How to Start a Bakery
If you love baked goods and have always enjoyed preparing them, then opening a bakery might be the perfect business for you. Owning a bakery is hard work, but it can also be rewarding to see your foods bring joy to others. Before opening a bakery, though, it’s important to understand everything that will go into this type of business.
Bakeries offer freshly baked goods directly to consumers, or others are wholesale bakeries selling their goods to retailers and grocery stores. Some types of bakeries include a cafe design, allowing consumers to sit and enjoy the goods right in the stores. Others may adopt a catering model, selling their goods to people who are hosting events.
Bakeries can specialize in many different areas. A business might specialize in offering tasty yet healthy baked or gluten-free goods, while others might focus on elaborately decorated cakes or even in offering wedding cakes exclusively.
From 2015 to 2019, the bakery industry underwent significant growth. According to IBIS World, during that five-year period, the number of bakeries grew to 11,533, and industry employment increased to 180,291. The industry experienced 2.9 percent annual growth, and in 2019 the bakery industry brought in $11 billion in revenue.
The growth of the bakery industry is partially the result of the increase in per capita disposable income during that time, leaving consumers with more money to spend on luxuries like baked goods. The bakery industry also combines the convenience of fast food with the quality of the food you would expect from a restaurant, making it a desirable option for consumers.
Numerous trends are shaping the bakery industry, and understanding these trends can help an owner to position their bakery for success. According to Harvest Food Solutions, one of the major bakery industry trends is an increasing demand for healthier food options. Besides moving away from high-fructose corn syrup and artificial dyes, consumers are looking for foods that blend both taste and health. Many bakery owners are meeting this demand by using whole grains, fruits, cocoa, and natural sweeteners to create tasty foods that are still health-conscious. Additionally, the popularity of gluten-free diets has prompeted the creation of new recipes to cater to this market.
Closely linked to the demand for healthy food is a demand for fresh foods that are baked using fresh ingredients. Consumers pay more attention to when products were baked and how fresh they are when they’re put up for sale.
Bakery owners also need to be aware of the focus on the taste, texture, and appearance of baked goods. A bakery owner needs to make sure that the foods they’re presenting match their audience’s demand for flavors, whether those are traditional or more creative, adventurous tastes.
Another trend to be on the watch for, according to Snack Food & Wholesale Bakery is selling fresh tortillias to Hispanic customers. Sales of healthier tortillia options such as cauliflower, low-carb, and high-fiber quinoa and flax tortillas have been increasing dramatically.
Bakeries will have different target markets depending on their business models. A bakery that includes a cafe might market to consumers with a love of fresh-baked breakfast foods and treats. A retail bakery that offers strictly breads or pastries will have a different audience, marketing to consumers who value fresh quality food or vegan baked goods with organic ingredients and who are willing to surpass the grocery store and make a special trip to a bakery.
Bakeries may also develop other target markets. Some may offer catering services and specialize in cakes and foods for weddings and parties. Others may focus strictly on cakes, creating highly detailed and beautifully decorated cakes at premium prices. All of these factors will affect a bakery’s target market.
Don’t forget to consider wholesale accounts such as local grocery stores, convenience stores, and restaurants to sell baked goods to. While the profit margins are lower than selling in your store, these consistent sales are often worth going after.
Checklist for Starting a Bakery
Opening a bakery is a huge and complicated endeavor. There are many things to consider before you even take your first step toward starting your own bakery. This checklist will help make sure you have everything you need to get started. From licenses and permits, to kitchen equipment and ingredients, make sure you cover all your bases before diving in. With this guide, you’ll be on your way to the sweet life of owning your own bakery!
Step 1: Write the Business Plan
After coming up with the idea, the next step in starting your business should be to write a bakery business plan. The business plan will help work out the details of your business and focus on important aspects such as costs to get started, market research of the competitors, marketing strategies, and more. Not only will a bank require you to have a business plan, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.
Related: How to write a business plan
Step 2: Name the Business
Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, it also has to be available to use.
Related: Tips for naming a Bakery
Step 3: Form a Business Entity
A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.
