Running a coffee shop or small restaurant is fun and rewarding. It might be a lifelong dream of yours! But don’t forget that it is a business and with that, you get the things that are not so much fun; some of which you have to have thought about when you select your cafe location.
It’s essential that your property has the space and facilities to enable you to stick to health and safety standards and the right licensing. You’ll need an A3 license to serve food in your cafe – getting this license can be a lengthy and expensive process (which may not always succeed). For this reason, we’d suggest you choose a property that already has an A3 license.
Then, there’s business decisions related to your location. After food and staff, your leasing cost or mortgage could be your highest monthly outgoing. That means that you need to be hard-headed about your estimated revenue in different locations; as well as to love the property!
Legal prerequisites (know before you choose)
Decide on the right legal structure for your business. Before you even think about signing leases, it’s essential that you register yourself as a company with HMRC and Companies House. Registering as a limited company is probably the best way to go for a business like coffee shops and small restaurants, as it lends you credibility when you come to sign leases, obtain loans and work with banks. Read our advice on when to register as a limited company.
Getting a licensed property vs. applying for a license yourself
In the UK, to serve hot food on the premises you will need an A3 planning licence. This is a type of “building use” classification, where the building holds the license, not the owner. A3 buildings are authorised for “the sale of food or drink for consumption on the premises or of hot food for consumption off the premises”.
If you take over a premises that is already A3 classified there is no additional cost for the A3 license although it may put up your rent costs. If you find a premises which has another classification or no classification, you’ll need to apply for a Change of Use/Classification. This is pricey and it’s not guaranteed you’ll be successful.
Note that this A3 licence is totally distinct from planning permission. You may have got planning permission for your cafe or restaurant, but this does not mean that a premises licence will automatically be awarded. You’ll need to go through a separate application process in order to get one. As the application is not guaranteed, you should take proper advice and investigate before applying.
A3 planning licences are often highly sought-after and typically carry a premium. A premium is a fixed sum paid up front to the landlord or current tenant, and covers equipment or fixtures already in place (e.g. kitchen and coffee machine) and for existing trade (if you’re taking over a cafe that is already established and making a profit each month). The premium can be over £5,000 but in some popular cities and sites, can be as high as £100,000, so watch out for this when you are searching through agents’ websites.
Other legal stuff for restaurants / coffee shops
The A3 license is the big one – and anything else can be subsequently put in place, usually. But there is a bunch of regulation around this. By our count, other regulation which your choice of place needs to adhere to includes:
In particular, the 1976 Local Government Miscellaneous Provisions Act stipulates that if your venue sits ten customers or more, you’re legally required to have toilets installed, which don’t open out into the food prep area, and must be adequately ventilated. In addition, welfare regulations for your employees stipulate minimum bathroom requirements for them.
You’re obliged to conduct a fire risk assessment which may oblige you to take further action to reduce the risk of fire.
Health & Safety Laws
Start with health and Safety regulations – if you have 5 employees or more, you’ll need a written health and safety policy that describes the arrangements in place.
Building & Pest Laws
The site for your coffee shop or restaurant must allow you to follow good food hygiene practices, including protection against contamination and pest control. So reconsider your options if the building you choose has records of rodent infestations! Having to deal with pests all the time will be a burden and cost you money in the long term. It’s a good idea to ask your local authority for advice. Make sure that the site you choose has enough space for hand-washing facilities and the windows can block out insects and be disinfected.
Do I lease or buy my venue?
Once you’re aware of the laws, this is perhaps the biggest decision you’ll make when starting your coffee shop or restaurant. The decision to lease or buy is sometimes described as a choice between “leasehold” or “freehold” properties.
For both lease- and freehold properties, the cost scales along familiar factors: location – but especially footfall – facilities and fittings, and whether the property has an A3 license.
The decision to rent is less risky, because it’s less difficult to leave or wait out the contract and move on than it is to sell a property you’ve bought. According to Bright Ideas, on average, for a 20-seater cafe in a London suburb it will cost around £600-£800 per year. That said, if you have established a successful restaurant it can be difficult to avoid rent hikes. Spots in Chinatown notoriously charges some restaurants £312,000 yearly rent.
