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How to Start a Coffee Shop
More than half of all Americans drink coffee every day. Coffee shops and cafes are everywhere, but many of them are about more than coffee. A good coffee shop is an experience, and a community, and offers an attitude of its own in addition to appealing snacks and coffee-based drinks. Opening your own coffee shop could be your opportunity to create a uniquely appealing experience in your town or neighborhood.
Keep in mind, starting any kind of business takes a lot of work. The key is to have the knowledge and patience necessary to move deliberately through the development and process, as detailed in this step-by-step guide.
$61,700 - $229,300
Time to build
$27,375 - $54,750 p.a.
Step 1: Decide if the Business Is Right for You
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. And for the record, a coffee shop is different from a cafe, which tends to focus more on food.
Pros and Cons
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.
- Offer your community a new coffee experience
- Flexibility, as you determine your own hours
- Healthy profit potential.
- Express your creativity with your coffee shop concept.
- Everybody drinks coffee, so competition will be strong
- Marketing will be required to build your reputation and clientele
- You’ll need significant capital to get started
German research firm Statista valued the US coffee shop market at $47.5 billion in 2019, with 3.3% growth from the previous year.https://www.statista.com/statistics/1032200/coffee-shop-industry-market-size-us/ Due to the pandemic, the industry shrunk by nearly a quarter in 2020 as many shops were forced to shut down.
But now the global coffee and tea industry is on the rebound and expected to grow 9% through 2023, according to industry analyst Research and Markets. The hot new trend is creative coffee flavors and styles, driving market growth.
How much does it cost to start a coffee shop?
Start-up 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.
|Start-up Costs||Ballpark Range||Average|
|Setting up a business name and corportation||$200 - $200||$200|
|Licenses and permits||$200 - $300||$250|
|Insurance||$100 - $500||$300|
|Business cards and brochures||$200 - $300||$250|
|Website setup||$1,000 - $3,000||$2000|
|Space lease security deposit or purchase down payment||$5000 - $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|
How much can you earn from a coffee shop?
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 be selling 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 do 50 sales per day, your annual revenue will be about $110,000, giving you a profit of more than $27,000. As your shop gains recognition you could get to 100 sales per day, doubling your revenue and profits.
What barriers to entry are there?
There are several barriers to entry for a coffee shop. Your biggest challenges will be:
- Finding a unique concept to help you stand out
- High startup costs
- Building a large customer base
Step 2: Hone Your Idea
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.
Why? Identify an opportunity
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.
Next, come up with a concept and environment that will be appealing to customers. Look at successful coffee shops in your area to see what they are doing, and what concepts and products people respond to.
What? Determine your products or services
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.
How much should you charge for coffee drinks and other products?
In the US, the average price for a cup of coffee is $2.99, or about $4.25 at more gourmet shops. Once you add in food items and specialty drinks, $6 per sale is a realistic target.
Research other coffee shops in your area to determine the best prices for your market.
Who? Identify your target 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.
Where? Choose your business premises
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 Loopnet, Craigslist, Crexi and Commercial Cafe.
When choosing a commercial space, you may want to follow these four rules of thumb:
- Central location accessible via public transport
- Ventilated and spacious, with good natural light
- Flexible lease that can be extended as your business grows
- Ready-to-use space with no major renovations or repairs needed
Step 3: Brainstorm a Business Name
Your business name is your business identity, especially for a coffee shop. It’s best to choose a name that encapsulates your objectives, services, and mission in just a few words. It should also be easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.
Here are some ideas for brainstorming your business name:
- Short, unique, and catchy names tend to stand out
- Names that are easy to say and spell tend to do better
- The name should be relevant to your product or service offerings
- Ask around — family, friends, colleagues, social media — for suggestions
- Including keywords in the name, such as “coffee” or “beans”, boosts SEO
- Choose a name that allows for expansion: “Jim’s Bakery” rather than “Jim’s Cookies”
- Avoid location-based names that might hinder future expansion
- Use online tools like the Step by Step business name generator
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names at a web cataloging site such as NameChk. 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. And if you’ve exhausted all your creative juices but still don’t have a business name, don’t stress! Instead, check out our business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.
Step 4: Create a Business Plan
Every business needs a plan, a rough outline that helps guide a startup through the launch process while maintaining focus on key goals. A business plan is also crucial for helping potential partners and investors understand your company and vision:
- Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
- Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
- Product and Services: Describe your shop’s services in detail.
- Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
- Competitive Analysis: Analyze main competitors, assessing their strengths and weaknesses, and create a list of the advantages of your services.
- Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
- Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
- Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
- Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
- Appendix: Include any additional financial or business-related documents.
If you’ve never created a business plan yourself before, it can be an intimidating task. Consider hiring an experienced business plan writer on Fiverr to create a professional business plan for you.
Step 5: Register Your Business
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!
Choose where to register your company
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 places offer real advantages when it comes to coffee shops.
If you’re willing to move, you could really maximize your business!
Choose your business structure
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your barbershop will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the four main options:
- Sole proprietorship – The most common structure for small businesses makes no legal distinction between company and owner: you get to keep all the profits, but you’re personally liable for all debts.
- Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses.
- Corporation – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly.
- Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
We recommend that most new business owners form an LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can quickly and cheaply form an LLC using ZenBusiness’s online LLC formation service (it can take as little as 5 minutes). They will check that your business name is available before filing, submit your Articles of Organization and be on hand to answer any questions you have about the company formation process.
Step 6: Register for Taxes
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 or 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.
Step 7: Fund your Business
Securing financing is your next step and there are plenty of ways to raise capital:
- Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
- SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
- Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
- Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
- Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund an entrepreneur’s vision.
- Personal: Self-fund your business via your savings, the sale of property or other assets, and support from family and friends.
Step 8: Apply for Licenses/Permits
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, health license and permit 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 licenses, a business license, and local county or city-based health licenses and permits. Additional permits may be required by your state, such as a general business permit or license. The license requirements and how to obtain them vary from state to state, so check your state government’s website or contact the appropriate person to inquire about licenses and permits needed to run a catering business. You could also use the SBA’s guide to identify your state’s requirements.
Your city, town, or county may also have additional requirements, such as signage and zoning permits. You may want to speak to representatives of your local governments about licensing requirements.
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.
For peace of mind and to save time, 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 you to make sure you’re fully compliant.
Step 9: Open a Business Bank Account
Before you begin making money, you will need to have somewhere 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 catering business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer business account options, just inquire at your preferred bank to learn about rates and features.
But it is a good idea to look at a few options, as banks vary in terms of offerings, and you want to find the plan that works best for you. Once you choose your bank, you just need to bring your EIN (or Social Security Number if you decide on a sole proprietorship) and your articles of incorporation or other legal documentation that proves your business is registered.
Step 10: Get Business Insurance
Business insurance is an area that often gets overlooked but is vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business, and your life.
Here are some types of insurance to consider:
- General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
- Business Property: Provides coverage for your equipment and supplies.
- Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
- Worker’s compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical space, whether it is a cart, storefront, or office.
- Commercial auto: Protection for your company-owned vehicle.
- Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
- Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.
Step 11: Prepare to Launch
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Develop your website
Website development is crucial because your site is your online presence and needs to convince prospective customers of your expertise and professionalism. They are unlikely to find your website, however, 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.
You can create your own website using services like WordPress or Squarespace. 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 developer to create a custom website for your business.
Essential software and tools
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. We examine several of them below.
Some of your business will come from walk-by customers and web surfers, but you should still spend time on marketing! Especially as a new business, getting the word out and increasing customer awareness is crucial.
Once your website is up and running, make sure you link to your social media accounts and vice versa. Social media is a particularly good way of promoting your business because you can create engaging posts that advertise your products:
- Facebook: Great platform for paid advertising, allows you to target specific demographics, like men over age 50 in the Cleveland area.
- Instagram: Same benefits as Facebook but with different target audiences.
- Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales.
- Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
- If you are unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.
In addition to the space itself, you’ll need several items to successfully launch a coffee shop, including:
- Coffee roasters and coffee makers
- Tables, chairs, counter, refrigerators
- Kitchen utensils and cleaning materials
Step 12: Build Your Team
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:
- General manager – Scheduling, ordering, hiring and firing
- Baristas – Take orders, prepare food and drinks
- Marketing lead – Social media marketing, SEO
Your business may at some point need to hire all of these positions, or just one or two of them, depending upon its size and needs. You might also hire multiple workers for a single role, or a single worker for multiple roles, again depending on your needs.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn or Facebook, or using free classified sites like Jobs and AngelList. You might also use a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Finally, you could also hire a recruitment agency to help you find talent.
Step 13: Start Making Money!
Focus on USPs
Unique selling propositions, or USPs, are the unique characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to 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.
Some signature USPs for your coffee shop could be:
- Creative signature drinks
- Unique environment with comfortable seating
- Homemade food choices
- A mission-based concept, such as providing jobs to at-risk youth
Take advantage of your website, social media presence and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:
- Competitions and giveaways – Generate interest by offering prizes for customers who complete a certain action, such as being the 10th customer on Black Friday.
- Optimize calls to action (CTAs) – Experiment with text, color, size and position of calls to action such as “Buy Now”. This can sharply increase purchases.
- Signage – Put up eye-catching signage at your store and website
- Flyering – Distribute flyers in your neighbourhood and at industry events
- In-Person Sales (IPS) – Offer your products at local markets, tradeshows
Build Affiliate Relationships
Affiliate marketing is advertising in which you compensate third parties, who are your affiliates, in order to generate traffic to your website. You develop long-term relationships with these affiliates and generate traffic for each other on an ongoing basis.
Coffee shop FAQs
Coffee shop startup costs range from $61,700 to $229,300. The highest cost is the preparation of the space, so if you find a space that is already setup as a coffee shop, your costs will be at the lower end of the range.
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 any business has challenges. It’s not complicated to start a coffee shop compared to some other types of businesses because the business model is straightforward. However, you need a thorough plan, a creative menu, and a unique concept if you’re going to be successful.
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.