How to Start a Food Business: A Step-by-Step Guide
For many food-lovers, the ultimate dream is to open up their own food business. What many people don’t realize in the beginning is that starting a food business is no easy feat. There’s a lot of business operational skills that are necessary to get started. Don’t worry, though: This step-by-step guide will walk you through how to start a food business and what you should consider when starting one.
How to start a food business in 9 steps
Step 1: Assess your skills
If you’re reading this article, we can assume that you have a food business idea in mind that you’re interested in starting. That’s great! While interest is the number one step in starting a business, you also need to take a good hard look and assess your skills and assets before jumping into starting a business.
Passion can get you a long way, but when it comes to how to start a food business you’re also going to need hard work and business smarts. While many first-time business owners don’t know everything off the bat, they know how to seek out resources for help when they bump into something they don’t know how to do or don’t understand. That’s a lesson you should learn quickly.
While much of how to start a small food business consists of concrete steps such as choosing your business structure and finding funding, there’s also the soul-searching question: Are you willing and capable to do this?
Before you start, take a moment to write down your strengths, consider your support network, and brainstorm your resources—better yet, research what resources are available to you.
Operating a food business means you’ll need to grapple with:
Hiring and firing employees
Buying from suppliers
Creating a menu
And so much more…
With that debate over with, it’s time to talk about the more nitty-gritty, concrete details of how to start a food business.
Step 2: Create a business plan
A business plan can have multi-fold benefits for your small food business. This is a great way to get your thoughts and plans on paper, which can be useful for you to refer back to you during the process of starting and operating your business. A business plan can also be beneficial if you’re looking for funding to start your food business.
SCORE offer great resources to help you write a business plan for your food business. It can seem intimidating to make one, but if you’re researching how to start a food business, it’s likely that you already have a lot of great thoughts to contribute to your plan. Below are a few of the steps you’ll need to take while creating a business plan.
1. Create a business budget
One of the most important parts of your business plan, especially if you’re seeking funding, is the business budget.
A business budget will include looking at all the costs you’ll need to cover to begin operation of your business, what funds you’ll need to operate the business once it’s up and running, and a more long-term look at how your business will make money and how much money you expect to make.
A few examples of the costs you’ll incur and what you need to consider while starting a food business include:
What type of food business you’re starting
Cost of employees and management team
Initial investment in food product
Design for a physical space
2. Study your competitors
As you’re putting together your business plan, you need to start looking at and assessing your competitors. The food industry is very competitive and many markets are saturated. Before you go any further in starting your small food business, you need to know who else is out there and what they’re doing.
As you’re finding your competitors, make sure to be assessing what they do well and where they’re lacking. That will tell you where there’s a hole that you can fill with your business.
This is also a great time to be looking at prices and assessing the cost of doing business and the reality of how much money you’ll be able to make.
3. Find a hole in the market
The ideal situation for starting a food business is to find a hole in the market. Where is there customer desire that no one else is filling? And just because no one is doing it, doesn’t mean there’s customer desire—to turn a profit, customers have to want it and be willing to buy it.
Finding a hole in the market will help you to decide what kind of food you want to sell and how you want to sell it. There are a variety of options to choose from when it comes to how to sell your food including:
Baked goods sold to other food establishments
In-home food business
Wedding and special event catering
4. Choose a concept
When starting a food business, it’s important to decide what type of food business you want to have. The main options include: a brick-and-mortar restaurant, a food truck, and a home-based catering business.
Each of these options is a viable way to start and operate your business. You might choose to start with one type of operation in the hopes of moving to another one eventually. A food truck and home-based catering business both have complications, but tend to require less capital to get started than a full-fledged brick and mortar restaurant.
Step 3: Set up your business
Once you’ve studied your market, you know where there’s a hole that needs to be filled, and you’ve taken some time to create a business plan, you’re ready to take the first steps toward starting your food business.
1. Choose a business entity
The first step in setting up your food business is to choose a business entity. There are a few different choices and depending on your circumstances, one or the other will be right for your business.
The most common business entity for small food businesses are sole proprietorships, LLCs, and co-ops. Other business entity options includes partnerships, S-corporations, and C-corporations.
One of the most straight-forward business structures available is the sole proprietorship. While a sole proprietorship is simple (and popular among food establishments), it’s also limited in protection. If someone gets sick eating your food and wished to do so, instead of suing your business, they’d have to sue you—and they could go after your personal assets as compensation.
An LLC is one step up from a sole proprietorship. An LLC or limited liability corporation is a legal business entity that separates the business from the owner. An LLC limits a business owner’s personal liability for the business. An LLC also provides businesses with tax efficiency and remains uncomplicated as to ownership structure, so it’s ideal for a food business owner who wants to be somewhat protected, but still have some flexibility when it comes to paying taxes.
