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How To Open a Coffee Shop

Barista making a drink at a coffee shop

Running a successful coffee business is more than knowing how to brew a good cup of coffee or make a pumpkin spice latte. Extensive planning goes into creating a successful business, with many business and legal decisions along the way.

If you're considering opening a coffee business, you already have many potential customers. That's because 62% of American adults drink coffee every day.

This article outlines the steps you'll need to work through to start your coffee business, with some helpful tips.

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Three Ways to Launch a Coffee Shop Business

There are three different ways to get into the retail coffee industry:

  • Owning an independent coffee shop that you start from scratch
  • Franchising a national brand
  • Renting, buying, or taking over an already-existing coffee shop

Each one of those business models has different organizational and legal requirements.

They also have much in common, including business licensing, food and beverage laws, local ordinances, and more. Several factors should influence your decision, including your business idea, risk appetite, funding, and marketing expertise.

Each option has pros and cons. But your choice to open an independent shop, purchase a franchise, or buy an existing coffee shop should be the backbone of your business plan.

Kinds of Coffee Shops

Next, decide what type of coffee shop you want to open. Here are a few types:

Coffee Cart, Coffee Kiosk, or Coffee Truck: These are the easiest and least expensive coffee shops to open. Mobile coffee shops usually focus on a few types of coffee and packaged pastries. They can be successful in locations with heavy foot traffic, like train stations, festivals, farmers markets, and fairs.

Roaster or Retailer: Roasters can set up a physical shop open to the public, sell beans to other coffee shops, sell to distributors, or sell directly to retail establishments like grocery stores. Commercial coffee roasting machines can be expensive. They also require space to roast, store, package, and ship the green and roasted beans.

Drive-Thru Coffee Shop: These can be small, one-person shops in a parking lot or other high-traffic areas. They can be independent shops or franchises. These have lower upfront and operating costs because they don't require as much physical space or staff.

Retail Coffee Shop: These often sell everything except brewed coffee, which cuts down on expenses. Storefronts like these sell mugs, roasted coffee, grinders, coffee makers, and other coffee accessories and related food items. These can work well inside a coffee shop. Because these don't provide food service, they don't need to meet legal requirements for serving prepared food or beverages.

Coffee Pop-Up Shop: These are businesses that can “pop up" anywhere for a limited time. They are often found at events, in vacant retail storefronts, or in other retailers or shops. These are a popular option for business owners who don't want the commitment of running a full-time business. Pop-ups can keep it simple and stick to traditional coffee. They can also capitalize on seasonal trends or specialty coffee drinks.

Coffee Bar: This can be a small business in a fixed location like a grocery store or mall—sort of like a mobile business that isn't mobile. These have low overhead, small staff, and limited kinds of coffee and pastries. Coffee bars are relatively inexpensive to get into and a good way to get a start in the industry. These also benefit from being in spaces with guaranteed foot traffic.

Independent Coffee House: Most people think of a coffee house when considering opening a coffee business. These are privately owned and not franchised, with permanent storefronts. They often serve a large variety of coffee and other beverages, small bites, and baked goods.

Many independent coffee houses encourage customers to stick around and enjoy their brew, with couches and comfy chairs, fireplaces, and free Wi-Fi. You will often find customers working on their laptops.

Some of these coffee houses also serve as a community space, hosting music, meetings, and other events. This is a smart choice for any size city that can support the business, especially college towns. These may or may not include a drive-through.

Café: A café is a full-service restaurant with a coffee bar. Opening a café will come with all the business and legal considerations of opening a restaurant.

Franchising

franchise is a business that is granted the right or license to market a company's goods or services in a particular territory. The primary business is the franchisor. The local business with that right or license is the franchisee. For instance, if you franchised a Dunkin' Donuts store, Dunkin' Donuts would be the franchisor, and you would be the franchisee.

Franchising a national brand gives you immediate name recognition. But the franchisor generally puts many business limitations on the franchisee. Some common examples of coffee franchisors include:

  • Dunkin' Donuts
  • Tim Horton's
  • The Coffee Bean & Tea Leaf
  • Scooters
  • Maui Wowi

Your state or region of the U.S. may also have more centralized, local coffee franchise options.

The two most important limitations of operating a franchise are the limits placed on your creativity and your ability to run the business as you see fit. But it gives you a good shot at a successful business.

Franchisors lock franchisees into a franchise agreement, a contract where the franchiser controls every aspect of the business. This agreement typically includes:

  • What equipment to purchase
  • What products to sell
  • What kinds of coffee you can offer
  • Where you can locate
  • Much more

If you want security and support, a franchise may be the way to go. But if you want control and creativity, you would be more satisfied running an independent coffee shop.

Some national coffee businesses (most notably Starbucks) do not franchise. These businesses license to an owner for a fee (Starbucks' license fees can range from a little over $300,000 to $700,000 or more).

Business licensing differs from franchising in that it grants rights to use intellectual property (logos, recipes, branding, and more) in exchange for royalties or fees. Starbucks inside Target or Barnes and Noble stores are examples of business licensing.

