Starting a Business

If you are considering opening a coffee shop, coffee store, espresso bar, or starting a coffee business (I use all these terms interchangeably), then there are multiple factors to consider, and details to attend to, in order to maximize your chances for success. In this article I'll be concentrating on how to develop your idea into an operating business. How to position your business for success before you ever open your doors. I will address how to run that business and achieve profitability in an upcoming article. Most people begin planning their new coffee business based upon their "dream," what they would ideally like to own. While this is a normal tendency, it may not be the most prudent way to start. Much time and energy can be wasted working on "your plan," when in reality, you may not be able to afford what you desire. As a consultant, I've seen this happen many times over the past 19 years. Often, new entrepreneurs get swept away by their dream, and end up over-extending themselves financially, only to run out of money before they can open their doors for business. Those who do manage to get open are typically left with little or no operating capital. Because few businesses open on Monday and are profitable on Tuesday, having sufficient operating capital will be necessary to pay your bills, employees, and yourself, until the business can generate some profit. How much capital can you raise? Unless you have substantial personal capital to invest, you would be wise to begin your planning process by taking a trip to see your banker. Discuss the possibility of borrowing money to help fund your future business. Understand that lending institutions typically don't like to loan on food service businesses due to their high failure rate (95%). They are even less enthusiastic if it is your first business. You will usually have to be willing (and able) to invest a good portion of the required money personally; typically 50% or more of the project cost, before the bank will even consider lending anything to you. Be aware that many times bankers may make it sound as if financing will be no problem during this initial inquiry, but when you come back to actually get the loan, their demeanor may change as if the first meeting had never occurred. For this reason, when you first meet with them, let them know you want honest answers, and that you will be basing your business concept, planning, and assumptions upon what they are realistically willing to lend you. lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus lebronplus Because I have done financial projections for hundreds of coffee businesses, I can confidently provide you with a realistic range of costs for different coffee concepts. When determining the potential cost, many factors must be taken into consideration beyond the expenses for equipment, fixtures, furnishings, and contractor labor. There will be expenses for professional services (lawyer, accountant, consultant, space designer, etc.), permits and inspections, small wares, beginning inventory, marketing, pre-opening labor, etc. You'll also need to set aside operating capital to pay bills, your employees, and yourself, until the business can become profitable. A good rule of thumb is to set aside 1/3 of the funds you have to work with as operating capital, and the remaining 2/3rds will be what you actually have to plan and open the business with. So, taking all of these factors into consideration, here are some typical costs (U.S. Dollars): Espresso Bar/Coffee Shop: $300,000 to $450,000+ Espresso Drive-Thru: $150,000 to $250,000+ Espresso Kiosk: $75,000 to $150,000+ Espresso Cart: $30,000 to $50,000+ Understand that there is not a direct relationship between the cost of a concept, and the income it might potentially produce. One of the most lucrative operations I had ever seen was an espresso-cart that was located in the lobby of a large hospital in a metropolitan area. This business was generating over 1,000 transactions per day, and I estimated that annual sales must have been over 1.2 million dollars, with a bottom line profit probably falling between $250,000 and $400,000. Creating a Business Plan When you determine which concept you can afford and would like to develop, the next step will be to create a well thought out, detailed business plan. It is during this business planning process that you will begin to determine the menu items you'll serve, and the other business features you desire to include. Your business plan should consist of 2-parts, a presentation portion, and a financial portion. A presentation plan should be 10 to 15 pages in length, and describe such things as the type of business you intend to create (caf, drive-thru, cart, etc.), what you will be serving (sample menu), who your customers will be, the state of the industry, why consumers will choose you over your competitors, how you'll market your business, and any experience you possess that might contribute to your success. This plan should include high quality graphics, and must look professional! If your business plan doesn't look professional, then why would anyone who is looking at it assume that anything else you do, will be done in a professional manner? The second part of the business plan is the financial projections. This should include detailed information about start-up costs, professional services, and 3 years of projected business performance. To estimate possible future business performance, you will need to project an average purchase per customer, and the number of expected customers that will visit your business each day, showing growth month by month and then eventually topping-out. You will need to estimate a realistic cost of goods for your menu, and all your other operational expenses. From this info, monthly financial projections can be created to determine the possible loss or profit that should be expected from the business. It will be critical to set aside a capital reserve to cover any projected monthly losses, so that your business can keep operating as you strive for profitability. Being under-capitalized is the number-one reason I've seen people fail in this business! It will