How to Start a Donut Shop

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How to Start a Donut Shop

There’s nothing more delicious than biting into a warm, freshly baked donut. If you enjoy putting your baking talents to use to create tasty donuts, pastries, and other baked goods, then starting a donut shop could allow you to capitalize on your baking talents. One of the great advantages of the donut shop industry is that there’s plenty of room for creativity and innovation. If you have a new idea to dress up this traditional treat, you might be able to create a unique and highly successful business and make some dough.

Business Overview

Donut shops often sell a variety of donuts, pastries, and sweets. They also sell coffees, teas, and other beverages. These shops offer the convenience of food prepared quickly, and customers may opt to get their food to go or to enjoy the food in the sit-down portion of the shop. A donut shop may also have a drive-thru window for extra convenience.

In addition to the appeal of a convenient snack or meal, some donut shops also make their own donuts and baked goods. It’s also possible for entrepreneurs to purchase a franchise location of an existing chain, retailing the brand’s already well-known products.

Industry Summary

According to IBIS World, from 2014 to 2019, the donut store industry experienced an annualized 3.1% growth. IBIS World predicted that the industry would grow by 1.4% in 2019 alone. In 2019, the industry brought in $8 billion in revenue, and 13,058 businesses employed a total of 113,848 employees.

The industry’s growth is due to increased consumer confidence and spending. As per capita disposable income has increased, consumers have become more willing to indulge in luxuries, like donuts and gourmet coffee. These trends are expected to continue to drive industry growth through 2024, and it’s likely that we’ll also see an expansion of specialty donut shops during that time.

The donut industry is highly competitive, and with well-established brands like Krispy Kreme, Dunkin Donuts, Tim Hortons, and Starbucks, new shops need to find a way to do things differently. It’s important to perform thorough market research to ensure that your shop will fulfill an unmet need in the community and that the public will be interested in the products that you plan to offer.

Industry Trends

According to Baking Business, creativity is a major trend that is currently shaping the donut shop industry. Bakers are increasingly exercising their creativity in coming up with unique and surprising donut flavors and combinations, and consumers are open to trying something new. While there’s always a place for traditional yeast donuts and flavors like glazed and chocolate-covered donuts, more shops are selling these treats with unique toppings like bacon, cereal, and fruit.

Gourmet donuts, made with premium ingredients and unique flavor combinations, are increasingly popular. Some stores are even offering customizable donuts and walk-in special requests made to order.

While there are plenty of people who want to indulge in a donut, many people are looking for healthier options. Portion control mini donuts and donut holes are popular, as are donuts that are made with natural sweeteners. In the fitness community, protein donuts are increasingly used as a replacement for protein bars. Vegan, keto, and gluten-free donuts and muffins are also popular.

Target Market

A donut business’s target market tends to be adults and families who enjoy donuts, though the specific target market can also vary according to a business’s specialty. It’s important to realize that, in many cases, coffee is what actually draws customers to these stores. According to Food Business News, 68% of purchases made at donut stores include coffee, while only 30% of purchases include a donut. While donuts are certainly an important part of the business, donut shops can’t underestimate the importance of marketing their coffee drinks, too.

Checklist for Starting a Donut Shop

If you’re thinking about starting a donut shop, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

After coming up with the idea, the next step in starting your business should be to write a donut shop business plan.  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: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures 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 donut shop, 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 to minimize liability risk 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 that 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: Guide 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 3: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a donut shop

Step 4: Select your Location

Rental costs will depend on the size of the space, its location, and even the amenities available at the space, like an available kitchen. It’s ideal to find a space that’s been previously used for similar purposes since it will require minimal renovation. The availability of a drive-up window can also be an advantage but may add to rent costs.

A donut shop doesn’t require a lot of space, with some operating in less than under 1000 square feet.
The location of the space is another important consideration. A space in a prime retail location may have a higher rent cost, but it can bring walk-in traffic and awareness of the business that pays off, too.

Related: Choosing a business location

Step 5: Apply for Business Licenses and Permits

A donut shop will need to obtain certain business licenses and permits in order to open. These permits and licenses can vary based on the state and town where the business is located. The business owner or a shop manager will also need to pass a food safety certification test as required by the state and be subject to random health inspections.

Some of the common business registrations many donut shops need will include a business license, sales tax permit, Employer Identification Number, and Occupancy Permit.

Related: What licenses do donut shops need?

Step 6: 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 donut shop is another.  Funding to start a donut shop business can be difficult.  In order to get a loan, the borrower(s) will need to have good credit and be able to personally invest 15-25% towards the total start-up costs.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

Donut shops need to perform a variety of marketing techniques, both when the business launches and to continue to drive business to the shop. Marketing activities include social media platforms like Facebook, Instagram, and Pinterest, online marketing, print advertising, and more. Loyalty cards and programs can also help to encourage customer loyalty at a relatively low cost.

