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There is no reason that you cannot continue working in your garage, basement, barn, or wherever you have been woodworking in the past. Of course, if you are now going to do it full time, accumulate more tools, take on projects that require more working space... what an excuse to upgrade! But if you are changing careers (or retiring) be sure you have a market for what you build, and like doing it for sale, before using the "business" as an excuse for making a big investment in a workshop.
Reading the articles in trade magazines that describe "small" commercial shops, the average shop size appears to be about 1,000 square feet per employee, and the annual sales (not profits) are typically about $100,000 per employee. For example, 10 employees, $1,000,000 per year in sales, 10,000 square foot shop would be fairly typical. Or a cramped inefficient shop with 6,000 square feet and $800,000 sales with the 10 employees. Or a highly automated shop with a large CNC machine, with only 6-7 employees, 8,000 square feet, and $1,000,000 in sales. There are no absolute formulas, but there seems to be a pattern.
Of course the type of work you do will impact the shop size - if you will be building jewelry boxes or humidors or turning bowls or pens you will need a much smaller shop than if you are building libraries or entertainment centers. (Many people plan on doing kitchen cabinets... I recommend that for your own home, but not for customers... that is a tough business for a solo woodworker.)
A friend bought a unit in an industrial "condo." Since it was not part of a home, it was built with a rest room, snack area, and a clean office and entry area. Add a loading area with overhead door, and suddenly a big piece of his 1,100 square foot shop was gone. He added a second floor for storage over much of the work area, raising the total space to about 1,500 square feet.
Noted furniture maker and author Garret Hack has a two story brick shop, 24 x 36 feet, built into a hillside on his Thetford Center, Vermont farm. The upper level (with ground level access) is for office and wood storage. The lower level is the workshop and tour area for visitors. The total space for both levels is under 1600 square feet.
Steve Jenkins is a well established professional woodworker (he was written up in Fine Woodworking years ago!). Steve had 3,800 square feet of commercial space in Dallas. When he moved to the "country," he built a 70x40 shop of 2,800 square feet. Having downsized, he feels a bit cramped.
Jerry Work, another computer pro and life-long woodworker, retired from full time computing and part-time professional woodworking, then toured the country in a motor home until deciding to settle in Kerby, in southern Oregon to flip the priorities and do woodworking full time with occasional computing and technical writing. He bought a former two story Masonic Temple, 2,500 square feet per floor, and built a shop and showroom on the first floor, with living quarters on the second floor. The "gallery" is about 500 sf, the finishing room about 500 sf, and the shop about 1,500 sf, with storage for 2-3,000 board feet of lumber along the shop walls, being "acclimated." Another roughly 3,000 bf of lumber is in covered secure outside storage.
Marty Walsh retired early from computing to do full-time woodworking (similar to my career path!). He chronicled the building of his shop, to the delight of forum members, starting on Sawmill Creek (but the pictures are gone) and later finishing on Family Woodworking. This "dream" shop, close to his home, has 2,540 square feet total including office, finishing room, kitchenette/bath, of which 2,080 square feet is the main shop. His first large complex piece of furniture taxed the space in his shop - he already wishes it were larger. (Be sure to admire the slide show on the building of this masterpiece.)
Sadly, Marty has closed his business and sold his equipment.
The dream shop of a woodworker Ruthie Walker-Rizer in Marshalltown Iowa is a separate 1,132 square building behind her house - she loves the commute to work. She (yes, the "WoodGal" of TV fame) didn't want it to be a big boring box, so she designed this shop using Sketchup. See Facebook for a shop tour.
John Ormsby of "Old World Construction" in Sacramento has been doing a wide variety of custom woodworking for over 30 years, specializing in home renovations and custom cabinets and furniture. He has a 30x45 shop (1350 sf) for a sliding saw/shaper, combination jointer planer, 4 bandsaws (yes, 4), wide-belt sander, etc. His expansion is a detached 2 car garage (400 sf) for lumber storage and the three phase converter. And he wishes he could add another 3,000 square feet.
Sam Blasco, a friend and well known MiniMax instructor, recently moved his shop from the MiniMax office to a 3,000 square feet Main Street storefront in the small town of Smithville, outside of Austin. This will be a small showroom for his crafts, plus his shop and classroom. He considered it small enough that he stayed with "combo" equipment rather than switching to "separate" machines.
For years my dream was to get an old two-story small-town downtown building (like Sam)... Isolate a small portion as a storefront facing the street for a few sample pieces, with a window into the workshop to entertain the customers. Typical small town stores are about 2-3,000 square feet - seemingly an ideal amount of space for a showroom and shop. If there is a second floor, that is also likely around 2,000+ square feet that could be a nice loft-style home, and I could wander in and out between shop and home, as I love doing. Jenny reminds me how much I talk, and that I wouldn't get any furniture built if I could chat interminably with visitors (potential customers). But I still think 1,500 to 2,500 square feet would be ideal for a one person "full time" shop.
A "shop behind the house" is an attractive option if you will be doing custom work "on commission." You may occasionally have to give shop tours to give a customer confidence before they hand you thousand(s) of dollars deposit on some work, but that is done by appointment. On the other hand, if you want to build "something interesting" before you have a specific customer, you need a showroom, whether it is a shop on main street or a tent that you take to fairs and shows, or need to be so good that a gallery can sell it for twice as much as you need to collect.
There are a number of suggestions that have come from multiple people
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