Renting, Buying, or Taking Over an Existing Business

Entering into a contract to buy, lease, or take over someone else's existing coffee shop business splits the difference between franchising and starting a shop from scratch.

Taking over a business from a friend on a handshake deal can cause significant legal headaches. To avoid this, strongly consider putting every part of the agreement in writing as a legal contract. You can write the contract with various clauses containing the agreement's parts.

When writing the contract, be mindful of state contract laws that will determine what kinds of clauses you can and can't enforce, and for how long. You also want to determine the value of the business, which can include:

  • The shop's "goodwill," or the value of the equipment and whatever stock is being transferred
  • The value of the shop going forward
  • Whether you will retain any current managers or employees

Finally, you may need to reach a separate agreement with the shop's landlord because the lease may not transfer with the business.

Starting From Scratch

When starting a coffee shop business from scratch, consider the following steps to give yourself the best chance at success.

Choose a Business Structure

A coffee shop will require a definite business structure or formal legal organization. Your business plan must include whether you want to be classified as a:

Many coffee shops form as LLCs for the personal liability protection they offer.

You may be able to set up your own company using simple forms provided by your state's secretary of state. But, it can be helpful to consult with an attorney if you're setting up an LLC or corporation. An experienced small business lawyer will ensure your business meets all legal requirements.

Write a Coffee Shop Business Plan

No new business can go far without a thorough business plan. But don't let that intimidate you. There are professionals who can write one for you or work with you one-on-one. There are also several online programs that can help you construct one.

Business plans organize your efforts and show potential investors why they should work with you. You will not get investors without a well-thought-out business plan.

A good business plan usually includes the following sections:

  • Executive summary
  • Objectives and mission statement
  • Keys to success
  • Company summary
  • Inventory needed
  • Market and competition analysis
  • Web plan
  • Management summary
  • Financial plan

Funding Your Business

You will need to know how you are going to fund your business. The most common financing method is taking out a small business loan from a bank or credit union. If you're unable to secure financing this way, you could be eligible for a loan from the Small Business Administration (SBA).

If neither of the above lending channels works for your business, you can consider crowdfunding, credit cards, or loans from family or friends.

Market Analysis and Marketing Strategy

You must perform a market analysis and outline a marketing plan before opening your new coffee shop.

Coffee is one of the world's largest commodities. Fortunately, you only need to analyze the local coffee businesses that are directly competing with you. Check out every coffee business within five miles (including gas stations), and then discuss how you intend to compete with each of them in your business plan.

Picking the right location for your coffee shop is crucial. Successful entrepreneurs perform a thorough location analysis. Besides just researching the competition in your area, you will want to scope out other factors, such as:

  • Proximity to your primary customer base
  • Demographics
  • Zoning and permitting requirements
  • Distance from suppliers

You will then need to use that information in your marketing plan. The marketing plan should target your intended customer base and include logos, flyers, social media, and your internet presence. Here are some quick ideas to drum up community excitement about your new coffee business:

  • Create an app or loyalty rewards program
  • Offer a referral program (there are options to manage these digitally)
  • Pass out flyers at fairs and other community events
  • Build anticipation for your opening day by hosting a grand opening event with prizes and discounts

Laying this plan out ahead of time will help you budget and create metrics to help focus your marketing programs.

Startup Costs and Budgeting

The startup costs for opening a coffee shop will vary widely based on the location and kind of shop you are opening. Rent in Manhattan, for example, might be many times the rent in a small Iowa city.

You will have fixed costs that you will want to include in your business plan. These include:

  • Coffee-making equipment
  • Rent
  • Build-out and renovations
  • Furniture
  • Technology costs, like computers, handheld registers, and a POS (point of sale) system
  • Licensing fees (if any)
  • Expenses for lawyers and accountants
  • Initial expenses for food, beverages, and refrigeration
  • Initial advertising and other marketing expenses
  • Operating expenses for the first few months

Most coffee shop owners will tell you to buy the best new equipment you can afford. Coffee shop equipment includes espresso machines, coffee grinders, drip brewers, and more. Make a thorough list, check reviews, and compare prices. Talk to other coffee shop owners and get recommendations if you can.

Set a budget and stick to it. A part of your initial analysis should include projected income, which will require a foot and vehicle traffic analysis.

Your rent should be no more than 15% of your projected income. Your largest expense will be drink and food ingredients, which should not exceed 40% of your income. Payroll costs should be about 30%. The rest should be profit.

Trademark Your Name

After you have picked out a name that sets you apart, you want to go through the process to trademark your name and logo. This will protect it so nobody in the coffee shop industry can claim your business name. Hiring an intellectual property attorney to help can be beneficial.

Bookkeeping, Payroll, and Taxation

You will also need to establish what bookkeeping method you want to use. An outside bookkeeper is an option if you lack accounting or bookkeeping experience. This should be one of your first decisions—you want to track your cash flow as soon as you open.

You want to be tight and precise with your payroll records, always paying your employees and taxes on time and in full. Many businesses have failed because they didn't pay enough attention to this critical area.