When deciding on which business entity is best for a bakery, it normally comes down to the sole proprietorship and Limited Liability Company.
A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay. The corporation can be a good choice because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities, and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.
That leaves the sole proprietorship and LLC.
The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.
Related: 3 steps to forming your LLC
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
Some popular LLC formation services include:
IncFile - $0 plus state fees & free registered agent for 1 year!
IncAuthority - $0 plus state fees & free registered agent the first year!
ZenBusiness - $49 plus state fees & free registered agent for 1 year!
Step 4: Select your Location
While it may be possible to start small as a home bakery business or operating from a shared commercial kitchen space. If you build a following, it will be likely that a larger kitchen and possibly a storefront for sales will be necessary.
It’s ideal to find a lease property that is already equipped with a commercial kitchen, which can save on renovation costs. Rental costs will depend on the size of the building and its location. For a bakery with a storefront or a cafe-style business with counter service and seating, rental property in a high-traffic retail area can bring in walk-in traffic but will come at a higher cost.
Before signing a lease, confirm the landlord has or can obtain a Certificate of Occupancy in order to know whether the business can legally operate out of this location.
Related: Choosing a business location
Step 5: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Federal Tax Identification Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file federal and state taxes, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Step 6: Apply for Business Licenses and Permits
Expect to face some unique challenges when starting your own bakery business. The first will be to find out about food safety regulations in your area. Some towns may allow you to prepare baked goods in a home kitchen with certification, while others will require a commercial facility.
Generally, a bakery will require food handling certification, a food service license, and approval from the Health Department.
Also, there are some general business licenses and registrations, such as a sales tax permit, Employer Identification Number, and Occupancy Permit, among others.
Step 7: Find Financing
Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a bakery is another. Funding to start a bakery can be difficult due to the costs of renovations, inventory, and equipment. To get a loan, the borrower(s) will need to have good credit and be able to invest 15-25% of their money towards the total start-up costs.
Many bakeries use a combination of savings and a loan from a bank. In some cases, the loan will need to be secured with a guarantee from the Small Business Administration (SBA).
Step 8: Open a Business Bank Account
Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the income and expenses of the business.
Step 9: Get your Marketing Plan in Place
Marketing is essential to a bakery’s success, important in the early startup days of the business. Common bakery marketing activities include maintaining active social media pages, establishing a website, participating in local print, television, and radio advertising, handing out business cards everywhere you go, and even sponsoring local events.
One important task while working on the marketing is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.
Step 10: Get Business Insurance
Bakeries need several types of small business insurance to be fully covered:
– General liability insurance protects the business if customers are injured while on the business’ property. This insurance can cover costs like legal fees.
– Commercial property insurance protects the bakery against the financial loss of inventory and property after an event, like a fire.
– Commercial auto insurance covers the expenses, like legal fees and medical bills, that can result if a company-owned vehicle is ever in an accident.
– Worker’s comp insurance helps to cover expenses like medical bills or lost wages if an employee is ever injured while on the job.
Insurance policy costs can vary depending on factors like the bakery’s location, the value of its equipment and the building, and the number of employees on staff. To get an accurate idea of what insurance will cost, request quotes from multiple insurance providers. Then, compare the quotes, paying attention to factors like coverage limits and exclusions, premiums, and deductibles.
Step 11: Hire Employees
Depending on a bakery’s size, it may be necessary to hire one or more additional employees. According to Census data, bakeries spend on average 25% of their sales on salaries, making it the second-largest expense.
Employee salaries aren’t the only expense that comes with hiring staff. A bakery’s budget also needs to include expenses like workers’ comp insurance, paid time off, and health insurance contributions.
Related: Hiring your first employee
Step 12: Set up an Accounting System
Setting up an accounting system for your bakery is critical to the long-term success of your small business.
Look into good Point of Sale systems (POS) that tracks sales, which will provide insights into what to stock more or less of, quickly track daily profits, and more.
Staying on top of taxes not only keeps the business out of trouble with the government but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.
The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:
- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.
