Opening a coffee shop of your own can ultimately be a very rewarding experience. The perks of being your own boss and starting a business of your own are enticing to many would-be entrepreneurs, but make no mistake, there are many risks involved in the process as well.
With the SBA reporting that two-thirds of small businesses fail within their first two years it is important to understand the risk you’re taking on. To fully understand the risks involved with opening a coffee shop, we will explore seven topics as the framework for our discussion. These are some of the biggest risks you will take as an entrepreneur.
- Choosing a business structure that’s best for you
- Location and lease agreements
- Over or under-capitalization
- Mismanagement of resources
- Creating the proper guest experience
- Business strategy
- Big picture ramifications
Choosing the legal structure of your business will be one of the first risks that you take after deciding to open your coffee shop. This will be a requirement for completing your business plan and there are several to choose from. Whichever one that you choose will ultimately decide how you will approach other risks down the road. Let’s examine each legal structure and examine how they will direct your approach to risks going forward.
- Sole Proprietorship – One of the riskier ways to structure your business as you and your business will be one in the same entity. You wouldn’t need to register as a business but there will be no separation between your personal debts and liabilities and those of your business.
- Partnership – This is the best option if you choose to open your shop with one or more other people. There are two kinds of partnership; limited partnerships and limited liability partnerships. Each has a different structure for how decisions are made, who is liable for the debt, and how profits are distributed.
- Limited Liability Company – The most common and least risky legal structure for a small business. This allows you to keep your personal assets and debts separate from those of the business keeping you safe from lawsuits against your business and financial repercussions if your business doesn’t make it.
- Corporation – A separate legal entity from its owners, a corporation can do everything that an individual can do, including making a profit, but also can be taxed and held responsible for legal issues. This is the safest legal structure for a high-risk business (your coffee shop probably doesn’t fall into this category), but also comes with stricter reporting and taxes.
- Cooperative – Just as it sounds, a cooperative is a collection of people who not only use the product or service but produce or offer that service themselves. Profits and liability are distributed amongst all members of the coop. This structure could only apply to you if you and a bunch of your friends decided to both open and be the main patrons of your coffee shop. Seems silly, but that could be the case! No judgment.
Need help writing your business plan? Check out our article here!
Starting as a small business your best option with the least amount of risk to you personally is most likely going to be to form an LLC. You will be able to run your business how you like with total control and you will be personally protected from any issues, financial or otherwise, that may affect your business.
Location And Leasing Agreements
Everyone is familiar with the fact that the location that you choose can be a deciding factor in your success or failure. Seems like a simple concept on the surface, but there is some nuance to this topic in its own respect.
For starters, look at the physical building itself. Look at the structure, the plumbing, electrical, and any equipment that may accompany the property. Take some risk out of it and have it professionally inspected to ensure you aren’t renting a money pit or investing in a place that isn’t up to code.
Next, is the proposed location near your target demographic? What is your target demographic? Your target demographic is the “who” in who is going to patronize your coffee shop.
Is there foot traffic, convenient parking, complimentary businesses (such as bakeries or donut shops), and what is the competition like in the area? These are all factors to be considered before finalizing a location.
Now let’s take a look at how you are going to own the location. Few small business owners want to take on the risk of purchasing a building outright. The extra capital required to do that most likely won’t fit into your business plan and getting a loan to purchase a location is all but unattainable for a small business. Renting makes the most sense from every angle but the terms must be favorable for you whether you are succeeding or struggling. Below is a list of a few items to consider that factor into the risk of leasing.
- Gross vs Modified Gross – Will the landlord be responsible for property expenses or will you share the responsibility.
Taxes and Insurance – Are they included in the rent or your separate responsibility.
- Length of Terms and Renewal – How long are the terms of the agreement valid and under what circumstances can you renew them.
- Rate – Is your rent a flat monthly rate or is it a percentage of your sales. Both can be beneficial depending on your business projections.
- Safeguards – Are there safe “outs” written into the terms that release you from liability on the occasion of extreme events.
- Default – At what point will your landlord consider that you have defaulted on your lease terms.
- Gross vs Modified Gross – Will the landlord be responsible for property expenses or will you share the responsibility.
Over or Under-Capitalization
Managing the financial risk associated with opening and operating your coffee shop will be one of the biggest, if not the biggest, tasks that you will have on your plate as a business owner. Even with all of the planning and steps that you can take to ensure that you have budgeted enough capital, there is still no planning for the unknown; entrepreneurship is fraught with the unknown. Be mindful of your expenses and expenditures. Be frugal with what you have and cognizant of your financial situation at every turn.
Mismanagement of Resources
The prior topic was a great segway into this one. Not only can you mismanage your finances, but really anything else that you have at your disposal in this process. These items will fall into one of two categories: tangible resources and intangible resources.
Tangible resources, simply put, are physical assets. These include things like your building, any equipment that you own, vehicles required for business, computers, point-of-sale systems, supplies, permits, and much more.
