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How To Start a Bakery Business

Bakery Opening

If you're an aspiring entrepreneur with a gift for baking and the pastry arts, a bakery could be the right small business for you. But running a successful business takes more than having a great business idea and the best donut in town.

To start a bakery, you must plan for the legal considerations and requirements governing a small business in the food industry. Sometimes, even the best baker or experienced business owner needs professional guidance or legal help.

If you're ready to start a bakery business, the following steps can help you build a strategy for profitability and avoid future legal hassles.

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How Profitable Is a Small Bakery?

On average, bakery business owners experience a profit margin between 5% and 15%.

The profit potential for a small bakery depends on several factors, including:

  • Pricing strategy
  • Financial management and operations
  • Marketing strategy
  • Ability to adapt to changing market demands

With rising inflation, periodically adjusting your pricing strategy may be necessary. When formulating your pricing, consider your costs, the market demand, and the value of your baked goods. You should also check your competitors to ensure your prices align with your market.

Thoroughly tracking your sales and expenses will help provide a clearer picture of your net profit and loss.

1. Decide on the Type of Baking Business You Want To Start

Consider whether you would like to open a:

  • Storefront bakery
  • Home-based bakery
  • Wholesale bakery

Storefront bakeries and home-based bakeries sell directly to consumers. Wholesale bakeries sell to retailers.

Home-Based Bakery

If you're starting out, a home-based bakery (or mini bakery) might be the way to go. Your overhead and startup costs will be lower. This option also allows you to hone your baking skills and commercial operations before you scale up your business.

With a home-based bakery, you can sell your baked goods:

  • Online
  • At farmers markets
  • At local events, fairs, or “pop-ups"

You can also ship your sales to customers or offer free local delivery. Consider offering a subscription service where customers receive regular deliveries of your baked goods, like a weekly or monthly assortment of cupcakes or bread. Some states, like Louisiana and Michigan, have cottage food laws that allow bakers to cook in their home kitchen without additional licensures.

You can also sell out of a food truck. Buying a truck adds to your startup costs but can help you reach customers in new locations.

Storefront Bakery

Storefront bakeries can be sit-down establishments like cafés or coffee shops. To open a successful storefront bakery, you must create an excellent customer experience. This will encourage repeat business and build a positive reputation for your bakery.

Make sure your employees can provide a high level of customer service. Other ways to enhance your customer service experience include:

  • An efficient checkout procedure
  • An attractive layout
  • A comfortable dining space
  • An offer of free samples

A consistent, service-oriented experience is crucial for building customer loyalty.

Wholesale Bakeries

Wholesale bakeries are larger operations. They're generally much more expensive to start than storefront or home-based bakeries.

Wholesale bakeries sell to retailers like:

Wholesale bakeries don't sell directly to customers. So, opening a wholesale bakery means you don't need to find a commercial location in a heavily trafficked area. Instead, you must find a spacious location to produce a high volume of baked goods for your retail clients.

You'll also need specialized bakery equipment and large amounts of ingredients. This will also add to your startup costs.

Opening a Storefront Bakery vs. a Home-Based Bakery

The decision between a home bakery and a storefront bakery depends on cost and preferences. A storefront bakery will have a higher overhead than a home-based bakery. For example, commercial rent or a mortgage and utilities for a storefront are steep monthly costs.

You will likely need more equipment and bakeware for a storefront, as well as furniture and other furnishings. This can add up to tens of thousands of dollars.

Conversely, home-based bakeries don't need to pay additional rent or purchase furniture.

Storefront bakeries come with some additional insurance considerations:

  • If you hire employees, you'll need workers' compensation insurance. This covers employees who are injured on the job.
  • Your insurance should include coverage for premises liability in case a customer injures themselves in your store.

Another Option: Shared-Use Commercial Kitchens

Some small bakeries operate independently from another restaurant's commercial kitchen. These are sometimes referred to as shared-use or incubator kitchens.

Renting a commercial kitchen can be a cost-effective way for small bakeries just starting out to expand their operations. This model can also lead to strong business partnerships. For example, a wine bar that shares its kitchen with a bakery. The space functions as a coffee shop during the day and transitions to a wine bar with small plates at night.

2. Choose a Name for Your Bakery Business

Your new bakery's name should be distinctive and unique. This will help your target market recognize your brand at a glance.

You should also make sure that your name is not trademarked. Use the trademark search tool on the United States Patent and Trademark Office (USPTO) website to see if your selected business name is someone else's intellectual property.