Find bookkeepers in your local area or use a service like 800Accountant.
How much does it cost to start a bakery?
Starting a bakery can require a significant financial investment, but there are also ways to start your business on a tighter budget.
Initially starting as a small bakery from your home kitchen can help you save on expenses. Before starting, be sure to check with your Health Department to learn about food business regulations. If starting as a home-based bakery, expect to spend $5,000 to get started. For a larger-scale bakery with storefront space, expect to spend closer to a minimum of $40,000 – $50,000 to start.
Common startup costs include:
– Inventory (The ingredients used to make baked goods, such as flour, sugar, shortening, etc.)
– Bakery equipment, such as work tables, dough proofer, commercial mixers, refrigerators, ovens, etc.
– Renovations to the building
– Display cases and storage shelves
– Furniture (for a sit-down bakery)
– Delivery truck
– Initial deposits for rent, utilities, etc.
How profitable is a bakery?
According to BizFluent, the annual income for a bakery general manager, who is often the owner of the business, ranges from $25,000 to $52,000 per year.
Many factors can affect this income, including ingredient costs, the number of years the bakery has been in business, the size and location of the bakery, its specializations, and even how efficiently the bakery is run.
It’s critical to consider how to price baked goods. The price needs to be competitive with other local businesses, but it also needs to be profitable for the bakery. Sourcing bulk-purchased ingredients at a discount will allow a bakery to balance these factors, but finding a quality and reliable source can be challenging, especially when just starting up. Many food suppliers will assist in helping cost each of your recipes which is valuable when determining the retail price of items, so be sure to budget time for plenty of phone calls during this part of the process.
When setting your pricing, don’t forget to include labor costs, even if it’s you doing the baking. To run a successful bakery, be sure to price your goods as if you hired someone to bake.
Bake Mag recommends keeping food costs under 35% of the retail price.
Since baked goods have a short shelf-life, a manager who has an excellent idea of how much product the bakery will sell each day can customize production to meet demand more precisely. This minimizes inventory waste and helps to maximize profit.
While baking may be your passion, don’t overlook sales of ancillary products to customers who are already in your store. Sales of coffee can be a big percentage of revenue for a baking business. Be sure to find a great product to offer in your store to encourage these additional and profitable sales.
Are there grants to start a bakery?
It’s extremely rare to find a grant to start a bakery. If you search for small business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.
Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.
What skills are needed to run a bakery?
While you won’t need a business degree to start a bakery, certain skills and experiences are useful and can increase the chances of your business being a success.
Baking experience. Experience working in a bakery is highly valuable in starting a new bakery. Knowledge of baking recipes and decorating practices will help ensure that a business starts by offering a quality, consistent product.
Attention to detail. Attention to detail might be one of the most important elements in running a bakery since detail is everywhere in this setting. From creating aesthetically pleasing displays to ensuring that every product represents the bakery well, a natural eye for detail goes a long way in this industry.
Foodservice experience. Baking is only one part of the equation in running a bakery. If a bakery offers eat-in options and seating, then some food service experience helps take orders, prepare drinks, and serving customers.
Customer service skills. Great customer service skills can help a bakery owner to establish an excellent reputation for their business. The ability to listen to and address customer concerns in an understanding way is important.
Management experience. Many bakeries require at least a few employees. Experience in hiring, training, and managing staff can help an owner to navigate this process.
Networking skills. Networking talents can be helpful in this industry, especially for small businesses that offer catering options. Establishing and maintaining relationships with local event venue owners can lead to increased referrals and future business.
Marketing skills. The more marketing that a business owner can do on their own, the more they can save over hiring a professional marketer, which can be important in the business’s early stages. In particular, some basic photography skills and knowledge of social media marketing techniques can help get a business off the ground.
What is the NAICS code for a bakery?
The NAICS code for a bakery is 311811.
The NAICS Code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Allied Trades of America
American Bakers Association
American Culinary Federation
American Pie Council
Bread Bakers Guild of America
Cookie & Snack Bakers Association
Independent Bakers Association
Retail Bakers of America