Buying a property could set you back anything from £100,000 up into the millions depending on the size and location of the property you choose – but that same spot in Chinatown would likely cost millions. As with non-commercial properties, you will need a substantial deposit of around 5% of the value of the property, and this brings with it the promise that you may one day pay off your mortgage altogether, and eliminate the business expense.
Something to remember: location will affect your business rates
The business rate is a tax levied on non-domestic properties, such as shops, restaurants and offices. This will factor into your location decision because the amount you pay will depend on where your property is.
How are business rates calculated?
Business rates are worked out based on your property’s ‘rateable value’.
This is its open market rental value as of 1 April 2015, based on an estimate by the Valuation Office Agency (VOA). To value a property, a valuer would look at the physical properties of the property (such as size and location), and consider the economic conditions (the market price for similar local properties), along with the nature of the transaction (such as a freehold sale, or agreement of a lease). Note that the VOA carried out a revaluation in 2017 to reflect changes in the property market, although this may not have had an impact on your bill.
You can estimate your business rates by multiplying the rateable value (an estimation of your rent) by the correct ‘multiplier’ (an amount set by the central government). For small businesses, in 2019-2020, the multiplier is 49.1p. So for example, if the rateable value of your property was £10,000; you’d pay £10,000 x 49.1 = £4,910. Your bill will be reduced if your coffee shop property’s rateable value is below £15,000 – you can apply for small business rate relief.
What location is best?
As we know, the best locations are really expensive. So to start off, it’s worth thinking about how critical location is to your business whatsoever.
How important is location for *my* business?
Spoiler: it’s very, very important.
To answer this, you need to think about two things. The first is, how far would someone be prepared to travel for your business? It’s tough to say, and it might be difficult to be objective about. I mean, who wouldn’t come out of their way for my business?
But think about the category of business you find yourself in, and how far you’d be prepared to travel for that category. Here’s a suggested breakdown for the kind of way we think it might look:
Even for businesses for which customers would travel – such as restaurants – a substantial portion of traffic is from passing customers. Many of these will be people who pass, and return; which means that footfall is also a valuable marketing channel for customers who choose between a few in the area. Think of it this way: everybody will either discover you in person, be told about your business, or find you online. How good is your online marketing?
We can see a basic guiding principle to this diagram: the more a customer is prepared to spend, the further they will travel for it. Nobody wants to travel very far for a cup of coffee.
The reverse is true as well. Just as a coffee shop is only worth travelling to if it’s close by, a cafe has to sell a lot of cups of coffee in order to be financially viable – so they will quickly find that they are unable to pay for lower rents in lower footfall environments. There just aren’t enough potential customers. For coffee shops, the value is disproportionately stacked in favour of higher-footfall, higher-rent property locations.
One way you can answer the question of how close to a thoroughfare is appropriate for your business is to literally try to fill in some of the points on a scattergraph. In a location you’re considering, what revenue do you think you’d be capable of achieving that close to the centre of town? What do you think the rent would be for the same property?
Finding a prime location is extremely important and sometimes well worth the investment.
That being said, a prime location doesn’t always mean the busiest one. Start looking in areas that you can reasonably afford. Target traffic areas that cater to your customers. The customer on the high street, the customer working in The City – London’s financial district – and the customer on a side street, are likely to be very different kinds of people. It’s up to you which of these sectors of the population your coffee shop or restaurant might be designed to target.
Grab a coffee and go!
If you’re providing coffee for people at work, this diagram applies – a great deal. Rent is likely to be high, and so is revenue. So let’s talk about maximising our revenue:rent ratio in our property choice here. First, think about the location of nearby office workers; and think about things like transport links. Are you between some kind of travel centre and the office for most workers? Can people see your coffee shop on their way to or from work? Have you successfully intercepted them before they get into their car, on their way elsewhere?
Successful cafes in this space also think really critically about improving their rent : revenue ratio by reducing rent. In a sense, the ideal form is a stand – then you have all the potential to sell cups and none of the expense that comes with a big interior.
