How to Start a Catering Business: The Ultimate Guide
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Running your own catering business gives you control over the products or services you offer. That control allows you to find the perfect niche in a market where your culinary strengths can shine. If you are pondering a plunge into the catering world, this article will explain licensing, startup costs, financing options and how to decide if it is the right choice for you.
The benefits of owning a catering business
Catering is a growing industry. People are increasingly looking for a great food experience where they live, work and play — just look at the emergence of food delivery apps such as Grubhub and UberEATS. According to MarketResearch.com (quoting a report published by Azoth Analytics), the catering industry is expected to grow by 4.02 percent from 2016 to 2021. Some entrepreneurs are leveraging the buoyant economic climate and launching their own catering ventures.
Veronica Dailey is an experienced chef and founder of Dailey Foods, a plant-based food product and recipe development agency based in San Luis Obispo, Calif. She also owns the website SLOVegan.com.
Dailey began working in restaurants when she was 15, and 17 years later, she found her niche delivering locally sourced healthy, organic meals to clients. “I wanted to be able to shop at the farmer’s market, cook, prepare and then deliver healthy, plant-based meals at an affordable rate…so that my clients weren’t feeling like they were getting some luxury service, but just that they had healthy food in their fridge,” she said.
Owning your own catering business means that you have flexibility and can determine your own schedule. Dailey delivers her meals on Mondays, which makes her life more predictable. “I dictate when I’m working,” she said. “I only do deliveries on Monday, so that I don’t have rush orders.”
Dailey can easily change her menus according to foods that are in season. “I don’t even tell my clients the menu before they order; I just tell them what they’re going to get: vegetables, grains, legumes, fruits and nuts and seeds. But I don’t tell them the specific meals. Then, when I deliver the food, I give them a printed menu.”
Jemel Sutton and his wife started a catering business, J.M.S. Catering, in Chapel Hill, N.C. Sutton decided to start his business after his wife’s colleagues (teachers at a local school), started asking him to provide them with lunch on Fridays. What began as a once-a-week service grew into a business that now caters weddings and other events, while still providing lunch for the faculty at the school each week.
For Sutton, one of the benefits of owning a catering company with his wife is having the flexibility to spend time with his daughter, who also loves to cook. “Once I saw her wanting to learn how to cook and how to season food, and she’s only six, it was really fun,” Sutton said. “It actually gives us family time even while we’re working, if that makes sense.”
The challenges of owning a catering business
Finding kitchen space is one of the biggest challenges in owning a catering business.
Dailey’s business model means that she doesn’t have the responsibility of a brick-and-mortar establishment because she cooks her meals at home. This gives her added flexibility because she isn’t tied to a certain location all the time. Also, according to Dailey, “I didn’t have to go through all the red tape of having a brick-and-mortar-type of establishment.”
Dailey escaped a lot of red tape by qualifying under the “chef-for-hire” rules that exist in California, with cottage food laws that became effective in 2013. According to these laws, people can make products from home and sell them to stores. Dailey thought she would need a cottage food permit, but she found that under the rules of a chef-for-hire business she avoided many of the requirements that apply to catering businesses in other states.
Sutton, however, uses a commissary, or shared kitchen, because North Carolina law states that you cannot work out of your home, and you must have a licensed commercial kitchen to prepare food.
For Sutton, the cost of a shared kitchen was an early hurdle he had to jump over. “I had to find the capital to pay to use the commissary and everything in their cost model — dry store shelves, refrigerant shelves and freezer shelves. Then you pay by the hour when you actually use the commissary, and different hours cost different prices.”
In Sutton’s case, cooking overnight, say from midnight to 6 a.m. is charged at a lower hourly rate. Hours from 8 a.m. to 8 p.m., however, are charged prime rates because everybody wants those times. In the past, he has had to get up at 3 or 4 a.m. to prepare food.
Winifred W. McGee, an extension educator with Penn State University, has worked with Penn State and budding entrepreneurs for 30 years and teaches a Food for Profit class. She has also taught in Maryland, West Virginia, Tennessee and Oregon.
McGee agrees that using a shared kitchen speeds up the licensing or registration process; however, the problem is that there are not enough shared kitchens to go around.
“People are always looking for and talking to me about setting up a new shared kitchen because it’s a quick way to get set up,” McGee said. “The closer you get to urban areas, the better chance there is that you’re going to find a shared kitchen.”
Another way to jump-start a catering business is to use local venues to cater events.
“I have seen new businesses start by catering events at firehouses or churches, for example. These venues will have a kitchen already set up with equipment to provide group meals for the fundraisers that they have,” McGee said.
The registration and licensing process is another challenge for budding entrepreneurs, which also varies by state.
According to McGee, the tricky part about a catering business or a restaurant is that they are both considered retail establishments that are selling directly to the consumer. In Pennsylvania, depending on the location, a catering business could be regulated by the municipality or by the Pennsylvania Department of Agriculture’s Bureau for Food Safety. McGee recommends that entrepreneurs first contact the Department of Health for their local municipality.
Startup costs are another challenge when entering the food business. Catering is a competitive industry and failure rates are high, which means financing can be hard to secure. According to McGee, “Food businesses have not been approved by the Small Business Administration (SBA) quite so often as other businesses because they change hands pretty quickly.”
7 steps to starting a catering business
Here are the steps you should take if you are thinking of launching a catering business:
1. Gauge demand for your services or products.
Before considering a food service business, an entrepreneur needs to be sure there is a demand for their product or service. Ask local, potential customers their opinions about your business as a way of free market research, which can also help you discover how competitors are faring in the market.