You also can't use a business name that is already registered in your state.

Your state's laws have naming rules you must follow if you're starting a limited liability company (LLC) or doing business under a fictitious name (DBA).

3. Decide on Your Business Structure

Consider incorporating or forming a limited liability company (LLC). These types of business entities help protect your personal assets from your business's liabilities. These business structures may also offer tax advantages.

Contact your state's corporate office for more information on formalizing your business's legal structure.

You will also need a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You can get an EIN instantly and at no cost on the IRS website.

4. Choose Your Business Location

As you narrow down your options for a business space, consider the needs of your specific type of bakery. Small storefront retail bakeries will have very different needs from large wholesale operations.

If you want to open a storefront or bakery café, choose a location with plenty of potential customers and foot traffic nearby.

For a wholesale business, you don't need to worry about locating nearby consumers. Your clients will be restaurants, cafés, and supermarkets. Focus on finding an ample business space with enough room for large baking equipment. This will help you create an efficient, high-volume bakery.

Before signing a commercial lease, ensure local zoning laws allow for a bakery in your selected location. Contact your city hall or county office for information on your area's commercial zoning and land use regulations.

5. Create a Marketing Strategy

The baked goods market is a competitive and evolving business environment. A successful bakery business needs a comprehensive marketing plan. This will help you identify your target customer base and what they are looking for.

Social media platforms can be good places to learn about recent market trends.

For instance, some customers might be looking for:

  • Gluten-free, dairy-free, or vegan options
  • Organic ingredients
  • Innovative flavor combinations
  • Nostalgic confections
  • Special occasion and wedding cakes

Good marketing research will help you create the quality product your target audience demands.

Once you know more about your potential customers, they need to find out about your new business. Consider the following ideas to spread the word about your new bakery:

  • Make attractive business cards you can give out
  • Create a website and social media channels
  • Participate in local events
  • Partner with neighboring businesses
  • Leverage flyers and direct mail
  • Secure publicity coverage through local news outlets

Your marketing plan should also include information about where your customers are located. It also helps to add some research about the pricing they expect. Include your market analysis in your bakery business plan.

If you're opening a storefront or café, you can attract foot traffic with an inviting exterior and a clear sign. First, look up the regulations in your area to see if you need a sign permit. Your city or county is generally the issuing authority.

These authorities often require that you send pictures of what the sign will look like and how big it will be. Working with a sign contractor can simplify the process. Sign contractors usually know the city or county's signage requirements and are often licensed with the state.

6. Write a Detailed Business Plan

A good bakery business plan will help you formulate your goals and mission. Business plans can vary, but yours should include:

  • A description of your bakery business
  • An overview of management
  • A list of business members
  • Your marketing plan
  • Your financing plan
  • Financial projections
  • An executive summary

As you write your business plan, consider your operating costs and the prices you think you can charge. Be realistic about these costs and prices to create accurate financial projections. Make sure to count all the costs of running a bakery—not just the ingredients, equipment, and labor.

You also need to consider overhead costs. Overhead includes any expense you must pay regardless of your production and typically include:

  • Rent
  • A mortgage payment
  • Utilities
  • Insurance premiums

Overhead will be lowest for home-baking businesses and food trucks.

Once you have a detailed rundown of your costs and product prices, you should create a break-even analysis. This is helpful because it shows you what sales you need to reach before you have paid off your costs. This analysis helps you build a strategy to create a profitable business.

With a comprehensive business plan, you can show investors the benefits of putting their money into your business. Most banks and financial institutions also require a business plan for small business loans or financing.

7. Look for Funding

If you're opening a brick-and-mortar bakery location, you might need a business loan to finance your commercial lease. Even if you plan on running a home-based business or a food truck, you may still need some initial financing to cover startup costs.

As an alternative to a bank loan, you could consider approaching investors. Your friends and family might also consider helping you finance your initial business expenses.

Your equipment and ingredients will also be a significant startup cost. Depending on the nature of your bakery, you'll likely need:

  • Commercial mixers
  • Refrigerator and freezer
  • Dough sheeters
  • Deck ovens and rack ovens
  • Proofing cabinets
  • Packaging equipment
  • Cooling racks and conveyors
  • Display cases
  • Point-of-sale (POS) system
  • Tables, chairs, and other furniture
  • Ingredients and inventory

If you get help from a business attorney, be sure to factor legal fees into your business budget.

