Thinking of starting a food business? An Overview of Options Food... · An Overview of Options...

Thinking of starting a food business?

An Overview of Options

Suzanne McGrath

Certified SCORE Mentor

[email protected]

http://www.score.org/

TYPES OF FOOD BUSINESSES

Catering

Food product

made to order (e.g. meal service)

packaged product to sell at retail and/or wholesale

Food Truck or Trailer

Brick & Mortar

Restaurant

Café

Bakery

Specialty

Where you want to end up may not be where you start

WHY DO YOU WANT TO START A FOOD BUSINESS?

What drives you?

Passion

Money-making opportunity

Both?

Entrepreneurial self-assessment

What does it take to be successful?

Need to understand food business – someone with food experience

Need to be able to run a business -- someone with business experience

Involves wearing a lot of different hats

Most of time spent running a business rather than working on the substance of the food aspect

Assess your strengths and weaknesses

Do what you are good at

Understand where you lack experience or desire to handle tasks/roles

Operator, processor, visionary theory

Develop plan to partner with, assign, or hire someone to do the things you can’t

Someone MUST be responsible for managing finances and administration

Industry experience

If you don’t have it, get it!

Part time job

Training/education opportunities

Want to make sure you like and know what you are getting into from behind the scenes

Be realistic about time commitment

Typical day

What activities are involved other than preparing food?

Wheel diagram of tasks & skill sets

Consider opportunity costs

How many hours are you willing to work?

How do you want to spend most of your time?

What are your career goals?

Consider impact on family

Consider opportunity costs

What could you make in salary or benefits if you got a job rather than started a business?

Can you make the same or more in the business you plan to start?

Run the numbers!

How much would you have to sell to generate this income?

Is it realistic?

Consider risk

Make sure you understand what you are signing up for and exactly what will happen if you fail

Try to protect your investment and limit your personal liability

Business entity

Insurance

Limit personal liability

Develop an exit plan

PREPARE FOR SUCCESS BUT PLAN FOR FAILURE

What will you do if the business fails

Job?

How much will you owe?

Will it affect your home, family, etc?

Retirement

Will it force you into bankruptcy

Don’t ignore this possibility, plan for it and make sure you would be ok with it if it happens

FINDING YOUR WAY IN

Home-based business under “cottage” food laws

Fairly restrictive

Most affordable if it fits can be a good first step

Be realistic about costs not true that working out of your home involves “no overhead”

Home-based business under “cottage” food laws

Potential costs:

Forming LLC and annual renewal

Business license, inspection, permitting, food handler’s license

Insurance

Bank account fees

Fees to sell at farmers’ markets, events, etc.

Marketing expenses (website, business cards, signage)

Credit card processing

Kitchen and office supplies

Packaging

Travel and delivery

Your time! (opportunity cost)

Create a P&L with breakeven point to assess sales volume and time needed to cover costs and generate return that justifies your time

Working out of a commercial rental kitchen

OPTION 1: “Commissary” kitchen (kitchen space only, food truck facilities)

Can be hard to find, limited hours

May be shared with existing business, like a caterer; or in a church, other organization, or community kitchen

May be least expensive option

May offer hourly or daily rental vs. long term commitment

Be creative in seeking out unused space from other food businesses

Working out of a commercial rental kitchen

OPTION 2: Membership kitchen

Requires longer term commitment (usually min of 6 months)

Might also be business “incubator” or “accelerator”

Might have different membership levels

E.g. food truck support or kitchen rental only vs. kitchen use + incubator or business advisory services

Or memberships based on hours of use (e.g. nights and weekends only vs. 24/7 access)

Storage (unrefrigerated or “dry”, refrigerated, freezer) may be extra


Incubator or accelerator services vary widely

Potential services include

General business assessment and development advice

Assistance with licensing and regulatory requirements

Referrals to third party providers for legal advice, trademarking, label development and compliance, branding design, packaging, financing, etc

Active involvement in getting your product in front of retail or wholesale buyers or distributors

Opportunities to participate in special events

Opportunities to try out your concept as a “pop up” retail or restaurant venue (for 1 night up to 6 months, depending on the incubator)

Assistance preparing for and establishing brick and mortar location


Cost of incubation/accelerator services varies widely

No additional cost over the membership

Increased cost for counseling services

Services for equity (% ownership of your business)