Retail sales taxes on coffee vary from state to state, as do taxes on baked goods or any other items you may sell. Use this state-by-state list of sales and other consumer taxes to find the specifics for your business's state.

You will need to obtain an Employer Identification Number (EIN). The EIN is similar to a social security number but for businesses. It's essential for things like paying taxes and opening business bank accounts.

Business Licenses

You will need to obtain a business license to open up your shop. These can vary by location and business type. Here is a state-by-state chart of the licensing requirements for starting a business in each jurisdiction.

Keep in mind that you may need different licenses for selling your baked goods versus selling coffee or for selling brewed coffee versus bagged coffee. This is another area where a consultation with a lawyer would be helpful.

Food Business and Health Regulations

Most coffee shops also sell baked goods, sandwiches, and other snacks. Even if you don't consider it one, a coffee shop is technically a food business. Because of that, you want to be familiar with the laws and regulations for a food business. These include federal, state, and local laws and rules regarding:

  • Food handling and storage
  • Employment
  • Real estate
  • Advertising

Your local health department is the best source for understanding and complying with these rules. Contact your local department and tell them your plans. Find out who will be the contact person for your business and set up a personal meeting with them.

At that meeting, say you want to cooperate with the health department fully, ask what you can do to ensure that happens, and ask for guidance on food licensing and inspections. Proactively fostering a positive working relationship can help you get the necessary information while creating goodwill.

Hiring Baristas

You will need to hire baristas for your coffee business. There are numerous laws that you must follow when hiring restaurant workers. Who you hire is up to you, but you must conform to specific laws and regulations during this process.

The first and most important rule in hiring staff is to ensure those you hire are who they say they are. You will need to have proper identification on file. You want to do a background check on every employee.

Every hire must also be legally eligible to work in the United States. You will need the proper paperwork to prove this.

You also may need to train your employees on food safety and ensure they have all proper certifications.

When training your employees, it helps to have a written job description and a comprehensive training program. Properly trained employees typically have a higher retention rate and are more focused on customer satisfaction.

Onboarding and Taxation

Employment taxation is a complex topic best left to experts. Once you hire an employee, you must fill out various federal, state, and local tax forms. It's worth the extra cost to hire someone to do this.

Labor Unions

Unless you are in a union-heavy location like New York City, it's unlikely that you will be interacting with labor unions in a small, local coffee shop. A franchise might also be unionized. If your workers are unionized, they're probably United Food and Commercial Worker's Union (UFCW) members.

Unless you have a background in union negotiation, don't try this alone. You can hire a professional negotiator or a labor lawyer to help. If you are a franchisee, the franchisor will handle this.

Insurance

You will need business liability insurance for a coffee shop operation. This will cover personal liability for issues like:

  • Customer slip-and-fall accidents
  • Smoke damage
  • Weather damage from lightning, hail, or other inclement weather
  • Natural disasters, like an earthquake or hurricane
  • Employee theft

If you're a franchisee, the franchisor will have insurance for you to purchase, or it may be a part of the franchise agreement. If you're a private owner, you will need to buy your own from an insurance company.

Fire Safety Inspections

You will only be able to open your business with the fire department signing off on the safety of the building. Treat this as another opportunity to build positive working relationships. Your local department may also have specific regulations for a drive-thru coffee shop.

Suppliers

Determining where you will get your equipment, coffee, and food may seem simple. But there may be legal hurdles to these essential acts for opening your coffee shop.

You want to check the licensing of any local food provider. You will take on any liability if the food injures someone.

Ensure you have the proper contracts with the coffee supplier, whether you are roasting yourself (which is unlikely) or buying from a roaster or wholesale supplier. You should have a written requirements contract to receive supplies whenever you need them. This eliminates having to store excess inventory you will not use immediately. This will be one of your most important contracts.

Going to the Source for Your Coffee Beans

You may be a coffee shop owner who wants to go to South America or Africa and pick your coffee beans. Or you want to buy directly from the farmers. Taking on these tasks can be complicated, and it can help to hire an experienced attorney to help.

If you decide to import coffee beans directly from their places of origin, you will need to know the U.S. regulations for importing coffee. You will also need to know the export regulations for the source country. For example, there are no U.S. import duties on green coffee (unroasted beans from Coffea fruits), but there are duties on roasted coffee. A licensed customs broker or an experienced coffee supplier can help you.

Alternatively, some coffee shops buy their beans wholesale from a coffee roaster. Depending on your location, there may be local options. Partnering with a local roaster can be a great way to build a mutually beneficial business relationship.

Legal Details Make a Difference

Opening a successful coffee shop can be incredibly rewarding but is a huge undertaking. Attention to detail is key. It can help you prosper as a business owner in this popular industry.

A good place to start is our trusted, simple-to-use online business formation tool. We'll walk you through the steps of creating your business and help you meet all the legal requirements.

You can also get experienced local legal help to ensure you do all you can to run a successful business. A small business attorney will ensure your business plan is in line with your area's legal requirements. This can free up time and energy for you to focus on other aspects of your new business.

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