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How to start a café business

June 6, 2020

HOW TO START A CAFE BUSINESS

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There are many reasons an individual may want to set up a café business. Perhaps you want to create a unique atmosphere for customers. For others, it could be for financial rewards or even to have a greater social impact on your local community.

Among the coffee giants such as Costa and Starbucks, there is a growing market for independent, boutique cafe’s, all across the UK. However, in order to be successful in the cafe market, you need to first do your research. Once you know the fundamentals for setting up and running a profitable cafe business, you’ll be in a much better position to start.

The last thing you want to do is to rush into a new business, unprepared and unaware of key factors that will shape your success. At Hilton Smythe, we have many cafes for sale and have previously sold countless businesses in the hospitality industry.

 We understand what a cafe needs to do in order to be profitable and most importantly, be valuable to future buyers. In this guide, we aim to break down the key things to consider when setting up, funding and running a cafe business.
How to set up a cafe

HOW TO SET UP A CAFE

Vision

If you don’t have a picture in your head of what your cafe is going to look like, start to get imaginative! Before undertaking a large responsibility, like running a cafe, it’s always good to have an idea of what you want the end product to be!

The vision could be a financial goal, an artistic direction, customer satisfaction, position in the market, quality of products, impact on the community, the list goes on! Whatever your vision for your cafe is, make sure to define it. The clearer the picture is in your head, the better chance you have of turning it into reality!

Concept

Standing out, in an already overcrowded market, can be difficult. To compete with the coffee titans such as Starbucks, Costa and Caffe Nero, you need to have your own unique concept that makes it different from the rest. This is completely down to you and it’s always good to inject your own personality into it, whatever that may look like.

Modern coffee shops in the UK, and other parts of the world, are more than just places to fuel your caffeine fix. From yoga and gaming to plant based and sustainability focused, cafe owners are finding interesting ways to differentiate themselves from their competitors.

In fact, we have written an article dedicated to the different cafe trends that have been sweeping the nation recently. You can read the article here and hopefully, it gives you the spark of inspiration you’ve been searching for. Your concept doesn’t need to be revolutionary and you certainly don’t need a slide and a ballpit to be ‘unique’.

Instead, you could simply specialise and focus on certain products. Some cafes focus on expresso’s only, whilst others will have a variety of quality sourced coffee beans. Or, you could make the food your focus and choose to offer only gluten-free or vegan options. There are many angles to come at it from, so you need to work out what people will enjoy and what will also be profitable for you.

If you would rather focus on the experience or decor of your cafe, you could create a concept that is reflected in the service, interior design or furniture.

Location

Within your vision, you need to think about where you want the location of the cafe to be. The location of any business can be the deciding factor between staying profitable and having to close the shutters. Make sure to do research on a few possible locations that you could operate in and then weigh up the best options.

You should consider the local competition, the daily/weekly footfall, public transport nearby, the location of suppliers, the weather and much more. Once you have decided on the ideal location for your cafe, you can now start to turn your vision into a plan!

Business plan

As with any business, it’s crucial to have a business plan in writing. This can give you the reference you need to make those important business decisions further down the line.

Business is all about preparation. It’s really useful to have cash flow projections, an understanding of your overheads/other costs, information on gross and net profit, market research data, location/footfall information, recruitment plans and more, in one document that you can refer back to.

We’ll talk about funding later on in this guide but if you are seeking investment for your cafe, you will need to present your business plan (most importantly the financials) to any potential investors.

Don’t worry too much about making the business plan look pretty, focus on collecting solid information that can assist your decision making and inform your strategy going forward.

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Finance to start a cafe

FINANCING/FUNDING OPTIONS FOR CAFES

With any business there can be fairly substantial costs to cover before you even serve your first customer. A cafe is no different, in fact it can be one of the more expensive businesses to set-up. You will need all the equipment to produce the best drinks, where will your customers sit? Do you need a solid WiFi network set-up? Not to mention the branding and marketing of your new cafe venture.

So what are the options for financing your new venture?

We have a specialist team of finance experts at Hilton Smythe Finance who have helped us compile this list.

Asset Finance:

You're going to need lots of furniture, serving equipment, shop fitting, potentially some TV’s on the walls etc. Well, all of this would class as an asset to the business.

A lot of funders will lend on the value of these assets and you would pay a monthly “rental” fee each month to hire the equipment. The beauty is that at the end of the rental period most funders will transfer ownership of the assets to the business for a nominal fee.