Be mindful of reviews from sites like Yelp, Google, etc. as a lot of new customers rely on these when choosing a new establishment.

Related: Low-cost ideas to market a new business

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 9: Get Business Insurance

There are several types of insurance to consider when starting a donut shop. A few of these include:
– General liability insurance protects the business if customers are ever injured while on the property, such as by a slip or a fall. This type of insurance can help to cover expenses like legal fees and medical bills.
– Commercial property insurance can cover the expenses associated with damaged or destroyed inventory or equipment that could be lost in an event like a fire.
– Worker’s compensation insurance helps cover expenses like lost wages and medical bills if an employee is ever hurt while working.

The cost to insure a donut shop is affected by many factors including the business’ location, the value of its equipment and inventory, and the number of employees on staff. To get the most accurate idea of what insurance will cost, request quotes from multiple providers. When comparing the quotes, be sure to look at details like coverage limits, exclusions, and deductibles, rather than only looking at how the premiums compare.

Related: Types of insurance your business may need

Step 10: Hire Employees

Even a small donut shop will likely require an employee or two, and as that business grows, multiple staff will be needed. According to Indeed, donut makers earn an average of $11.52 per hour. Indeed also reports that donut store clerks earn an average of $9.53 per hour.

In addition to budgeting for employee salaries, a business will also need to budget for other expenses that come with hiring staff. A business may need to cover expenses like paid time off, health insurance contributions, and worker’s compensation insurance.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system for your donut shop is critical to the long-term success of your business.

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.

Related: Setting up the accounting for your business

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 donut shop?

It’s possible to start a small donut shop for about $15,000, while larger shops will carry closer to $50,000 or $75,000 in startup costs.

Some common startup costs for a donut shop include:
– Baking and display equipment such as refrigerators, ovens, donut fryers, mixers, proofer, cooling racks, donut cutters, etc.
– Drink and coffee equipment
– Ingredients and inventory
– Furniture
– Building renovations
– Signage

If you’d like to start a donut business but aren’t yet ready for the investment of a brick-and-mortar location, consider starting a business with a food truck or trailer. These types of mobile facilities can allow you to travel directly to your target audience, and they don’t carry the same scheduling requirements that running a storefront requires.

How much can a donut shop owner make?

A donut shop’s profits will depend on many factors, including the business model, the location, and how many years the shop has been in business. According to Salary.com, the average donut shop owner’s salary is $41,005. Salaries most typically range from $36,152 to $47,812. The top 90th percentile of donut shop owners earn a salary of $54,009.

There are a number of ways that you can maximize your shop’s earnings. When creating a business plan, look for a location with minimal competition, or create a business model that offers something that your competitors don’t. Careful market research can also increase the chances of your business being a success.

Coffee sales are an easy way to increase sales and profits for a donut shop.  Make sure a good quality coffee is being used as a good coffee will pull in coffee drinkers who wouldn’t have stopped for donuts.

What skills are needed to run a donut shop?

While a donut shop owner doesn’t need a business degree, certain skills and experiences can increase the business’s chances of success.

Food preparation and handling experience. A business owner who has previous food preparation and handling experience will be better prepared to implement safe food handling procedures. Business owners may also be required to earn a food safety certification through an accredited program as approved by their state’s regulations.

Experience working in a café. Business owners who have previously worked in fast-paced cafes will have multiple skills that are an advantage in owning a donut shop. Knowledge of various coffee drinks and preparing them can help a store owner plan their menu and ensure their store offers popular quality beverages.

Customer service skills. Engaging with the public is a big part of owning a donut shop. A business owner with customer service skills and experience can teach those skills to all employees to build strong relationships with customers.

Management experience. Most donut shops require multiple employees, so experience in hiring, training and managing employees is helpful.

Creativity. There’s plenty of competition in the donut shop industry. A shop owner who is creative in their recipes, their store’s theme, and their marketing can help their store to stand out from others.

Multitasking skills. A donut store owner will benefit from multitasking skills that continuously balance multiple priorities and tasks throughout the day.

Are there grants to start a donut shop?

It’s extremely rare to find a grant to start a donut shop. If you search for 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 is the NAICS code for a donut shop?

The NAICS code for a donut shop is 445291, which is categorized under Baked Goods Stores.

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.

Related: What is a NAICS code?

Resources:
American Bakers Association
American Culinary Federation
American Institute of Baking
Association of Nutrition and Foodservice Professionals
Cookie & Snack Bakers Association
Independent Bakers Association
Retail Bakers of America

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