be during this financial planning process, that you will determine whether all the items and features that you plan on including will be possible with the capital you have available. If you decide to eliminate menu items or features due to budgetary constraints, be sure to analyze the financial impact of eliminating those items before doing so. Your financial plan should be combined with the presentation plan for distribution to potential lenders and investors. Property managers or leasing agents should only be given the presentation plan. There is no need to show property managers your financial projections, and doing so would probably not be advantageous to you when negotiating a lease. Securing your financing After your business plan has been completed, it will be time to revisit your banker to secure your financing. You don't want to actually execute the loan at this point in time, but you do want to get a written commitment for funding. Try to structure the loan as a line of credit if you can, in this way you can draw the money as it is needed, as opposed to taking out the entire loan up front, and having to make payments on the full amount. Your banker may be hesitant to approve the loan at this time, because you won't be able to tell them where your business will be located yet, and "location" will be an important factor contributing to your potential success. If this is the case, see if they will be willing to give you conditional pre-approval, with final approval being dependent upon their acceptance of the location(s) you are considering. You will want to make sure that you have secured the funds necessary to develop your project, before you sign a lease on a location! Finding a location When you have your financing arranged, then and only then will you be ready to look for a location for your business. Keep in mind that coffee is typically an impulse buy. This means you need to find a location where a large number of people work, reside, or pass by on a daily basis. Locations adjacent to or in large office buildings, hospitals, college campuses, industrial or business parks, airports, commuter train stations, performing arts centers, sports stadiums, large resorts, shopping malls, and condominium complexes, can all be prime! Your location should also be highly visible, and easy to access. If your business isn't highly visible, if its hard to find or tucked away in the back of a shopping center, then consumers might not see it. If they don't know you exist, then they won't come into your store to purchase your products. Equally important is ease of access. If consumers can see your business, but it is difficult to get to, or has no parking, then once again, limited sales will result. Negotiating an advantageous lease A great location with a bad lease is not a great location! You may find a truly great location, but if the lease rate and terms are not conducive to your financial model, then agreeing to that lease may predestine your business to fail. The challenge becomes disconnecting your feelings from the process, so that you will make decisions based upon good business sense, and not emotions. Understanding how the lease rate and terms might affect your chances for success is critical. In many cases, break-even monthly business volume will occur around 10 to 15 times the monthly lease rate. Therefore, paying $3,000 a month for a space may require $30,000 to $45,000 a month in sales to debt service the business. $6,000 a month may require $60,000 to $90,000 in sales. Divide the projected monthly sales that might be needed by 30, and you will see what will be required in sales each day. Divide that daily sales amount by your projected average customer transactions, and you'll now understand how many customers you must attract daily. This is a critical number for you to understand and consider as you select a potential location. If the rent factor on a location you are considering will require 500 customer transactions per day to generate the necessary income to debt service your business, you won't want to accept a location that only has the potential to generate 300 transactions! A location's potential to attract customers needs to be considered in order to understand if the location and lease amount will make sense. In other words, a location that cost $10,000 a month to lease, might make sense if it will generate 1,000 transactions per day. Conversely, a location that only costs $1,000 a month to lease may not make sense if it only has the potential to attract 50 customers a day! The terms of the lease can be as important as the rate. Most commercial leases are structured as a 5-year commitment, with an option to renew for 5 more. If your lender will allow, you may want to try to structure the first term of the lease into smaller time increments, with YOUR option to renew. You'll always want to secure the option to renew your lease for a second 5-year term. I advise my clients to not even consider a 5-year lease without an option to renew for 5 more. If you do not have a renewal option, two unpleasant things might happen when your lease expires. First, if you have developed a successful business, and do not have the rate pre negotiated beyond the first lease period, I can almost guarantee that your lease rate will go up after that first term has expired; perhaps significantly. Second, and worse yet, the property manager may decide to not grant you another term. In this case, you may have to close or move your business. One final thought on lease negotiations: never sign a lease without having your professional team (attorney, accountant, consultant, etc.) review it first. Design, Layout, and Equipment Selection As soon as you have a signed lease on a space for your coffee business, developing construction plans for bureaucratic approval will come next. Warning: do not spend any money on a space designer until you do have a signed lease! The design stage will be where the physical means and procedures required to prepare your menu items will be determined and developed. It is also when the other business features you desire to include need to be taken into consideration, and worked into the design.