A cooperative, which is more commonly known as a co-op, is a business structure that is formed and owned by multiple people. Each member or owner of the business owns a portion of the business. Co-ops are one of the most collaborative business types available and are very common among food operations, especially food production facilities, grocery stores, and farmers markets.
Choosing the right business structure for your future food business can be confusing and initially seem complicated. But, if you start your business and decide you’ve chosen the wrong structure, you can certainly change it. If that sounds like a headache, though, you can consult with a business attorney to help you decide which structure is right for your business.
2. Register your business
If your business is going to employ others, it’s recommended that you register for an EIN, or a federal employee identification number, from the IRS. If you apply online, you can get one in a matter of minutes. An EIN helps you get business loans, manage your taxes, open a business bank account, and more, so this step is highly recommended.
You’ll also probably need to register your business with the state you’re operating in. Rules for how to do this exactly vary by state, and even county, but generally this information can be found on your state’s Secretary of State website. You should do a business name search before registering your business to make sure your desired name isn’t already taken by another business in your area.
3. Register for all required licenses
One of the most important steps in starting a food business is to make sure that you’re legally licensed to prepare and sell food. There are many different certifications and licenses that are necessary for food businesses.
It’s also important to note that what licenses you need will depend upon what type of food establishment your opening, whether or not you’ll be selling alcohol, and where you’re located. Different local jurisdictions can have slightly different requirements for food establishments.
Here are some types of licenses and certifications you might need for your food business:
A food handling permit
A Certificate of Occupancy or CO for your restaurant
A liquor license or beer and wine license to sell alcohol
A food license to make and sell food out of your home
A resale license to be able to buy ingredients at wholesale
No matter what type of food business you’re starting, you’re going to need some permits and licenses. Your local government office should be able to help you figure out exactly which licenses you need for your type of business.
4. Get insurance
As a business that employs workers and has a physical location which hosts customers, you need certain types of insurance to make sure your business is covered in any situation. You might consider:
General liability insurance
Auto insurance for business vehicles
Commercial property insurance
Mobile food vendor insurance
5. Separate your finances
No matter what type of business entity you’ve chosen for your business, it’s important to separate your personal finances from the business finances. This makes figuring out your taxes and expenses much easier.
When you start your small food business, simply start a second bank account for your business. This can be done with the institution you use for your personal banking, but if you want to switch things up, there are some newer banks allow you to open a business checking account online.
And, if you choose to, you can also get a separate credit card that’s used only for business purposes. If you use a business credit card, you’ll be able to build up your business credit (assuming you use it responsible and pay off your bills on time), which can ultimately help you secure a business loan down the line.
Step 4: Look for funding options
When you’re thinking about how to start a food business, one of the major concerns can be the funds you need to get started. The initial investment in a business can be costly and it can take months, even years, before a business is profitable.
To get started, many new food businesses ask for funding from investors, seek out loans, or ask for help from friends and family. Bank loans are one option for funding, though banks typically are hesitant to lend to first-time business owners. There are also alternate lenders you can look into.
1. Equipment loans
An equipment loan is a great option if you need to be expensive equipment for your restaurant or are looking at buying a food truck. An equipment loan is simple: You receive a loan to buy the equipment and the equipment serves as collateral. Meaning if you don’t pay back the loan, the equipment can be repossessed as payment.
This type of loan is easier to get than other types of loans.
2. Friends and family loans
If you’re starting up a food business, who better to get involved and help you out then your friends and family? If you’re saving up to get your business up and running, don’t be afraid to ask for help. Just make sure to write down a loan agreement with your lender and then to stick to it.
3. Line of credit
A line of credit is a fantastic option for someone starting a food business. A line of credit gives you access to a pool of funds. You can borrow from that fund and up to the limit of that fund anytime you need. This is a great option for a business that’s a little cash-strapped for short periods of time.
4. SBA microloan
For food businesses looking to start up a food truck business or for a restaurant that just needs a little extra cash to get going, there’s the SBA microloan. An SBA microloan is a loan of up to $50,000 that the Small Business Administration guarantees. A loan from the SBA is considered the best loan on the market due to its low interest rates and flexible repayment terms.
Step 5: Invest in product and tools
When it comes to how to start a food business, you need more than just cash and business entity to make your dream a reality: You need equipment, food supplies, and something to sell it all on.
1. Research suppliers
One of the most important relationships you form as a food business owner is with your suppliers. Your suppliers are the businesses who make sure you get the food and products you need to keep your business going.
If there’s a restaurant in your area that has closed recently, you might be able to buy their equipment or furnishings for cheap, or take on extra stock they had saved up. Your food can often be sourced locally and trade publications or professional organizations, like the National Restaurant Association, can be helpful.
Find trustworthy, reliable suppliers to make sure you’re always getting your supplies on time and for the best price. Where you source your food from can also be a selling point for your food business, since sustainable companies have become more attractive to customers recently.