Obviously, to do this you would normally need to sign a personal guarantee that you will pay it all off even if the business can’t. Well worth thinking about as it’s fully tax deductible each year too.

Bank loan:

Really straight forward option here, you could look to borrow money from the bank you use personally or that the new business entity will be using to bank with.

It’s again a fixed monthly amount to pay back over a period of time. You or the business then own the assets outright from the start. But you will still be liable for the loan. 

Family and Friends:

We’ve seen this fairly often, friends and family members provide a loan or a helping hand to get a new cafe off the ground.

The downsides of this approach are that if the business poses losses and they end up losing money it can create strain on the relationship you have.

On the other hand, if the business does succeed it could help build a stronger friendship and relationship with the people who backed you.

You may want to consider having this as a written document or agreement for any future disagreements that may occur. This not only provides security for you but also the business in the long term.

Crowdfunding:

Crowdfunding has become a very popular way to build initial capital for starting a business. The general premise is that people pay small amounts of money upfront to get access to the product or cafe earlier than other people.

With a cafe, there is the more traditional crowdfunding approach that might rely on local people funding the venture but you could also look to get a peer to peer loan via a funding source such as Funding Circle or similar. 

Credit Cards:

Well, most of us have some form of credit card for personal use, and within business it’s no different. A fairly straightforward approach to funding your new cafe could be just to buy everything on your credit cards.

In our opinion, this can be a fairly risky approach to starting a new business as the interest charged can accrue pretty quickly and could stop your new venture before it’s even started.

But the option is there should you choose this approach. As with personal credit cards a common sense approach and close eye on finances would always be recommended.

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Running a cafe

HOW TO RUN A PROFITABLE CAFE

Premises 

We’ve spoken above on the location of the business and the importance of footfall but now we will look at the actual premises themselves. This is so important to get right as the wrong premises can cause nightmares for your cafe/coffee shop.

If you choose a building that is too small then this could affect the volume of customers and the number of sales at certain points in the day. If you do have a smaller premises then it’s a good idea to have processes in place and well trained staff that can serve customers effectively and efficiently.

Not only do you need to consider the number of customers at one time but you also need to consider the user experience, layout and functionality of the premises. You can always use a floor planner first to map out possible layouts of your cafe and see where the queue would be, the location of doors and bathrooms, the position of the counter, seating areas for customers, how/if wheelchair access would work and many more logistical considerations.

Contacting a floor planner would be the best bet here to get professional recommendations that will make the most sense for your premises.

Check out our blog on the differences between freehold and leasehold, and this should point you in the right direction when distinguishing between the two kinds of interest and deciding which is right for you.

Décor and Atmosphere

Whilst your cafe needs to be structured in the correct way and logistically sound, it also needs to generate a feeling for your customers. What that feeling is is completely up to you.

Through sights, smells, tastes and touch, you can create an unforgettable experience for the customer that will keep them coming back.

Perhaps your cafe makes customers feel more connected to their friends because you’ve invested in comfortable seating and a relaxed atmosphere. Or maybe, you create a very tranquil atmosphere that let’s people get their work done in peace and leaves them with a sense of accomplishment.

The decor and atmosphere are crucial to get right in a cafe. Following a customer-centric approach to the design of your cafe will ensure that your customers leave satisfied and hopefully, feeling different to when they walked in.

Here’s a couple a things to consider when it comes to the atmosphere of your cafe:

  • Lighting
  • Music
  • Temperature
  • Cleanliness
  • Visual noise
  • Colours
  • Textures

Products and services

One of the most integral factors of your coffee shop will be your products. You will need to source affordable, profitable stock that customers will enjoy and be satisfied with. It’s always useful to find suppliers that are affordable and can build up a solid working relationship with.

The working relationship is very important because you will potentially be dealing with them for a long time to come.

Now, you need to think about what you will offer, whether that is certain types of coffee, sandwiches, cakes etc. Here is where your concept and vision for the cafe can come in handy. Think back to the type of atmosphere and environment that you wanted to create and also look in your business plan at your financial goals.

With these in mind, you need to put a plan together for how you are going to source your products and also how you are going to price them appropriately. Food and drink is one of the most important things to get right in a cafe, so ensure that your products are enjoyable to your customers and also profitable for your business.

