How to Open a Coffee Shop
If you are thinking of opening a coffee shop business you already have many potential customers. That's because over 200 million Americans drink coffee every day. But there are a lot of steps that go into creating a successful coffee business and a lot of decisions that you will have to make along the way.
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Three Ways to Launch a Coffee Shop Business
There are three different ways to get into the retail coffee industry: As the owner of an independent coffee shop that you start from scratch, as a franchisee, or by renting, buying, or taking over an already-existing coffee shop. Each one of those business models has different organizational and legal requirements.
At the same time, they all have much in common, including business licensing, food and beverage laws, local ordinances, and more. It is up to you which way you want to approach the decision regarding opening a new shop, purchasing a franchise, or buying an existing coffee shop. Each has its pros and cons, but the choice 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 to look at:
- Coffee Cart or 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 and can be successful in high-traffic locations like train stations or festivals and fairs.
- Roaster/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 and require some 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 area. These can be independent shops or a franchise.
- Retail Coffee Shop. You could sell everything except brewed coffee and cut down on expenses. Sell mugs, roasted coffee, grinders, coffee makers, etc. Maybe you can set up inside a friend's coffee shop.
- 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 is not mobile. These have low overhead, small staff, limited kinds of coffee and pastry. Coffee bars are relatively inexpensive to get into and a good way to start in the business.
- Coffee House. Most people think of a coffee house when thinking of opening a coffee business. These are community spaces with couches and comfy chairs, fireplaces, many varieties of coffee and other beverages, different food products, music, meetings, etc. This is a great choice for a small city or college town. You could operate independently or as a franchise. Either way, you could be a hometown hero.
- Café. A café is basically a full-service restaurant with a coffee bar. However, keep in mind that opening a café will come with all of the business and legal considerations of opening a restaurant.
A 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 called the "franchisor." The local business that has that right or license is called 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 Dunkin Donuts, Tim Horton's, Scooters, or other national brand gives you immediate name recognition, but the franchisor generally puts many business limitations on the franchisee.
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. However, it gives you a good shot at a successful business.
Franchisees are locked into a franchise agreement, which is a contract with the franchiser that controls every aspect of the business. This includes what equipment to purchase, what products to sell, what kinds of coffee you can offer, where you can locate, and much more. So, if you want security, a franchise may be the way to go. If you want control and you want to set up a cute little neighborhood shop, you would have to go with another option.
Note: 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).
Renting, Buying, or Taking Over an Existing Coffee Shop
Entering into a contract to buy, lease, or just 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 those, strongly consider putting every part of the agreement in writing in the form of a legal contract. Contracts may be written with various clauses that contain the parts of the agreement.
When writing the contract, you need to be mindful of state contract laws that will determine what kinds of clauses can and cannot be enforced and for how long a time. Additionally, you should determine the value of the business, which will include the shop's "goodwill," the value of the equipment and whatever stock is being transferred, and the value of the shop going forward. You should also address whether you will be retaining any of the 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, you should take the following steps to give yourself the best chance at success.
Choose a Business Structure
A coffee shop will require a definite business structure. Your business plan will need to include whether you want to be a sole proprietorship, a limited liability corporation (LLC), a corporation, or a partnership. Many coffee shops incorporate 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 is usually helpful to consult with a lawyer if you are setting up an LLC or corporation to ensure all legal requirements have been met.
Write a Business Plan
No new business can go very far without a business plan, but don't let that intimidate you. Numerous professionals can write one for you or work with you to write one. Additionally, there are any number of off-the-shelf computer programs that can help construct one.
Business plans assist in organizing your efforts and show potential investors why they should work with you. You will not get anyone to invest 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
Market Analysis and Marketing Plan
You will need to perform a market analysis and rough out a marketing plan in preparation for opening your new coffee shop.
Coffee is the second-largest commodity in the world, after oil. But you only need to analyze the local coffee businesses that are in direct competition to you. Drive around, 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.
You will then need to use that information as a part of a marketing plan. The marketing plan will be geared toward your intended customer base and includes logos, flyers, social media, and your entire internet presence. Consider creating an app and loyalty rewards. Pass out flyers at fairs. Have a grand opening and give away prizes.
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 what kind of shop you are opening and where it will be located. Rent in Manhattan, for instance, might be many times the rent in a small city in Iowa.
But there are fixed costs that you will have, and these should be included in your business plan. These fixed costs include:
- Coffee making equipment
- Computer hardware and software
- 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 that you can afford.
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 then be no more than 15% of your projected income. Your largest expense will be drink and food ingredients, which should be no more than 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 should hire a lawyer to trademark that name so nobody can take it from you.