Starting out as a food truck or trailer

Perceived as less expensive than brick and mortar

Potential costs:

Food trucks can run $20-150k, depending on the vehicle type, whether new or used, and what type of equipment is needed


Regulatory costs

Licenses, permits, inspections, etc to get started

Vary widely from county to county under $1000 to about $2900

According to Chamber of Commerce, Washington DC is among the most expensive in the country

Regulatory costs continue on an annual basis after initial start up

Need to factor into monthly operating expenses

Can be very costly

Up to $30,000 annually in Washington DC


Other costs:

Place to park truck

May still need commissary kitchen

Licensed place to prep, store food

Place to hose out truck, dispose of grease, etc.

Sometimes also offer parking


Heavily regulated

Need to understand regulations before jumping in, buying truck, etc

Limitations on

Size of truck

Where you can park/sell

If someone isn’t doing what you are planning or where you are planning it, there might be a reason!

Brick & Mortar

Potentially expensive rent

Potentially expensive construction/improvement/equipment costs

Frequently requires longer term commitment

Regulatorily intense (permits, licenses, inspections)

May be riskier may require personal guarantee

Brick & Mortar

Ways to decrease cost/risk:

Think smaller

How much space do you really need?

Can you start small and increase later?

Consider less expensive areas

Can you find month to month opportunity?

Consider a kiosk, stall, or pop-up

Look for spaces already built out with kitchen facility

Consider buying a business for sale

Consider a franchise

Consider a partnership, space-sharing, or renting part of facility to other businesses

WHERE WILL YOU SELL

Order-based business, e.g.

catered events

custom orders (e.g. wedding cakes)

meal delivery

Sporadic

Festivals, events

Pop up locations

Farmers’ markets

WHERE WILL YOU SELL

Retail – Direct to Consumer

Market stall (e.g. Union Market) or kiosk

Food Truck or Trailer

Brick & mortar location

Online (own website)

Wholesale – to or through another business

Markets or other retailers

Caterers

Restaurants, cafes or other food service outlets

Distributors

Online (through another website, including Amazon, Etsy, etc.)

MAPPING YOUR COURSE

Where do you want to go?

Side hustle

Catering

Food truck

Major retailers

Amazon

Brick & mortar

What can you afford?

MAPPING YOUR COURSE

Can you bootstrap your way to your ultimate goal?

Brick & mortar bakery: cottage business doing custom orders commercial kitchen expanding to farmers’ markets then retailers kiosk or stall brick & mortar shop

Retail product in markets & on Amazon: cottage business or commercial kitchen selling at farmers’ markets selling and sampling in small retailers incubator/accelerator to increase volume and get into larger accounts

Full service restaurant: commercial kitchen-based catering to build customer base, menu, track record food truck or trailer or accelerator-supported pop-up and/or stall-based business brick and mortar

CREATING A PLAN

Realistic, careful, well-informed planning is key to success

Essential elements of a plan

Initial concept development

Feasibility assessment

Market/competition analysis

Profit & Loss/Breakeven analysis

CREATING A PLAN

Market analysis should include:

Detailed research and assessment of the market and existing competitors

Why is your concept needed?

How does it fill an unmet need or solve a problem?

Who are the most important competitors

What are they doing?

How are they doing?

CREATING A PLAN

Why can you succeed in this market?

How is the market evolving and changing?

What will you do if and when someone tries to eat your lunch?

Be realistic: The number of food businesses of all kinds is exploding so competition is fierce!

How will you attract and keep:

Customers

The attention of the food media

Employees

CREATING A PLAN

Profit & Loss/Breakeven analysis

Critical to understanding how much volume you need to do to cover costs and make a profit and whether/how you can generate that volume

Data you need to create the analysis

Understanding of cogs, pricing, margins

Sample break-even spread sheet

How much time and effort will it take to generate the required volume

Do you have the space, time, and investment to do it

Written business plan

Plan is for you, not others

forces you to think through every detail

increases likelihood of success

SCORE workshop and online resources can help


Marketing plan is critical

Don’t underestimate the effort required to generate, maintain, and increase sales

Develop a very clear understanding of your target market niches and how to reach them


Goals and objectives

You will achieve more by establishing specific, measurable goals than if you just start out and see where you go

Need to think through where you are going and how you are going to get there

How much profit/income do you want to generate?