In Dailey’s case, she found that people wanted to eat healthy foods; they just didn’t know how or have the wherewithal to prepare meals. As such, her business has become part of a wellness program of sorts. “I had a friend who contacted me and said that she knew people with poor health who really needed healthy foods.” Also, there were few, if any, competitors providing the same type of service.
2. Determine your business structure.
You have to have a business structure set before you can apply for registration. For example, where will your business be located? What are you going to name your business? What will your floor plan look like and what equipment will be used?
According to McGee, “The location of any equipment on a floor plan, along with manufacturers’ names and model numbers, will be required to satisfy compliance.” Most organizations provide checklists so that the business owner knows what needs to be inspected from walls, ceilings, doors, windows and lighting to hand-washing and food preparation areas.
3. Seek financing.
Setting up a catering business requires equipment and materials, and McGee emphasizes that food businesses have high costs of entry simply because of the specialized equipment. Typical options for loans are the SBA, traditional banks or commercial credit cards.
4. Determine licensing requirements.
Once you have your business structure nailed down, approach your local Department of Health for your local municipality for guidance. Your local Small Business Development Center (SBDC) might also be able to help you navigate red tape, and SCORE provides mentors who have similar business start-up experience and can provide support as you launch your business.
5. Shop around for insurance.
The information you receive from your local registering agency will help you determine what insurance coverage you need. According to McGee, coverage requirements are linked to product liability and state-level case litigation. For example, coverage might be costlier if there have been a lot of incidents related to food businesses.
“Insurance coverage will probably be different for a food truck compared to a catering business or a restaurant,” McGee said. McGee also suggests shopping around for insurance and choosing a broker partly based on your relationship with that broker.
“You may go with one broker that you just relate to a whole lot better rather than one who offers a lower price. Remember that you’ll have to deal with that broker continually in the course of business.”
6. Prepare to track your supply chain.
A huge part of catering is tracking your supplies and ingredients.
“Tracking where products come from is crucial because it is incumbent upon any food business owner to know that they are using an approved source,” McGee said. “Business owners must track the suppliers (and) ingredients, and keep a record of lot numbers and batches because there could be a recall at any time.”
McGee noted that the supply chain is far more important than it ever has been in the past, simply because of the wide range of sources and the frequency of recalls for various reasons.
According to McGee, in many cases, a food will be recalled because of mislabeling. For example, common food allergens such as tree nuts or shellfish might not have been disclosed on packaging. There are also cases that go beyond mislabeling where a food product might be contaminated with salmonella, for example. McGee emphasized how important it is that a caterer be aware of where their ingredients are coming from and track their suppliers.
7. Determine your prices.
Pricing food products is similar to the pricing of any product. You have to cover your costs and then add on a margin. You may decide to offer custom proposals for catered events depending on what the client wants. For example, it’s quite obvious that lobster will be more expensive than chicken. Alternatively, you may want to limit your range of options and provide a custom proposal. Either way, you also have to look at the competition and see what they are charging. Market research can also help here because you can poll people to find out how much they would be willing to pay for your products or services.
Startup costs of a catering business
Still interested in starting a catering business? All businesses have start-up costs ranging from equipment to furniture and technological services. Here are some common start-up costs for a catering business.
Equipment and staffing
Depending on your business model, you may need to source supplies such as linens, tables, chairs and utensils. These could be rented rather than bought to start with, which gives you time to decide how your business is going to develop before you commit to a bigger cash outlay.
Sutton had to buy equipment to store his food once it was cooked. If he was cooking from 3-6 a.m. and wasn’t serving the food until 11 a.m., he needed equipment to keep food at the right temperature for five hours. “That’s something that people have to think about if they don’t have their own kitchen,” he said. “I had to go out and purchase heat boxes that the health department had to check to make sure the food was stored at the right temperature for the required time.”
Staffing is another expense and you will need to determine if you want to hire full-time, part-time or independent contractors. You’ll need to properly train staff on your recipes and proper health and safety protocols.
Insurance is a big expense that will vary by state. For Dailey, the biggest costs she encountered when starting her business were the various types of insurance required. Some examples were personal liability, food insurance and commercial auto insurance to cover her food deliveries.
Sourcing ingredients is a challenge because your profit margin depends on the cost of your raw materials. Dailey relies on the local farmers market, where she has built relationships with the local vendors. “By going to the farmer’s market regularly, you get to know the people selling produce. You can negotiate bigger discounts once you purchase more in volume from them.”
Dailey also makes and sells food products, for which she did need financing. She started her food product business in 2010 and found financing to be frustrating.
“When I launched my product line, I had to go through SBA loans (and) small business loans through the bank, and it was really challenging,” she said. “Since then, American Express has created a business credit card where they start you off in a tiered program, say $30,000, and, if they know that you need more capital, they’ll work with you and extend it.”
Is a catering business right for you?
Members of the restaurant industry are aware of its unsociable hours and the hard work required. Perhaps the biggest question an entrepreneur should ask themselves is how the business will impact their lifestyle now and in the future.
Sutton suggests asking yourself first, if you have the time, and second, if you love to cook. “Once you get started, catering can get very hectic and very busy, and I always say to people that when you own a business, you do more work than when you’re working for someone else.”
Sutton notes that catering could infringe on family time, so how your spouse or partner feels about a business, and how you feel as a parent about possibly spending less time with your children, are valid concerns.
In Dailey’s case, she feels that her business is less of an imposition because she prepares meals for her clients when she is also cooking for herself. “My business is literally an extension of my own food prep, and I deliver the excess to my clients,” she said.
The bottom line
The experts that LendingTree spoke to can attest that starting your own catering business involves assessing demand for your product, navigating complex registration and licensing requirements, raising capital if needed, and hard work. But all of these efforts can change your life. Perhaps the most important question, then, is does your business model fit with your desired lifestyle, and will that still be the case tomorrow?