Bookkeeping, Payroll, and Taxation
You will also need to establish what bookkeeping method you want to use, although an outside bookkeeper is always an option if you don't have experience in that area. This should be one of your first decisions because you need to track your cash flow as soon as you open.
You need to be very tight and precise in keeping payroll records and in paying your employees and sales taxes on time and in full. Many businesses have failed because this very important area was overlooked or not enough attention was given to the details.
Retail sales taxes on coffee vary from state to state, as do taxes on baked goods or any other items you may sell. Here is a state-by-state list of sales and other consumer taxes.
You will need to obtain an Employer Identification Number (EIN). The EIN is similar to a social security number for businesses and is essential for such things as paying taxes and opening business bank accounts.
You will need to obtain a business license to open up your shop. These can vary by location and type of business. 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.
The Food Business and Health Regulations
You will probably have some baked goods or sandwiches in your coffee shop. But even if you don't, a coffee shop is a food business. Because of that, you will need to become familiar with any number of laws and regulations that surround a food business. These include federal, state, and local laws and rules about food, employment, real estate, advertising, and more.
The best source for assistance in understanding and complying with these rules is your local health department. Contact your local department and tell them what your plans are, find out who will be the contact person handling your business, and set up a personal meeting with that person.
At that meeting, say that you want to cooperate with the health department fully, ask what you can do to make sure that happens, and then ask for guidance in the food licensing and inspection areas. Make a new friend and create goodwill along with getting the information that you need.
You want the best baristas that you can get. But once you start hiring restaurant workers, there are numerous laws that you must follow. Who you hire is up to you, but how the process works needs to conform to numerous laws and regulations.
The first and most important rule in hiring staff is to ensure that the people you are hiring are who they say they are. You will need to have a proper ID on file. You will need to do a background check on every employee. You can hire who you want, even if that person has a criminal record. But you need to be aware of the person's history.
The person you hire also needs to be legally eligible to work in the United States, and you will need the proper paperwork to show that.
In addition, you may need to check employees for food safety training certification and make accommodations for that training.
When training your employees, it will always be better to have a written job description and thoroughly train them. It is worth the time because properly trained employees will have a higher retention rate and will be happier employees, which means happier customers.
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 is worth the extra cost to hire someone to do this.
Unless you are in a union-heavy location like New York City, it is unlikely that you will be dealing with labor unions in a small, local coffee shop. A franchise might also be unionized. If your workers are unionized, they will probably be members of the United Food and Commercial Worker's Union (UFCW).
Unless you are experienced in negotiating with unions, do not try to negotiate with them by yourself. They have professional negotiators, and you will need a professional on your side, too. Your attorney will be able to help in this area. If you are a franchisee, the franchisor will handle this.
You will need business liability insurance for a coffee shop operation. This will cover you for personal liability for such things as a customer slip-and-fall accident, fire/smoke/earthquake/lightning damage, or employee theft.
If you are a franchisee, the franchisor will have insurance for you to purchase, or it may be a part of the franchise agreement. If you are a private owner, you will need to obtain it. Virtually every insurance company sells this product.
Fire Safety Inspections
You will not be able to open your business without the fire department signing off on the safety of the building. Treat this as another opportunity to make friends. They may also have specific regulations for a drive-thru coffee shop, if that is in your plans.
Determining where you will get your equipment, coffee, and food may seem like a simple task, but there may be some legal hurdles to these essential acts for opening your coffee shop.
It may be tempting to let your cousin's girlfriend's babysitter make your brownies, but you want to check the licensing of any local food provider. You will take on any liability if the food hurts someone.
Make sure you have the proper contracts in place with the coffee supplier, whether you are roasting yourself (which is unlikely) or buying from a roaster or wholesale supplier. You should have some kind of requirements contract to receive supply whenever you need it without having to store a lot of inventory that you will not use for a while. This will be one of your most important contracts.
Going to The Source for Your Coffee Beans
You may be the kind of coffee shop owner who wants to go to South America or Africa and pick your own coffee beans. Or you want to buy directly from the farmers. Taking on these tasks can be complicated and it helps to know exactly what you are doing or to hire an experienced attorney to help.
If you do want to import coffee beans directly from the places of origin, you will need to familiarize yourself with the U.S. regulations for importing coffee and the export regulations for the source country. For instance, there are no U.S. import duties on green coffee, but there are duties on roasted coffee. A licensed customs broker or an experienced coffee supplier will be able to help you with this.
The Legal Details Make a Difference
Opening a successful coffee shop is a wonderfully romantic notion. But that romance can come to a quick end if you do not follow the numerous legal requirements for the business. Pay attention to all the details, both small and large, and you can prosper in this popular business.
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 are doing all you can to succeed. Maybe soon you can have your own brewed coffee in your own store. Good luck!