How much volume is needed to do that?

How many customers/sales would you need?

How can you get those customers?

Think short term (first year in business), intermediate term (1-3 years), long term (where do you want the business to be in 5 years)


Think through and understand plan for business development

If you start out at home or in a commercial kitchen, is that the ultimate goal or just a transitional step to building a larger business?

At what point will you be ready or need to transition to the next step?

Consider breaking development into phases

E.g. if you plan to scale

Phase 1 first location

Phase 2 additional locations and/or franchise


Consider exit strategy

What is your ultimate goal?

Run business in long term

Multiple locations

Grow then sell

Grow then franchise


What happens if it fails

Consider a drop dead date for success

What does failure look like

How will it affect

Financial situation

Family, relationship

Job prospects

How can you plan for it and limit liability

What will you do if the business doesn’t work

SET YOURSELF UP FOR SUCCESS

Understand goals for positioning yourself during first 12-18 months in business:

After 1-2 years in business, you want to be able to prove that you have been successful

Want to be able to qualify for loan or investment if needed to grow or expand


How to do this:

Establish a realistic plan to finance your business during the first year or two

Base your plan on conservative, realistic estimates of costs and sales

Figure out realistic financing

Don’t rely on credit cards to finance the business

Tailor your business scale to available financing

Set up and maintain accurate accounting system so you can pay taxes and generate financial statements whenever needed

Create a system for complying with all regulatory requirements, filings, tax payments, etc. so that everything is filed and paid promptly


How to do this:

Establish a business bank account

preferably at a bank that makes a lot of SBA-guaranteed loans to small businesses

get overdraft protection from the beginning if you qualify

keep your bank account squeaky clean with no overdrafts

get to know the bank staff, tell them about your business, and keep them apprised about your progress

Protect and try to improve your personal credit score


How to do this:

Build a written, countable customer database

Collect customer email addresses from day 1

Focus on getting to your break even point and generating a profit, however small, before expanding your business

UNDERSTANDING THE LANDSCAPE

Whatever the business, you will have to learn and navigate a complicated maze of:

Regulations (registration, licensing, permitting, inspections, taxes, filings, labeling)

Financing

UNDERSTANDING THE LANDSCAPE

Good news is that more resources are available to food-based entrepreneurs than ever before

Private incubators/accelerators

Associations

E.g. food truck associations

Specialty food and beverage associations

Education programs and classes to train entrepreneurs

Gov’t programs that offer training or assistance

SCORE mentors

County level small business start up assistance from economic development offices

Other gov’t programs (e.g. latino economic development, women’s business center, community business partnership, crossroads)

Loan and microloan programs

REGULATORY LANDSCAPE

Can be very complex and sometimes difficult to ascertain

Many laws regarding food-based businesses are at the county level

if you are operating or selling in different counties, may need to research and comply with laws for all of them

E.g. if you are operating a food truck or selling at farmers’ markets in different counties


Get help

Many organizations can help you understand and navigate the regulatory process

Food truck association

Economic development office in the county where you will be producing the product

Accelerator or incubator where you are a member


Be patient, work through regulatory process step by step

Begin at the beginning

Licenses will need to be in the name of your business so if you are forming an LLC or a corporation, do that first

Register your entity at state corporation commission

If necessary, consult a lawyer to choose best business entity for you

SCORE maintains resource list of lawyers, accountants, etc.

Once business is formed, you’ll need an Employer Identification Number from the IRS (can be done online)


Best to begin at business license office in county where you will be producing the product (i.e. where home kitchen or commercial kitchen is located)

Don’t apply for business license online go to the office and speak with a real person

Tell them everything you are planning to do or might do in your business and ask them to tell you everything they will require (licenses, permits, inspections, annual taxes or other filings)

Be thorough: particular aspects of your business might trigger additional regulation (e.g. selling online, outdoor seating, live entertainment)

Ask them where else you will need to go to handle regulatory issues (health dept, county and/or state dept of taxation, zoning, alcoholic beverage control, USDA, FDA)

If you are planning to sell in counties other than where production takes place, contact those counties after complying with your local regulations


Regulations for particular business types

Cottage Food Businesses

Increasingly adopted by most states over the last decade

Can be confusing because rules are created by state laws as well as regulations

Fairly restrictive


Virginia is special case:

