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The Basics of Starting a Food Business

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Thinking of starting a food business? Or are you looking to take your Cottage Food business to the next level? Starting any business is always challenging. There are taxes, regulations, managing staff, managing inventory, and so on. A passion for your product will only get you so far, and then you'll need to consult an expert. If you've never run a business before, you might need help at the start to save you money and heartache later.

You need to plan from the start. Here are some suggested steps to take to create a successful business.

  • Validate your product ideas. In the initial stages, ensure that there's a potential market for the product and that consumers will pay enough for it to allow you to make money. You can test your ideas at a farmers' market where you can meet customers and get feedback.
  • Prepare a business plan. Many people believe business plans are unnecessary. We completely disagree! A business plan is a road map, a way to organize your thoughts and your goals and to determine if you can envision the direction you will take. Sure, a formal business plan is necessary if you will be seeking funding. But it is a good idea to at least develop an informal plan to 1) get you excited enough to proceed, and 2) provide a blueprint to keep you on track.
  • Set a budget as part of your business plan. It should include all the costs to begin the operation of your business and give you a firm idea of how much money you need to cover your ongoing expenses. For example, if you need to purchase equipment, what are the costs? How much will you charge for your products? Consider the cost of ingredients, packaging, and labeling materials. What are the fees associated with any licenses or permits you need before starting? What about indirect expenses, like insurance, phone, POS equipment, etc. Does the product you produce require you to rent space in a commercial kitchen, or will you need a commercial kitchen to grow? There are many more considerations, and a business plan helps you get your arms around them. It is indeed difficult to predict all your costs initially, but you need to be aware of all the financial considerations before you start. Otherwise, you will invariably make mistakes that will cost you money.
  • Know your competition! The food industry is very competitive, and many markets are saturated. You need to know what other food businesses are out there and what they're doing. Pay attention to what they do well, if their products are consistent, and what they might be missing. Understand their pricing and their portion sizes. What niche can your food business fill? What is your value proposition? Why should people buy from you?
  • Understand your customers. What is the demographic of the area, and what can people afford to spend periodically on specialty food items? Before planning your menu consider emerging food trends and consumer priorities, especially concerning allergens and organic and vegan trends.
  • Set up and register a business entity. Most small food businesses are either a sole proprietorship or an LLC. A sole proprietorship is a company owned by one person that is not incorporated or registered with the state. The business does not exist separately from the owner. A sole proprietor reports business income on their individual tax return and the business risks apply to the individual's assets. As its name suggests, a Limited Liability Company, LLC, offers limited liability protection for you personally. An LLC must be registered with the Secretary of State in the state where they do business. Corporate income is separate from the income of the owner.
  • Understand the licensing requirements for your business. Additional licensing is required of all food businesses to ensure food safety. It's essential to understand all the necessary licenses to do business in your city, state, and county and what they allow you to do.
  1. A Certified Food Protection Manager (CFPM) license is required of at least one person present anytime food is produced or served.
  2. A food handler's permit is required of anyone else involved in preparing, storing, or handling food.
  3. A cottage food license allows you to make and sell food out of your home.
  4. A wholesale license will allow you to sell your food products to retailers, but you must make your product in a commercial kitchen and get a wholesale permit from the state health department.
  5. A resale license is necessary to buy ingredients at wholesale prices.
  • Protect your food business and yourself with the proper insurance.
  1. General Liability Insurance
  2. Auto insurance for business vehicles that make pick-ups or deliveries
  3. Workers' compensation for any employees in case of injury
  4. Commercial property insurance for brick-and-mortar locations and/or expensive kitchen equipment
  5. Mobile food vendor insurance
  • Keep your personal and business finances separate. This includes bank accounts and credit cards. It's essential to track your expenses, and do not to make purchases or large payments with cash without a paper trail.
  • Set your pricing. This may be one of the most critical steps you take as a food entrepreneur. There is no magic to it. You must price your products appropriately to make a profit from them. Include all your ingredients, packaging material, and other expenses you incur in making your products. Don't forget to include the cost of your labor to make and serve your food items and clean up the kitchen after a full day's use.
  • Define your brand. Your branding, including your logo, imagery you use, the design of your menu, the music you play, and even what you wear when public-facing, define your business. Think carefully about how you want to position your food business and how the brand will help customers remember you and find you again.
  • Create an online presence. Your social media, website, newsletter, blog, or podcast will help people find you. Once you have a business plan and have defined your brand, your online presence will help you attract people and test your ideas. Learn how to photograph food so that it captures people's attention.
  • Serve up a good product. Test your product and make sure your recipes produce consistent outcomes. All the planning in the world won't help you if your baked goods are dry or your cookies are underbaked or inconsistent. Start with a small menu. Add items once you get the feel for the market. You don't want to make more than you can sell.
  • Be ready to pivot. The pandemic taught us how important it is to be flexible and pivot when necessary. Even without a pandemic, revisit and adjust your business plan as time goes on. Prices of ingredients may fluctuate, and you may need to change your pricing and menu accordingly. As you learn more about what the market wants, gravitate toward that and what you do well.

As you see, it's no small task starting a business as a food entrepreneur. If you want your food business to be successful, you must plan. Don't hesitate to ask for help! 

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The Business of Food, LLC
1330 E. State Street, Unit A
Sycamore, IL 60178
815.991.5505