When planning your menu, you need to consider your concept, your customers and your finances. Some cafes will tend to start off with a smaller menu and then expand into more products as time goes by. One good way to work out which products you should sell is to do some market research. By conducting market research, you can understand current trends and find out what your target audience has an affinity towards.

When your cafe is up and running it's very important to have good stock management strategies in place so that you can reduce any waste and leave yourself with more profits in the long run. Unused and wasted stock is one good way to eat into your profit margins so you want to avoid that at all costs.

Deliveries and Insurance

Due to the recent effects of the coronavirus, the hospitality industry has had to adapt and overcome a lot of obstacles. The government restrictions have prohibited bars, restaurants, cafes etc from doing any business other than takeaways and deliveries. This has given small businesses a well needed lifeline that can be the difference between them closing up shop and keeping their doors open. With restrictions slowly easing and the country gradually returning to a new ‘normal’ However, some businesses may carry on with some of the measures they have implemented whilst the population is in lockdown.

Cafes and coffee shops now may have realised that although people will still want to come and have coffee in shops, they also may like the freedom of ordering something from their home and receiving the coffee or food directly. This could transform some retail businesses as they would no longer need to rely on customers coming in store and they could do more of their activities online.

It's worth noting if you don't already have insurance cover for takeaways and deliveries that's something that you will definitely need to get in place. The last thing you want is to get into legal issues with customers surrounding the takeaways and deliveries. If you plan on going ahead with deliveries and takeaways for your cafe or coffee shop, you need to get insurance on your delivery vehicles and your drivers will need to be insured on the cars for commercial use.

Equipment

As with any retail business, your equipment is vital. Especially when it comes to cafes as you need to have specialist equipment in order to fulfill the order's.Typical equipment that you may find in a coffee shop could include an espresso machine, a blender, a coffee bean grinder, a filter coffee Brewer, an oven, a Wi-Fi router, cash register, card machine and much much more. Not only do you need to source your stock in the most effective way possible but you also need to source your equipment in a logistically sound and cost effective way.

Prices can vary drastically between higher and lower end equipment. This is why it's so important to have a budget in your business plan and calculate all the cost of products and equipment. As we mentioned above, you can get asset finance which means that any equipment you have in the business, can potentially be paid on a monthly payment plan, which can be very good for your cash flow in the long run.

It's also important to refer back to your floor plan when you are looking at equipment to use as you will need to factor in the flow and functionality of the cafe floor.

Recruitment

Like with any successful business, hiring the right staff is crucial to guiding your cafe to profitability and long-term success. After all, your staff are the people who look after your customers and interact with them on a daily basis. It's so important to achieve great customer service, enabling the lifetime value of your customers stays high and you retain them instead of deterring them from your business.

A good way to ensure you hire the right people is having a recruitment strategy in place, how this looks is completely up to you, however, most businesses will have some form of staged interview process where they can get to know more about candidates and their previous experience in business.

We've all experienced it at some time in our life where a member of staff is rude to us and it sours our experience, making us not want to go back to that business.  Customer satisfaction should always remain your number one priority so hiring the right people who have empathy, consideration, good communication skills and disciplined work ethics is the best way to go about it.

Service

As we touched on above, your recruitment process needs to be efficient and effective. If you have a quality recruitment process it then means that the quality of your service increases which then can lead to increased sales and profitability. Each Cafe will have its own service style which is unique to their business.

There are many avenues that you could go down and explore but it all depends on your approach and the experience you want to create for customers. The service, along with the products, is what really makes the experience memorable to customers and helps them to establish positive memories of your business in their mind.

Summary

We hope this article has provided you with some value and inspiration for your next venture. You now have a basic outline of how you can start and run a profitable cafe business. Once you have your plan figured out, you can start to take action and make your dream become a reality.

At Hilton Smythe, we have 100’s of businesses for sale including cafe’s, coffee shops, pubs and much more. You can search for businesses for sale in the UK by using our business search tool here. We also offer financial services such as business loans, short-term finance or bridging loans, commercial mortgages and much more. You can find out more about our financial services here.

Get in touch if you are thinking of buying a café, coffee shop or tea room

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How to start a cafe business guide

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Thinking of buying a café then get in touch and find out how café culture is dominating the food and drink market in Britain. The number of coffee shops in the UK is rising, as speciality coffees from around the world become a serious hit with Brits.