Intangible resources are assets that you can’t see or touch and mostly include what is known as intellectual property. To you, this means things such as the recipes you create for coffee drinks, branding, marketing, and even your employees (human capital).
Each item suggests risk in the loss. With tangible resources, we are mostly talking about risking capital, but with intangible it’s more of an existential loss.
Creating the Guest Experience
This starts with how you are intending on getting patrons through the door and ends with how they feel and what they thought after they left.
First, what does your marketing plan look like? What is the image you are putting forth to your target audience? That is a risk in itself as to how you will be received and what your imagery will mean to potential patrons.
Next, how are you going to tailor their experience when they are inside your building. You will have to look at everything from how the flow moves from the front door, through the line, payment, and ultimately how they will leave. Set up the workspace to ensure the efficiency of your baristas. Give them the tools and space they need to make great drinks and happy guests. How do the mugs, glassware, and to-go cups look and feel? Sounds silly but even these are small risks that you’ll need to take when deciding how you’re going to create your individual identity. Unless you have unlimited capital to re-concept you are essentially putting all your eggs in one basket on a lot of important and costly things in creating this. How’s that for risk?
This will be included in your business plan but will be entirely something separate as well. Your business strategy will include your set of values with which you operate your business, your goals, and how they will be measured. Below is a 6-part breakdown by Keap for a successful small business strategy.
- Passion – There is a tough road ahead when you decide to open your shop. You’ll undergo trials and tribulation but what will get you through is your passion for what you’re building.
- Take Time Off – Let’s be clear here, you’re going to work a lot and probably won’t think that you can take a day to yourself. Plan for it and make it happen. Taking time away from your business to focus on your business is important as well.
- Shared Values – Seek out and hire people that share your core values and remove those who don’t. This will be the foundation for building your culture.
- Marketing – Be sure to invest in marketing. As a small business, getting the word out is as important as anything else you’ll do. When times are tough, marketing tends to be the first thing cut from the budget. In actuality, marketing will be the thing that keeps the cash flowing and gets people through the door.
- Email Marketing – Like social media, it’s free. It’s also still one of the easiest ways to reach new and existing patrons.
- Loyalty – Stay focused on your current patrons. They have already come through the door and if they trust you and your product they are likely to continue to frequent your coffee shop. Build relationships and get to know them and their needs.
Staying true to yourself and your business values is a risk in itself. Not saying that there won’t be moments that you’ll need to pivot and adjust, but you risk everything if you aren’t able to operate within your values.
Big Picture Ramifications
Last but not least, let’s talk about everything you risk personally when you leap into starting your coffee shop.
You’re risking your financial stability. You won’t have another source of income while you are running a business.
You’re risking your time. The time that you won’t get back.
You’re risking your family and friends. The stresses of running a coffee shop and the time required to be successful can and will push some people away.
None of this is meant to deter you but is all calculated risks in achieving your goals and dreams. Take heed. You got this!
Are there additional resources for small businesses to aid them in choosing and applying for their legal structure?
Yes! Some many legal websites and attorneys can help with this. It would be best to start with the SBA first to get some base knowledge before deciding to pay for this service.
Is there a template for deciding your business strategy?
There are templates but sitting down with yourself and putting some real values down on paper that mean something to you is always the best route to go. Who knows what values mean something to you better than you!
Looking to learn more about how to start your very own coffee shop? Checkout my coffee shop startup course and documents here.
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Hi! I’m Shawn Chun
My adventure in coffee began when I first launched my first coffee shop back in the early 2000s. I had to figure out so many things on my own and to make it worse within 2 years of opening two large corporate coffee chains moved in just blocks away from me!
As I saw smaller and even some larger coffee shops in the neighborhood slowly lose customers to these giant coffee chains and slowly close up shop, I knew that I had to start getting creative…or go out of business.
I (like you may be) knew the coffee industry well. I could make the best latte art around and the foam on my caps was the fluffiest you have ever seen. I even had the best state-of-the-art 2 group digital Nuova Simonelli machine money could buy. But I knew that these things alone would not be enough to lure customers away from the name brand established coffee shops.
Eventually, through lots of trial and error as well as perseverance and creativity I did find a way to not only survive but also thrive in the coffee/espresso industry even while those corporate coffee chains stayed put. During those years I learned to adapt and always faced new challenges. It was not always easy, however, in the end, I was the sole survivor independent coffee shop within a 10-mile radius of my location. Just two corporate coffee chains and I were left after that year. All told the corporate coffee chains took down over 15 small independent coffee shops and kiosks and I was the last one standing and thriving.
Along the years I meet others with the same passion for coffee and I quickly learned that it is not only “how good a barista is” that makes a coffee shop successful, but the business side of coffee as well.
Hence why I started this website you are on now. To provide the tools and resources for up and coming coffee shop owners to gain that vital insight and knowledge on how to start a coffee shop successfully.
Stick around, browse through my helpful blog and resources and enjoy your stay! With lots of LATTE LOVE!