It’s the dream of a lifetime — open your own coffee shop, help people get away, relax, and work remotely, while you bask in the smell of rich, dark roasts. Well, the dream is possible. Coffee shops have become increasingly popular, and research shows that the demand for cafes has grown faster than other food service companies.
They appeal to a wide variety of people, from commuters who grab a cup of coffee in the drive-thru to those who want a place to work remotely. Plus, revenue in the coffee industry has climbed along with demand. Reports indicate that the industry brings in $50.7 billion every year.
As with any new business, starting a coffee shop comes with challenges. Competition and high startup costs are just two of them. However, if you’re interested in learning how to start a coffee shop, our guide can help.
Benefits of Opening a Coffee Shop
There are plenty of benefits to opening a coffee shop. Here’s a look at what business owners can look forward to:
- Impressive profit margins: Selling single cups of coffee can bring a nice profit. Research shows the average cost to make a cup of joe is about $1, but consumers pay $3.50-$4.50. That’s a 300-400% markup, and a recipe for a successful business.
- Increasing demand: More and more people are visiting their local barista for their favorite beverage. An estimated 83% of Americans drink coffee, which may explain why coffee shops have a 7% annual growth rate.
- Ability to specialize: Coffee is no longer a simple drink with cream or sugar. Customized drinks and specialty coffee orders have created a whole new language. Ordering a venti, half-whole milk, half 1%, no foam latte with whip and two packets of Splenda won’t raise eyebrows in your corner shop.
1. Create a Business Plan
Starting a coffee shop requires a sound business plan, which is a document that explains how your company will succeed. Its sections explore key aspects of the business, like the coffee shop’s goals, marketing, and finances.
More specifically, a business plan will include these parts:
- Executive summary: A top-line view of your business plan.
- Company overview: Explain the business and what sets it apart.
- Description of products or services: The food and drinks on the menu.
- Marketing plan: Discuss your ideal customers and how you’ll attract and retain them.
- SMART goals: Set Specific, Measurable, Attainable, Relevant, Time-based goals.
- Management team overview: Provide details on managers, their experience, and duties.
- Financial plan: Explain where funding for the coffee shop will come from.
2. LLC vs Sole Proprietorship: Choose a Business Structure
Once you’ve created your coffee shop business plan, it’s time to move on to structuring your business. What form will your new coffee shop take? There are several different kinds of business structures, but a sole proprietorship or a limited liability company (LLC) is the most common.
The difference? A sole proprietorship is best for small businesses with no employees. If you plan to start small — like a mobile coffee shop or a coffee kiosk in a mall where you’re the sole employee — a sole prop is a good choice. Setting it up is also free.
However, most coffee shop owners hire at least a small staff, which lends itself to an LLC. An LLC provides liability protection. That means if the shop goes under or ends up in debt, your personal assets are off limits to your creditors.
There’s a cost to apply for LLC status. Filing fees vary by state, but you can expect to pay anywhere from $50 to $500.
3. Determine Your Business Costs
The startup costs for a coffee business vary. Research shows a small coffee kiosk will set you back about $60,000 to $150,000. A coffee shop with seating and drive-thru runs about $80,000 to $300,000. But startup costs are just part of the financial picture. Consider these costs as you learn how to start a coffee shop:
- Real estate costs: Ideally, your coffee shop will be in a location with high foot traffic, but a spot in a popular retail area could be pricey. Factor in whether you’ll lease, buy, or rent.
- Equipment costs: Some coffee shop equipment is highly specialized, like espresso machines or grinders. The size of your shop’s gear matters too, and depends on how much seating you’ll provide. A coffee shop with 15 tables has different equipment needs than a kiosk.
- Labor costs: If you’ll start an independent coffee shop with employees, labor costs are a factor. The average coffee shop employee makes $11.10 per hour.
- Consumable supplies: You’ll need to order a few supplies continuously, like paper plates, plastic silverware, and ingredients for coffee and food. Many coffee shops buy high-end ingredients for premium quality coffee, so these expenses can add up.
- Marketing and advertising: Where will you find customers? To start, some shops buy local advertising for a grand opening, then drive repeat business through word-of-mouth and social media. It all comes down to location, though. If you’re visible, the customers will come.