Cottage food law

Allows production of limited goods for limited use without inspection of kitchen

PLUS has Home Food Processing law

Allows for many more foods (excluding meats) with inspection of kitchen


Typical provisions

Only certain types of low-risk foods can be produced

Limited to non-hazardous foods

Baked goods, jams, jellies, popcorn, granola, high-acid jarred foods

Excludes items made with meat, some dairy, some fresh produce


Foods can only be sold in limited places

Usually only direct to the consumer with no middle man (i.e. not to restaurants, retailers, etc who will then sell to consumer)

At your home or at a stand outside it

At farmers’ markets

Community events or fundraisers


Restrictions, licenses and inspections are often (but not always) required

May require food handler certificate

No pets in home (or at least in food preparation area)

Kitchen belongs to business owner

May involve a monetary limit (i.e. after reaching certain sales volume, have to move to a commercial kitchen)


Prescribed labeling

Usually not as restrictive as for products produced in commercial kitchen

At least name and address of producer and disclaimer to the effect that this was not produced in a commercial kitchen

Some states require more info (e.g. ingredients, net weight, date of production)


Food Trucks/Trailers

Requirements, restrictions, and costs vary dramatically among counties and cities

Typical requirements:

Business license for the mobile food business itself

Employer Identification Number (EIN) from IRS

Vehicle itself has to be commercially licensed

Depending on the vehicle and jurisdiction, driver could need commercial driver’s license

Seller, vendor, or peddler’s license may be required by localities in which you are selling

May be required of one or all employees on the truck

Food handler’s license

May be required of one or all of employees on the truck

Food Trucks/Trailers

Health Department inspection and permit for the truck

Health Department inspection and permit for the kitchen out of which the truck works

Fire Department inspection and certificate

Usually required if you cook on the truck, have a propane tank, generator, or generate grease

Sales tax account for state and/or local tax agencies

Event license for selling at special events might be required for EACH event

Certificate of Occupancy might be required for selling on private property


Brick & Mortar

Regulatory requirements vary based on location, building & business type

Establishment of business may require:

Professionally prepared renovation plan

Plan approval and building permits

Zoning approval

Health dept approval

Multiple inspections (electrical, plumbing, mechanical, fire, health)

Certificate of occupancy

Business license

Alcohol license if applicable

Sales tax account

Food managers’ licenses

Ongoing Regulations

Businesses are also subject to annual regulatory requirements

Annual health inspections

Annual license renewals

Business license

Alcohol license

Annual tax payments

Gross receipts tax

Personal property tax

Misc (depending on county)

Employee Regulations

No employees other than yourself

Need to pay estimated quarterly income tax payments

Pay self-employment tax – Medicare & Social Security

Other employees

Payroll taxes

Withhold Federal & State income tax

FICA – Medicare & Social Security (employer & employee each pay half)

FUTA – unemployment tax

Workers’ compensation insurance

Most businesses with one or more employees in MD, DC, VA are required to have it

FINANCING

How much will you need?

Be realistic and very conservative

You’ll always need more than you think

Don’t undercapitalize

Think about what will happen if you undercapitalize and avoid it

Total amount you’ll need is not just the amount for start up costs, but also for operating expenses that you’ll need to cover until the business reaches profitablility

Need a conservative breakeven analysis to figure this out

Permitting and other regulatory processes can delay startup and profitability – build in this time

For brick and mortar, permitting and construction delays also need to be factored in

FINANCING

Funding can come from a variety of sources:

Personal contribution – lenders and investors will want to see that you have some money of your own in the business

Friends and family

Bank loans

What are SBA guaranteed loans

Non-bank “alternative” lenders

E.g. internet lenders (usually not start ups with no track record)

Gov’t or quasi-govt loan programs

Crowdfunding

Grants

Limited for small business (vs. non-profits)

FINANCING

DON’T rely on:

401k funds

Credit cards

EDUCATION, TRAINING, ASSISTANCE

Many programs exist today to help prepare you to start a business

Economic Development office in your county small business liaison

Culinary training programs

Crossroads Community Food Network (Montgomery Cty, MD)

Cocina (Arlington, VA)

Latino Economic Development (Washington, DC)

Training & loans

DMV Food Truck Association

EDUCATION, TRAINING, ASSISTANCE

SBA Affiliates

SCORE

Women’s Business Center

Small Business Development Centers

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