Janitorial and maintenance
• Marketing and administrative professionals

Restaurants employing tipped wait staff have special taxation rules and regulations for the restaurant and the employees. There is also a tipped employee minimum wage. If allowed in your business budget, consider hiring an accountant to handle this area.

The Restaurant Tax Center on the IRS website is a great resource for restaurant owners and tipped staff.

All employees must be legally able to work in the United States. Ensure they complete the required paperwork upon hire.

Potential employees should fill out an application, even those you know on a personal level. Everyone should have proper identification with a copy kept on file. Your employees should also pass a background check, particularly those who will handle money.

Your local health departments may require food safety certifications for your employees. Some states require food handler permits.

There are also many federal and state employment laws you must follow.

Few small restaurants outside of large metropolitan areas have employee labor unions. Prominent cities like New York City may have a strong union presence in restaurants, including the United Food and Commercial Workers Union (UFCW).

All restaurant owners should understand labor laws, including the National Labor Relations Act (NLRA).

Negotiating with a union can be difficult, even for those with experience. Hire a professional negotiator rather than trying this yourself. If you are a franchisee, the franchisor will already have a negotiation team in place.

Restaurant businesses require necessary insurance coverage, including the following:

• Business liability insurance
• Worker's compensation insurance
• Automobile insurance if you have delivery drivers

You may want to consider commercial umbrella insurance. Your lease may also require you to have specific insurance limits for a loss or damage to the real estate.

Consider the needs of your business and its potential liabilities to determine the appropriate insurance coverage for your restaurant.

Starting a business in the restaurant industry means you'll have to deal with several safety regulations. As early on as possible, establish personal contact with local regulators. This includes:

• The fire inspector
• The health inspector
• Any other government officials who may interact with your business

Tell the regulators you want to cooperate with them and ask if you can contact them with any questions. Building a positive working relationship allows you to address potential issues before they flare up. If an inspector identifies areas for improvement, you can work together to implement corrective actions, minimizing the risk of penalties.

Some restaurant owners hire a lawyer for help applying for, receiving, and conforming to local regulations.

Franchising or purchasing an existing restaurant comes with built-in brand recognition and sometimes even a loyal customer base. Marketing a brand-new restaurant will take more effort and ingenuity. Regardless, you need to get the word out about your restaurant.

Your business plan should be the backbone of your marketing plan. The target market and market analysis sections of your business plan should inform how you promote your restaurant.

Be flexible with your marketing strategy. You may need to try several ideas to see what resonates with your target market.

Your marketing plan can include:

• Creating a website and social media pages
• Digital marketing like search engine optimization (SEO) and targeted ads
• Engaging with your local community
• Local media coverage (public relations)
• Traditional and digital advertising, like direct mail, flyers, and ads in local publications and on social media websites
• Soft opening and grand opening parties

One of the best ways to promote a new restaurant is through word-of-mouth. Encourage patrons to post pictures of their meals on Instagram or leave a Yelp review in exchange for a discount to use on their next visit.