If you have gotten countless compliments on your cupcakes or find yourself with requests from your friends to be their personal chef for special occasions, a home-based food business might be a great way to earn extra money while doing something you enjoy. But even though frosting cakes or bottling your homemade barbecue sauce may seem more fun than work, a home-based food business is still a business. As with any business, you need to plan and research before picking up your mixer or designing labels for your salad dressing.
Here are 10 things you should know before opening a home-based food business:
Your first step is to determine the rules for a home-based food business in your area. Some states, such as California, have a law that allows home-based food businesses meeting certain criteria to bypass being certified as a commercial kitchen.
“There are state and local requirements for running a business out of the home, especially if it is a food business, including zoning, business licensing and permitting, and in the food context also production and safety requirements depending on the product,” says John Gerber, lawyer with Upstart Legal. “Failure to do this correctly will jeopardize the company’s ability to produce and sell product.”
You could have the best cupcakes on the planet or the tastiest dry rub ever invented, but if there is not a market for your product, then you will not be able to make revenue on your product. Chef Veronica Rains, co-owner of Wholesome Chow and author of Sell Your Organic Food Product recommends doing focus groups, making small batches with inexpensive packaging and selling your products to a few retail locations before fully investing in the business.
Since home-based food businesses often are built out of a hobby, many entrepreneurs in the industry make the mistake of continuing to run their business in a casual way. “Whether as an LLC or corporation, the business owner should form an entity and operate the business as that company, as opposed to themselves individually,” Gerber says. “The legal entity, if properly managed, will keep the liabilities of the company separate from the assets of the individual owners.” He also recommends carrying insurance, keeping business accounts separate from personal accounts and registering all products as trademarks in the company name.
While you may have designed a website for your homeowners association or taken a class in college on accounting, carefully consider hiring professionals for tasks that are outside of your realm of expertise. Although you could do these tasks, your time can often be better spent growing the business, and the result is usually of higher quality by bringing in professionals.
To protect yourself and your company in the future, you need to put all relationships and work-for-hire provisions in writing. This is also especially true if friends and family have helped with the capital investment to get your business off the ground.
“If people other than the owner of the business are involved in creating or preparation of the product, the company needs to have them assign to the company any ownership rights they may have in their work,” Gerber says. He also says that provisions should be in place for vendors including website designers.
Even if you bake your goods wearing your pajamas while your children do homework in the next room, you want to look like a established and polished company. Take the time to have a professional looking website, brochure and business cards. Be sure that all of your product packaging reflects the image of your company and is professional.
Many food-based entrepreneurs assume that since everyone loves their products, that people will be clamoring to buy it. Steve Brodsky, owner of personal chef company 3 Star Chefs says that's the biggest mistake he sees home-based food businesses making. It's vital to spread the word about your business. “My suggestion would be to put as much money as you can afford into marketing/PR/advertising right out of the gate,” Brodsky says.
Spend time researching comparable products and determining your costs before setting prices. When Myriah Zaytoun, home-based food business owner, first started out she would price her products based on her ingredient costs, but would not include her time into the price and quickly realized that not all cooking jobs are created equal. “You cannot make a profit if you charge $20 for a baking job that takes you four hours to complete, on top of the price of ingredients. However, if you price things too high, you risk alienating your customer-base. I have learned to carefully weigh out all factors before pricing any baking job.”
Chris Henry, owner of personal chef service Fresh! also cautions against pricing too low and says that it could set a precedent that is hard to break. You might get clients, but you won't make a reasonable profit, which can can be frustrating and make you feel as though you've wasted your time, Henry says.
Prices for the items that you will use on a daily basis, such as flour, butter and eggs, are not static and will change based on events in the economy and industry. “It is important that when you price out your products, that you (leave) room for the prices to fluctuate so you can weather the increases and just revisit it on a semiannual basis,” says Kelly Delaney, pastry chef and operator of Cakes for Occasions.
When Delaney was first starting out, she was trying to save money on expenses and would only buy the items that she needed for the week’s orders. But she quickly realized that while the financial outlay was more up front, that she saved considerable money by planning ahead and buying common items in bulk. “When you purchase ahead, in bulk, you save in the future,” Delaney says.
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