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Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on November 4, 2021
Investment range
$61,700 - $229,300
Revenue potential
$110,000 - $1 million p.a.
Time to build
1-3 months
Profit potential
$55,000 - $250,000 p.a.
Industry trend
Growing
Commitment
Full-time
Here are the most essential factors to consider when starting a coffee shop:
Starting a coffee shop is a major commitment. Before you jump in, it’s best to fully understand what’s involved — and whether it’s a good fit for you. For the record, a coffee shop is different from a cafe, which tends to focus more on food.
Every business has its pros and cons, which you should weigh before deciding if starting a coffee shop is your best choice.
Here are some basic pros and cons of starting and running a coffee shop.
Due to the pandemic, the US coffee shop industry shrunk by nearly a quarter in 2020 as many shops were forced to shut down. Now, the industry is on the rebound and is steadily growing.
Trends
Challenges
American’s most popular espresso-based beverages in 2022((https://www.ncausa.org/Portals/56/PDFs/Communication/20220315_media_highlights.pdf?ver=Xz7bwWmt8eAtyGxkFp30b))
A barista prepares and serves espresso-based coffee.
Startup costs for a coffee shop range from about $60,000 to nearly $230,000. The largest expense is the space itself, so if you can find a place that needs few renovations you’ll reduce your costs.
In addition to the space itself, you’ll need several items to successfully launch a coffee shop, including:
| Startup Costs | Ballpark Range | Average |
|---|---|---|
| Setting up a business name and corporation | $200–$200 | $200 |
| Business licenses and permits | $200–$300 | $250 |
| Insurance | $100–$500 | $300 |
| Business cards and brochures | $200–$300 | $250 |
| Website setup | $1,000–$3,000 | $2,000 |
| Space lease security deposit or purchase down payment | $5,000–$50,000 | $27,500 |
| Space remodeling and preparation | $20,000–$100,000 | $60,000 |
| Furniture | $10,000–$25,000 | $17,500 |
| Equipment and roasters | $20,000–$40,000 | $30,000 |
| Initial inventory of coffee beans and food | $5,000–$10,000 | $7,500 |
| Total | $61,700–$229,300 | $145,500 |
Your profit will vary depending on how large your space is and the level of traffic.
The average profit margin for a coffee shop is 25%. You will sell drinks that vary in price as well as food items such as pastries and pre-packaged sandwiches.
If your average sale per customer is $6 and you initially make 100 sales per day, your annual revenue will be about $220,000, giving you a profit of around $55,000. As your shop gains recognition, you could make 500 sales per day, bringing in $1 million in revenue and more than $250,000 in profit.
There are several barriers to entry for a coffee shop. Your biggest challenges will be:
Now that you know what is involved in starting a coffee shop, it’s time to hone your idea in preparation to enter a competitive market.
Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important because it can help you understand your customers better, who your competitors are, and your business landscape.
Since you will have no track record in the business, you need to find a way to stand out from the competition. A good first move is to find a high-traffic area with little in the way of coffee providers.
For example, combining a coffee shop with an internet café can be a good business opportunity, because of diverse revenue streams and longer customer stays, which can lead to increased sales.
Next, devise a concept and environment that will appeal to customers. Look at successful coffee shops in your area to see what they are doing and what concepts and products people respond to.
You probably want to start with an up-to-date selection of coffee drinks and food items. Look at what’s trending and put your own spin on it. It’s crucial that you deliver the best possible coffee drinks, from drip to espresso, so perfect your methods and recipes by testing again and again with family and friends.
In the US, the average price for a cup of coffee is $4.90. Research other coffee shops in your area to determine the best prices for your market. Once you know your costs, you can use our profit margin calculator to determine your markup and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Your target market will be coffee drinkers and anybody else who appreciates your concept. You may want to research the preferred products of younger and older demographics, then offer and promote some of those drinks to draw that group. Once you open that door, word-of-mouth referrals and repeat customers will be your biggest source of business.