The Study Hub
One way to game the rent : revenue ratio is to find a location which is only valuable to cafes, and not other kinds of businesses. One way to do this is to locate yourself next to some kind of “anchor”. Remember when we said that people would travel further to spend more? That could refer to time as well as money. One popular anchor is a University library, in which students are always getting caffeinated.
Consider opening your shop near a library, university or book shop – where there are young adults studying, chances are that students will also want somewhere to get caffeinated, re-fuel and finish their essays. If you’re planning to go down this route, you may also need to think more deeply about your shop furniture and power socket options.
Marketplaces and Parks
Premiumisation – as StoreKit has recently covered in an interview with Crosstown donuts – is here to stay. Consumers are demanding more premium products than ever before; flat whites, cortados, babycinos, the list goes on.
But even with a slightly higher spend, coffee is just too small a product to expect customers to travel further for. It’s really difficult to make a coffee shop “a destination”. But one way is to think about the surrounding location as a “destination”.
Lots of outdoor places which people enjoy are not economic, and don’t capture the value they create – like parks. In London, lots of people go to the park to eat picnics and drink cans of beer in the summer. The economic beneficiary of this isn’t the park is the surrounding businesses and area. The park is the “anchor”.
Coffee culture and the passion of coffee-lovers are ideal places to sit down after a whole ton of outdoor experiences. Think about pottering around the market, strolling down the canal, and generally enjoying some of the outdoor green areas we’d associate with town centres.
Is yours a destination restaurant? Or are people visiting your restaurant out of convenience?
That almost seems like a rude question! And of course, it’s always somewhere in between. People do not fly to Australia for a specific restaurant – and no matter how much of a “destination” your restaurant is, whether you’re Gordon Ramsey or you’re a first-timer just starting out, location is very important.
Unlike coffee shops, it is possible to start a restaurant in a “bad” location with regards to footfall. Restaurants survive in former industrial estates; and the countryside – where people might travel to them. If you’re thinking of doing this, it’s probably worth coming to terms with, whether you’re a competent digital marketer or not. It’s important to “shout” about your food.
(Read our tips on how an EPOS can help with marketing).
But you need to create the experience people want to travel for! Restaurants you need to travel for need a higher standard of food and review to make them “a destination” in themselves. Unless you’re in a huge city, like London, there’s likely to be a portfolio of different restaurants to choose from in an area.
It’s easy to map them. If you’re thinking of starting a restaurant in a commutable distance from where you live, try entering some target postcodes to delivery sites and seeing what casual dining places you’re competing with; and having a look online. If you’re looking to launch a specific proposition, ask whether there’s a local competitor of the same cuisine. If there is, consider going further afield.
After you’ve chosen…
Register your food business
When you start your new cafe or take over an existing cafe, you must register your business with the local authority since you’re expecting to serve food – but you can do this once you’ve chosen.
If you have more than one site for your coffee shop business, you need to register each of them with the local authority in which they are located.
You should do this at least 28 days before opening. Registration of your food business is free and can’t be refused. If you are already trading and have not registered, you need to do so as soon as possible.
We’d advise registering your business early, as getting guidance from government authorities will help you prepare for food hygiene inspections.
Besides paying staff to maintain your cafe’s facilities and toilets, other premises related costs you should expect to incur include:
Service charges – usually paid to the landlord monthly or quarterly
Waste management – a monthly rolling contract is standard
Buildings insurance – with business premises insurance, you can insure your coffee shop against damage from unexpected crises, such as fire and flood. If you rent your business space, you’re unlikely to need buildings insurance – but contact your commercial landlord to make sure. If anyone contracts food poisoning or gets injured because of being in your cafe, you may be liable to pay out a hefty compensation claim. Product liability cover can be an important safeguard against claims like food poisoning.
Update your business with local authorities
If you decide to move or you want to make changes to your premises, you should tell your local authority as:
You may need planning permission if you want to change the nature of your business
Your business rates may change
There’s a lot of things to sink your teeth into here. Opening a coffee shop is a daunting prospect, with many different costs to think about. This is why we’ve explored the main start-up costs that will factor into your decision about where your coffee shop will be located. You are always welcome to meet up with us for a coffee.
Or if you have any questions about the above; or about store software, don’t hesitate to get in touch!
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