8. Find Out About Your Tax Obligations

As a small business, your business taxes will include federal, state, and local taxes. These taxes can include:

  • Income taxes
  • Sales taxes
  • Property taxes
  • Employment taxes

It's important to understand your tax obligations and keep good records to avoid an audit.

Keep records of your employment taxes for four years. Employment taxes most often include:

You have the “burden of proof" as a business owner. This means you must be able to substantiate any deductions or expenses you claim on your tax returns.

If you or your bakery employees receive tips, it's important to know the rules for reporting tip income. Reference the Restaurant Tax Center section of the IRS website to learn more.

Your location and business structure determine the specific tax laws that apply to you. Contact your city or county government to learn about your bakery's local tax responsibilities.

You can also look up your state's tax requirements on the U.S. Small Business Administration (SBA) website.

9. Implement Food Safety Procedures

Regardless of your business model, you must have food safety procedures in place. These procedures help protect you and your customers from foodborne illness. Foodborne illness is not only bad for business, but customers who get ill from food poisoning can even bring legal action against you.

The following steps can help you maintain the safety of your bakery items:

  • Always store baked goods at the right temperature to keep it fresh
  • Establish a clear handwashing policy
  • Store unprepared ingredients separately from finished baked goods
  • Make sure all utensils, cutting boards, and other food preparation tools are clean and safely stored

There are even more ways to lower the risk of foodborne illness or contamination. The Centers for Disease Control and Prevention (CDC) website shares tips to help decrease the spread of foodborne diseases. You can also visit the U.S. government's website on food safety for more information.

Visit the U.S. Food and Drug Administration (FDA) website to learn more about your state's food service codes and regulations.

Also, ensure all staff are properly trained on food safety. Consider implementing a food safety certification as part of your employee training program.

You should also plan for local health authorities to inspect your bakery.

10. Research and Purchase Business Insurance

Even if you have excellent safety procedures in place, it's still a good idea to have a large limit insurance policy.

If you have a storefront or wholesale bakery, you also need your insurance to cover:

Good insurance coverage protects your business from potential liabilities like a food poisoning claim.

11. Learn About Licensing Requirements in Your Area

Whether your bakery business is a large wholesale bakery or a homemade food business, you'll likely need a business license. The U.S. Food and Drug Administration (FDA) recommends that food business startups contact their local FDA office to learn more about licensing.

The FDA can also help you learn what regulations apply to your bakery business. Before you open your bakery, you'll probably need a food establishment permit from the local authorities. These are usually issued by a state agency like the department of agriculture. The interactive map provided by the Association of Food and Drug Officials can help you locate the state agency near you.

12. Research Your Labeling Requirements

If your bakery operates in multiple locations, you may need to provide nutritional information on your menus. You will also have labeling requirements if you sell packaged goods.

Labeling Requirements

Foods sold for human consumption are generally subject to labeling requirements. The FDA enforces many of these requirements. The requirements differ depending on whether you sell packaged or unpackaged food.

Packaged foods usually must have a nutritional information label. The required information includes:

  • Ingredients
  • Preservatives
  • Spices
  • Allergens
  • And more

Contact the FDA for more information on what to include in your nutrition label.

Your unpackaged food will have labeling requirements if you sell it at a retail chain with 20 or more locations. Your nutritional information must be available for customers to read at the point of sale. This could be:

  • On a sign at the checkout area
  • In the menu
  • In an informational pamphlet

Gluten-free baked goods have additional labeling requirements.

Small Business Food Labeling Exemptions

You might be exempt from the packaged foods labeling requirements if you're a small business. An exempt small business has fewer than 100 employees and sells fewer than 100,000 units of its product in a year.

There are also exemptions for retailers based on gross sales. If your business makes less than $500,000 in gross sales, you might be exempt. You could also be exempt if your gross sales of food and supplements are $50,000 or less.

If you think your business qualifies for an exemption, you can file a notice online on the FDA website.

Need More Help With Your New Bakery? Get Legal Advice

Starting your own bakery is exciting. It can also be overwhelming even for the best bakers. Food preparation businesses have special legal requirements you must meet to manage risk, ensure compliance, and protect your customers and employees.

Some bakery owners benefit from working with an attorney. Talk to a local business attorney today for advice on licensing, insurance, labeling, and other legal aspects of your new bakery.

Another option is FindLaw's simple DIY business formation process. This online tool will guide you through each step of your new business, helping ensure you meet all legal requirements.

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