How can you fund your startup costs?
Startup costs are often the first big hurdle for new coffee shop owners. If you need to raise capital, consider these options:
- Government assistance: There are a handful of government grants that may provide assistance. Start your search on Grants.gov. While grants provide “free money,” they’re also difficult to qualify and apply for.
- Credit cards: A business credit card can cover some of your startup costs, but many credit cards have high interest rates.
- Loans: You can apply for a business loan, or ask friends and family for financial help. A bank loan takes time and involves a lot of paperwork. Asking friends and family to pitch in is easier, but not always possible and can damage the relationship.
4. Create a Business Name
The next item on your to-do list? Create a coffee shop name. While the options are endless, most states have rules when it comes to how to name an LLC. A name must be unique. Most states have a searchable database on the secretary of state’s website to let you check.
If you plan to LLC, most states require the name to contain “limited liability company” or “LLC”.
Before registering a name with the state, check for a matching domain name. Ideally, the company website and company name will match.
5. Register Your Business and Open Financial Accounts
You’ll have to clear a short list of chores to get your coffee shop up and running as a legal entity:
- Register the business: Each state requires you to fill out LLC formation documents to legally establish a business. The forms are usually on the state’s secretary of state website. There’s often a filing fee, too.
- Create an operating agreement: That’s a contract that explains how the shop will run. It explains who’s involved, how decisions are made, and how profits and losses are managed.
- Get an EIN: Every business needs an employer identification number (EIN) from the IRS. Visit the IRS website to get this nine-digit number. In addition, your state may require a separate tax ID. Visit your state business department to learn more.
- Open bank accounts: You’ll want to open a business checking and savings account to keep the books above board. You’ll need your EIN in place before you apply.
6. Purchase Equipment for Your Coffee Shop
It’s time to start filling your coffee shop with necessary gear and furniture. Here’s a checklist of coffee shop equipment to consider buying:
- Espresso machine
- Coffee grinders and espresso grinders
- Point of sale system (POS system)
- Automatic coffee brewers
- Ice machine
- Display cases
- Accessories and utensils
Need more? This handy coffee shop equipment list is a good start.
7. Market Your Coffee Shop
Marketing is an ongoing cost, but you don’t have to bet the farm. Consider starting with social media. You can tailor your channels to the clientele you want to target. If you want corporate clients, LinkedIn is a good platform. For the younger crowd, try Snapchat or Instagram. Consider joining groups on social channels too. Facebook, for example, has a coffee shop owner group brimming with great ideas.
Examples of Coffee Businesses to Start
When you think of a coffee shop, you probably picture a Starbucks-like experience, with a seating area and a drive-thru. But there are other kinds of coffee businesses. Consider these ideas:
- Coffee bar: A small space with bar seating and limited menu.
- Coffeehouse: A traditional coffee shop with a full menu, seating, and a drive-thru.
- Drive thru-only coffee shops: No indoor seating, just a drive-thru and a limited menu.
- Coffee carts and trucks: Mobile options that can be one-person venues.
- Coffee roaster/retailer: Roast different blends of coffee beans and sell them to regional coffee shops.
Starting a coffee shop can be an exciting endeavor, but it’s not without its challenges. From picking a company name and business structure to finding a location and creating a menu, there’s a fair amount to do before opening day. For the passionate, persistent coffee lover, a coffee shop can be a highly profitable business to start.
Coffee Shop FAQs
- Where should I incorporate my coffee shop?
When you’re ready to set up a business, you can research and file everything yourself, or reach out to a business formation company to handle the details.
- What’s the biggest challenge in the industry?
The competition can be steep. Nearly four out of five coffee shops in the U.S. are Starbucks. It can be hard for an indie owner to start a coffee shop that gets foot-traffic traction.
- Do I need a lawyer to start a business?
No, but it’s a good idea to consult one. A lawyer can provide direction as you register your business, review lease documents, and create employee contracts.
- How much does the average coffee shop owner make?
On average, the owner of a small-to-medium sized coffee shop can earn $60,000-$160,000 a year.
- Do I need to sell food in my coffee shop?
Offering food at a coffee shop tends to increase foot traffic, but the food itself isn’t always profitable. If you’re concerned about the costs, consider offering ready-made items.