You will not need an office that is separate from your coffee shop, but the location of the shop itself is critical. The ideal would be a welcoming space in a neighborhood with high foot and road traffic yet minimal competition. Find commercial space to rent in your area on Craigslist, Crexi, and Instant Offices.
When choosing a commercial space for your coffee shop, you may want to follow these four rules of thumb:
Here are some ideas for brainstorming your business name:
Discover over 390 unique coffee shop name ideas here. If you want your business name to include specific keywords, you can also use our coffee shop business name generator. Just type in a few keywords, hit Generate, and you’ll have dozens of suggestions at your fingertips.
Once you’ve got a list of potential names, visit the US Patent and Trademark Office website to make sure those names are available for registration. Check the availability of related domain names using our Domain Name Search tool below. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that set your business apart. Once you pick your company name and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Here are the key components of a business plan:
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.
Registering your business is an absolutely crucial step — a prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s done, you have your own business!
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to coffee shops.
If you’re willing to move, you could really maximize your business! Keep in mind that it’s relatively easy to transfer your business to another state.
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your coffee shop will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
Choose Your State
The final step before you’re able to pay taxes is getting an Employer Identification Number or EIN. You can file for your EIN online or by mail/fax. Visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate on a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
The IRS website also offers a tax-payers checklist, and taxes can be filed online.
It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.
Securing financing is your next step, and there are plenty of ways to raise capital:
Bank and SBA loans are probably the best bets, other than friends and family, for funding a coffee shop. You might also try crowdfunding if you have an innovative concept.
Starting a coffee shop requires obtaining a number of licenses and permits from local, state, and federal governments.
Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.
If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your coffee shop as a sole proprietorship. Opening a business bank account is quite simple and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Business insurance is an area that often gets overlooked, yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
You may want to use industry-specific software, such as Square, clover, and toast, to keep track of orders and inventory, engage customers, manage payments, and more.
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.
You can create your own website using website builders. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech savvy, you can hire a web designer or developer to create a custom website for your business.
However, people are unlikely to find your website unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.
Here are some powerful marketing strategies for your future business:
Unique selling propositions, or USPs, are the characteristics of a product or service that set it apart from the competition. Today’s customers are inundated with buying options, so you’ll have a real advantage if they can quickly grasp how your coffee shop meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your coffee shop could be:
You may not like to network or use personal connections for business gain, but your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a coffee shop, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in coffee shops for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in coffee. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.
You probably can’t operate and manage a coffee shop on your own, so you’ll need to hire some staffers right off the bat. Potential employees for a coffee shop include:
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
Competition is tough in a market dominated by giant coffee shop chains such as Starbucks, which has more than 17,000 stores across the country. Still, there’s always room for something new and unique. If you can come up with an innovative concept for your coffee shop, offer an interesting flavor or style, and get creative with your marketing campaign, you can still develop a coffee shop brand that can hold its own.
Now that you have the knowledge needed to start your own business, it’s time to roll up your sleeves and brew your own formula for success!
The average profit margin of a coffee shop is 25%. The profit for a new coffee shop can range from $27,375 to $54,750. Popular, established coffee shops can have much higher profits.
Coffee shops face a lot of competition and need to have very high-quality and creative products to succeed, as well as an excellent location. They also take a good amount of capital to start. Profit margins are relatively high, however, and the lifestyle of a coffee shop owner is good.
Starting a coffee shop is not overly complicated compared to other types of businesses due to its straightforward business model. However, like any business, it has its challenges. Success requires a thorough plan, a creative menu, and a unique concept.
There is no magic formula to create a successful coffee shop. But most successful coffee shops offer an appealing experience for customers created by the ambiance and environment, rather than just great coffee.
Even small coffee shops can provide a comfortable living for the owner if they are successful. With one small coffee shop you’re not going to be a millionaire, but if your small shop does well you could make a decent living — and then maybe expand or franchise your business.
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