2. Point of sale system
A point of sale system, or POS, is the modern version of a cash register. The POS is how your waitstaff takes down orders, charges customers, and receives payment from customers.
There are many restaurant POS systems available on the market that offer enhanced usability for your staff, including:
Square for Restaurants
Lightspeed Restaurant POS
Some, like Square, can be great for mobile companies since you only need a card reader to do business, if you have an Apple product its free terminal can work with. Others, like TouchBistro, are better for full-service restaurants that might benefit from a POS that also offers tools for customer and floor planning management. The best POS system for you will depend on your food business’s needs.
3. Buy or rent necessary supplies
Before your restaurant can open the doors to customers, there are a lot of supplies you need to make sure the restaurant is outfitted to be inviting to customers, serving up good food, and making money for you.
Aside from your POS system, here are some examples of supplies you might need:
Flatware and utensils
Furnishing for the restaurant
Some of these you can buy in bulk, but depending on the mobility of your food business, you might want to consider renting equipment—which might work out cheaper for you. As an example, if you run a catering business, you might not need to own tons of flatware and utensils just yet. Renting on a case-by-case trial will save you money and help you understand what a practical order might be when you’re actually ready to buy.
Step 6: Hire staff
Depending on what type of food business you’re starting, you may or may not need help. But, even the smallest establishment usually hires an extra set of hands to increase production. Who you hire and how many people you hire will all depend upon your needs. For example, a food truck probably can’t fit many employees, but a large-scale restaurant will require more employees to keep the floor running smoothly.
Some examples of staff you might need include: delivery drivers, hosts, waiters, dishwashers, bartenders, and busboys. Make sure you factor hiring staff into your business plan, since you may be required to take on added costs, like purchasing workers compensation, for them.
Step 7: Set your pricing
One of the most important steps in how to start a food business is setting your pricing. Without the right price on your food products, it will be impossible to make money.
1. Do market research
One of the first steps in figuring out what you should charge for certain foods is to do market research. Go to your competitors to see what they’re serving, what their portion sizes are, and how much they’re charging.
This gives you a starting place to assess the right price for food, but it’s only a starting point. While it gives you an idea, it doesn’t give you insight into whether that business is making money or not.
You should also be mindful of emerging food trends and what that says about consumer priorities. For example, the wellness trends in food indicate that your business might do well if there’s a health-conscious market you’re able to tap into and you’re able to sell them on the health benefits of your food products.
2. Price out the cost of your product
While it’s not easy, it is possible to calculate the total cost of a dish. You’ll have to be mindful of all the tiny ingredients that go into a dish, including oil, seasonings, and garnishes. This can seem like a lot, but there are actually a number of formulas and measurements professional kitchens use to determine these figures, so be sure to study up.
Then, with a little magic and math, you’ll be able to price your product accordingly, so that you make a small profit from it, even when including the cost of labor to make, serve, and clean up the dish.
Step 8: Create an online presence
While you might think that a food business is all about food—and it is—you also need to get customers in the door and eating your food. The food industry is notoriously difficult to break into. For example, 85% of consumer packaged goods products fail within the first two years. One important step to avoiding that fate is establishing your online presence and nurturing your consumer base.
1. Social media
While food is all about the taste, many diners shop with their eyes. If you want to establish an online presence for your food business, one of the fastest ways to do that is through social media.
Instagram is a food business’s best friend. Post delicious-looking pictures of your food and customers will want to try it. Make sure you interact with consumers and encourage them to see you as a company that will be responsive to their needs.
While not every food business has a website, this can be a way to establish your credibility as a business. A website can be a place to post information for customers including menus, restaurant hours, and specials. There are a number of ways to build your small food business website, so it’s easier than ever to either sell products online or add helpful features like reservation widgets to your site.
3. Online review sites
While many a food business owner loathes review sites, it’s a necessary evil for those who have restaurants, catering businesses, and food trucks. According to a TripAdvisor survey, 94% of U.S. diners will consult online reviews before trying a restaurant. That’s the vast majority of diners. As a food business owner, you can hate the sites as much as you want, but you need to have a presence. Try offering a free perk to incentivize customers to leave reviews.
Step 9: Serve up delicious foods
When you’re thinking about how to start a small food business, the big draw is, obviously, the food. What you’ll cook, how it will taste to the diners, and what seasonal changes you’ll make to the menu. Owning a food business is only partly about the food, though—there’s also a ton of time spent on operating and managing the business. Study up to ensure success.
But, make sure you’re just as dedicated to serving up delicious foods!
There are a wide array of food businesses you can start and competition will be tough. To help you get a leg up, make sure you consult these nine steps for starting a food business. If you pay attention to foundational steps, like creating a solid business plan and registering for all licenses you might need, you’ll put yourself in a good place for your food business to grow. So, refine that menu and get ready to feed the masses. With a little elbow grease and planning, there’s nothing you can’t do.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.