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How to Start a Catering Business

Author: C. Galoozis Date: January 11, 2012

Learn more about starting a businessIf you’re the go-to cook or baker for your friends and family, you’ve probably thought about opening your own catering business. Since you already have the talent and tools to cook food for large crowds, it seems all you need to get your business of the ground is a marketing plan and a handful of clients.

But becoming a professional caterer isn’t that simple. “A lot of people think ‘Oh, I can do this out of my house,’ but it’s a lot more complicated than that,” says Donna del Ray, a professional caterer and owner of Relish Culinary Adventures, a recreational cooking school in Sonoma, Calif.

From getting properly licensed to maintaining a steady flow of customers, del Ray says starting a catering business is a more serious endeavor—and a lot more work—than most newcomers expect.

Here’s a comprehensive guide to help start your catering business.

I. Industry Snapshot

The U.S. catering industry rakes in about $7 billion a year. Much of the sales in the industry are generated through events—weddings, corporate functions, funerals, holiday parties, etc. Spending on catering services typically depends on the dispensable income of businesses and consumers. While there is always a demand for catering services, customers typically spend less during slow economic times.

The United States is home to about 10,000 catering businesses that employ more than 110,000 people. It is a highly fragmented industry, meaning the majority of catering companies are small, local and don’t account for a large portion of market share. Demand is typically higher in densely populated areas, like the Northeast, and in large cities.

II. Legal Considerations

  • Business Structure. Incorporation is your first priority when opening a catering business, as outside income above $600 without an official business structure will raise a red flag to the IRS, says Michelle Bomberger, an attorney in Bellevue, Wash., who represents several professional caterers. Choosing your business structure largely depends on how you want business income to be taxed (read about the differences among structures here). But the most important consideration is liability. For example, sole proprietorships do not insulate the owner from the liability of the business, whereas limited liability companies and corporations do. “Catering is in a high-risk category because you’re making something that’s being consumed by individuals and handled by multiple people,” Bomberger says. “You’re safer choosing a structure that protects the owner’s personal assets from a lawsuit.”
     
  • Contracts. When you draft a contract for a customer, include what services are being offered, how those services are being paid for (and when), and how to protect yourself if something goes wrong. Be explicit in the details. “Say, for example, the customer is paying you $5,000. If you say something [in the contract] like ‘caterer’s liability is limited to [the] amount paid by customer’ then the customer can’t sue you for $10 million,” Bomberger says. (Check with state laws to determine if customers are allowed additional damages.)

    Another crucial item is the venue. Spell out who is contracting with the venue (the customer or your business) and who would be responsible for damages. Additionally, understand any rules the customer has agreed to (with the venue) that would affect your business.
  • Licensing. You’ll need a business license from the state—some states have different types of business licenses, so pick the right one. You may also need to obtain a city business license. “One of the challenges, as a caterer, is if you’re doing a one-time event halfway across the state, you may actually need to obtain a city license for just that one event,” says Bomberger. Look into food-serving licenses and liquor licenses, which vary widely from city to city and even block to block in larger cities.
     
  • Health and building codes. As a professional caterer, you’re liable for food consumption. Many nascent caterers are surprised by how onerous the food preparation rules can be. “In California, the code has hundreds of pages about food handling, inspections, how to build a kitchen and so forth,” says del Ray. She recommends hiring a consultant when starting your business to make sure your kitchen/equipment is suitable, to train your employees, and to help structure your operations around complying with the code.
     
  • Liability. Catering businesses hold a lot of potential risk: kitchen fires, food poisoning and transportation accidents, among other hazards. Insurance insulates you from those risks. Bomberger suggests buying a policy that covers every risk you can think of. “A general, $1 million liability policy probably does the trick,” she says. She also suggests asking experienced caterers what type of insurance they carry and what could go wrong.

III. Financial Considerations

  • Startup costs. Startup costs for would-be caterers can run anywhere from thousands to hundreds of thousands of dollars, mostly depending on whether you build your own commercial kitchen. Your initial costs will include business setup fees (licensing, attorney, etc.), insurance, marketing, inventory (food, servingware, etc.), staff and equipment/building costs. When you write your formal business plan, lay out how you’re going to generate enough revenue to cover these costs, says del Ray.
     
  • Financing. When financing the start of your business, the general rules apply to caterers: Bank loans will probably need to be collateralized by assets, and if there are no business assets, personal assets of the owner(s). Other typical startup financing includes SBA loans, microloans, grants, peer lending and family-and-friends financing. (Read more about how to finance a startup.)
     
  • Taxes. When you’re going through the incorporation process, hire an accountant who can help you understand the tax implications of owning a catering company. “[When I started catering] I ran into all this stuff I didn’t know,” says del Ray. From property taxes to county, city, state and federal taxes, tap the expertise of an accountant to get your ducks in a row—and include these costs in your financial projections.

IV. Operational Considerations

  • Equipment. You’ll need to cook in a commercial kitchen that’s been inspected and approved by your local health department. It can cost tens of thousands of dollars to build your own kitchen—the grease pump for del Ray’s commercial kitchen, a requirement of her local health code, cost $15,000 alone.

    To curb these costs, rent a local commercial kitchen that subleases to freelance caterers. You can also rent out a bar’s commercial kitchen. Even retrofitting your home kitchen to commercial standards may be more cost-effective.
     
  • Staffing. Staring a catering business means you’ll need to hire help—servers, preparers, perhaps an administrative assistant. Caterers typically hire food staff as independent contractors, says del Ray. The staff’s cost is determined by the event (amount of food, guests, etc.) and is included in the price to the customer.
     
  • A word of caution from Del Ray and Bomberger: Make sure you understand the federal and state labor laws governing independent contractors vs. full-time employees. You can get into trouble with the IRS (mostly for unpaid payroll taxes) if you’re paying someone as a contractor when they should be paid as an employee. “Know that just because you’re hiring someone as an employee doesn’t mean you have to give them a certain number of hours per week,” Bomberger says. (Read: Independent Contractor Versus Employee: Nailing Down the Difference.)
     
  • Marketing. Marketing may be your biggest initial expense because until you build a reputation, you’ll have to pay to reach customers. Set up a social media presence, print business cards and promotional brochures, join NFIB and the local chamber of commerce or similar groups, and do your first few events at a discount to get your name out there, del Ray says. Arm yourself with promotional materials at the events you cater—guests will likely be your next customers. 

NEXT STEP: Start Up: What Lenders Look for in a Business Plan


 

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