Is Opening a Restaurant a Good Investment?
The restaurant industry is notoriously challenging—about 60% of restaurants fail within the first year, and 80% close within five years. However, the ones that succeed can be highly profitable businesses. The difference? A thorough feasibility study before investing.
This guide will help you determine if your restaurant concept is financially viable before you invest your savings.
Restaurant Startup Costs (CAPEX)
Startup costs vary dramatically based on concept, location, and size. Here's a realistic breakdown:
| Category | Small (1,500 sq ft) | Medium (3,000 sq ft) | Large (5,000+ sq ft) |
|---|---|---|---|
| Lease Deposit (3-6 months) | $15,000-$30,000 | $30,000-$60,000 | $50,000-$100,000 |
| Build-out & Renovation | $50,000-$150,000 | $150,000-$350,000 | $350,000-$750,000 |
| Kitchen Equipment | $30,000-$75,000 | $75,000-$150,000 | $150,000-$300,000 |
| Furniture & Fixtures | $20,000-$50,000 | $50,000-$100,000 | $100,000-$200,000 |
| POS System & Technology | $5,000-$15,000 | $10,000-$25,000 | $20,000-$50,000 |
| Licenses & Permits | $5,000-$15,000 | $10,000-$20,000 | $15,000-$30,000 |
| Initial Inventory | $10,000-$20,000 | $20,000-$40,000 | $40,000-$75,000 |
| Working Capital (3 months) | $30,000-$60,000 | $60,000-$120,000 | $120,000-$250,000 |
| Marketing & Grand Opening | $10,000-$25,000 | $25,000-$50,000 | $50,000-$100,000 |
| TOTAL INVESTMENT | $175,000-$440,000 | $430,000-$915,000 | $895,000-$1,855,000 |
Monthly Operating Costs
Understanding your fixed and variable costs is critical for break-even analysis:
Fixed Costs (Monthly)
| Expense | Small Restaurant | Medium Restaurant |
|---|---|---|
| Rent | $3,000-$8,000 | $8,000-$20,000 |
| Utilities | $1,500-$3,000 | $3,000-$6,000 |
| Insurance | $500-$1,000 | $1,000-$2,000 |
| POS/Software | $200-$500 | $500-$1,000 |
| Marketing | $500-$2,000 | $2,000-$5,000 |
| Accounting/Legal | $300-$800 | $800-$1,500 |
Variable Costs (% of Revenue)
| Category | Target % | Warning Level |
|---|---|---|
| Food Cost (COGS) | 28-32% | Above 35% |
| Labor Cost | 25-35% | Above 38% |
| Credit Card Fees | 2-3% | Above 4% |
| Delivery Commissions | 15-30% | Varies by platform |
Revenue Projections
Build your revenue from realistic assumptions:
Revenue Calculation Method
Daily Revenue = Seats × Turns × Average Check × Occupancy Rate
| Variable | Casual Dining | Fast Casual | Fine Dining |
|---|---|---|---|
| Seats | 60-80 | 40-60 | 40-60 |
| Turns per Day | 2-3 | 4-6 | 1.5-2 |
| Average Check | $25-$45 | $12-$20 | $75-$150 |
| Weekday Occupancy | 50-70% | 60-80% | 40-60% |
| Weekend Occupancy | 80-100% | 85-100% | 85-100% |
Sample Revenue Calculation
60-seat casual dining restaurant:
- Weekday: 60 seats × 2.5 turns × $35 × 60% = $3,150/day
- Weekend: 60 seats × 3 turns × $35 × 90% = $5,670/day
- Weekly: ($3,150 × 5) + ($5,670 × 2) = $27,090
- Monthly: ~$108,000
- Annual: ~$1,300,000
Profitability Analysis
Using the revenue above and industry benchmarks:
| Line Item | Amount | % of Revenue |
|---|---|---|
| Revenue | $108,000 | 100% |
| Food Cost | ($32,400) | 30% |
| Gross Profit | $75,600 | 70% |
| Labor | ($32,400) | 30% |
| Rent | ($8,000) | 7.4% |
| Utilities | ($3,000) | 2.8% |
| Marketing | ($3,000) | 2.8% |
| Other Operating | ($5,000) | 4.6% |
| Net Profit (EBITDA) | $24,200 | 22.4% |
Note: This is an optimistic scenario. First-year restaurants typically see 5-10% net margins as they build their customer base.
Break-Even Analysis
Your break-even point is where revenue equals total costs:
Break-Even Revenue = Fixed Costs ÷ Contribution Margin %
Example:
- Monthly Fixed Costs: $20,000 (rent, utilities, insurance, fixed labor)
- Contribution Margin: 40% (after food and variable labor)
- Break-Even: $20,000 ÷ 0.40 = $50,000/month
You need $50,000 in monthly revenue before you start making profit.
Key Success Factors
- Location, Location, Location: High foot traffic areas command premium rent but drive revenue
- Concept-Market Fit: Your concept must match the local demographic and competition
- Cost Control: Keep food costs under 32% and labor under 35%
- Working Capital: Have 3-6 months of operating expenses as buffer
- Marketing: Budget 3-5% of revenue for ongoing marketing
- Staff Training: Quality service drives repeat business and reviews
Common Mistakes to Avoid
- ❌ Underestimating build-out costs (always 20-50% over budget)
- ❌ Not having enough working capital for slow months
- ❌ Overestimating first-year revenue
- ❌ Ignoring competitor analysis
- ❌ Signing a long lease without rent negotiation
- ❌ Underpricing menu items to "attract customers"
🍽️ Create Your Restaurant Feasibility Study
Use our AI-powered calculator with built-in restaurant industry benchmarks to validate your concept.
Start Free Analysis →Financial Viability Checklist
Before investing, ensure your projections pass these tests:
- ☐ Gross margin is 55-75% (industry standard)
- ☐ Net margin is at least 5% in year 1 projections
- ☐ Break-even is achievable within 12-18 months
- ☐ You have 3-6 months working capital as buffer
- ☐ ROI exceeds 20% within 3 years
- ☐ Rent is under 10% of projected revenue
- ☐ Food + Labor costs are under 65% combined
Next Steps
- Create your restaurant feasibility study with our free calculator
- Input your specific location costs and concept
- Review the AI-generated validation for unrealistic assumptions
- Export to Excel for detailed customization
- Generate a shareable report for investors or lenders